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Why do investors ignore promising startups?
/>The startup world doesn't reward the best product. It rewards the best storyteller!
Why do investors give money to «bad» startups and ignore promising ones?
If you’re looking at the startup world, you’ve probably come across this paradox: millions of dollars go into projects that don’t have a strong product or business model, and really promising ideas are left unfunded.
It seems illogical that venture capitalists, people who make money from risk analysis, make these mistakes. But the real reasons are not just miscalculations or lack of experience. The situation is more complicated - it has to do with the characteristics of the venture capital market, the psychology of investors and the very structure of start-up financing.
This article will detail why this is the case, what mechanisms are behind these decisions and what can be done to attract investment in a promising but undervalued project. We will consider real examples of startups that received hundreds of millions of dollars despite a weak business model, and companies that were without money, although they could become the next «unicorns».
How Venture Capital Investments Work: A Brief Guide
Before we understand why money gets startups, we need to understand how the investment mechanism is organized.
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1. Venture funds make tens of bets, counting on 1-2 successful
The venture market is different from classical investing. Funds are not looking for stable, reliable companies - they are looking for those that can explode and bring X10 or even X100 profit.
What does that mean?
- 90 percent of startups are “dead”, and investors understand that.
- Their strategy is to invest money in 50-100 companies, knowing that only 1-2 of them will «shoot» and pay the rest of the losses.
- So, the main factor is not reliability, but the potential scale of growth.
This leads to mistakes: potentially profitable but boring startups are ignored, and high-rollers and loud get money.
How Venture Capital Investments Work: A Brief Guide
Before we understand why money gets «not the» startups, we need to understand how the investment mechanism is organized.
1. Venture funds make tens of bets, counting on 1-2 successful
The venture market is different from classical investing. Funds are not looking for stable, reliable companies - they are looking for those that can explode and bring X10 or even X100 profit.
What does that mean?
- 90 percent of startups are “dead”, and investors understand that.
- Their strategy is to invest money in 50-100 companies, knowing that only 1-2 of them will «shoot» and pay the rest of the losses.
- So, the main factor is not reliability, but the potential scale of growth.
This leads to mistakes: potentially profitable but boring startups are ignored, and high-rollers and loud get money.
2. Investors are investing in people, not ideas
Another important point: startups do not get investment for cool products, but for a convincing presentation.
The more charismatic the founder, the better the chances of getting funding.
- Investors believe that if a person can convince them, they can convince the market.
- Sometimes it’s justified (Steve Jobs also sold not the product, but the vision).
- But sometimes it leads to failures (see WeWork). The World of Warcraft is a World War II.
Now that we have a base, let’s figure out why bad startups get paid and good ones don’t.
Image by Pexels
Reason 1: Investors are betting not on the idea, but on the charisma of the faders
Venture capitalists often invest in personalities, not business models.
They believe that if the founder can convince them to invest, he can persuade the market to buy the product. This leads to charismatic but incompetent faundors getting paid even if their start-up is weak.
Example: WeWork
What happened?
WeWork is a co-working rental company. Founder Adam Newman was charismatic and confident. He sold investors not just offices, but a «revolution in the working culture».
Why did investors invest?
SoftBank and other funds invested more than $10 billion in WeWork because they believed in Newman’s vision. But the business model turned out to be unsustainable: the company was spending huge amounts on rental of premises, without a clear path to profitability.
What did it end with?
WeWork’s IPO failed, and the company’s valuation collapsed from $47 billion to $8 billion, Newman was fired.
Reason 2: The Venture Market Operates on the Principle of Big Risks - Big Wins
Investors understand that 90% of startups die, but their strategy is not to avoid risks, but to make many bets and hope that one of them «will shoot» and pay all the losses.
This leads to a situation where money goes even into strange and unwarranted projects if they have the slightest chance of success.
Example: Juicero
What happened?
Juicero is a startup that sold "smart" juice squeegees for $700. The company raised $120 million in investments from Google Ventures and other major funds.
Why did investors invest?
Juicero promised a «revolution» in the preparation of juice, but it turned out that users could simply squeeze the juice bags with their hands, without an expensive car.
What did it end with?
The company closed in 2017, setting an example of how venture capital funds can invest millions in an absurd project if it is beautifully curated.
Reason 3: Investors are prone to FOMO (fear of missing the opportunity)
If one known investor invested in the startup, others are afraid to miss the next Google and also invest money.
This creates a crowd effect when companies get funding not because they are good, but because everyone else supports them.
Reason 4: Startups with real potential seem too boring
Promising projects that have real revenues and a working business model often look less exciting than the trending trends, such as NFT, brainstorming or artificial intelligence.
Example: Basecamp (now 37signals)
What happened?
Basecamp is a project management service that earns money from the very first days. They never took any outside investment, although they could be the next Trello.
Why did investors ignore them?
The company has chosen slow growth and sustainable profitability, and investors want exponential growth even if it is accompanied by losses.
What did it end with?
Basecamp is still successful, but without any venture capital money. And many unprofitable startups that were given millions have long since closed.
Reason 5: Politics and personal connections decide more than logic
Often investors invest not in the best startup, but in one closer to their circle. If you don’t have a connection, even a brilliant product can go unnoticed.
Example: Clubhouse
What happened?
Clubhouse is a voice social network that attracted $100 million in investments in 2020, although it did not have clear monetization.
Why did investors invest?
The project received a hype among the elite of Kremlin Valley, and the investment was made according to the principle «my friend invested - I will invest».
What did it end with?
Clubhouse has lost popularity because it did not think of how to make money, and now few people remember about it.
How to attract investment in a promising start-up?
If you have a really strong project but you are having trouble getting investment, use these strategies:
- Develop storlelling
- Investors buy not only ideas, but people.
- Create FOMO around your startup
- If you seem like everyone is interested in you, investors will want to invest too.
- Prove profitability before finding investors
- If you already have income, that’s a strong argument.
- Build Connections in the Venture World
- Without an acquaintance, you might not be noticed.
- Look for alternative sources of money
- Crowdfunding, grants, angel investors.
Final thoughts
Investors do not always make logical decisions. The hype, connections and crowd effect often play a bigger role than the real prospects of the startup.
But if you understand how this system is set up, you can increase the chances of attracting investment - even if your startup doesn’t seem to be fashionable.
The Cymes Team
