You have a great product, and customers are struggling. The business plan looks fantastic. Now, you just need funding to bring the product to market.
You started pitching to angels and VCs, but there were no bites. Why is no one interested?
It's all about the math of risk.
The business plan indicates that you will reach $20 million in revenue in 7 years. You now want to raise $2 million at a $10 million valuation.
You project that the business will generate $5 million in profit each year. Isn't this a fantastic opportunity?
Well... no.
If the startup generates $5 million in profit each year, conventional accounting math suggests that this is a great business for the founders. However, for venture capitalists, it is a poor opportunity.
Assumptions of Risk Math
When investors look at your deck, they are not looking for a good, profitable business. They are looking for that needle in the haystack, which will be an investment in their portfolio that returns 100 times or more and makes their fund successful.
Venture capitalists (VCs and Angels) invest in startups based on the following business...