Chipman Mazzucco Emerson LLC

Why venture capital firms won't work with certain startups

There are several reasons why a startup in Connecticut or elsewhere won't get funding from a venture capital firm. For instance, there may have been problems with the pitch deck that scared a potential investor away. Issues could be related to how the deck was designed or the fact that there were egregious spelling or grammar issues. A venture capital firm may also have an issue with the company's valuation.

If the valuation is too high, an investor may be getting too little equity for too high a price. Furthermore, it means that the company will need to raise money later at a higher valuation, and there is no guarantee that this will happen. However, if the valuation is too low, it could send a signal that a company isn't confident in itself. Therefore, it is best to create a reasonable valuation backed up by quality research prior to making a pitch.

In some cases, a venture capital firm won't invest because it could create a conflict of interest with other investors. It is not uncommon for investors to fund a business simply to get an inside look at what the company is making or to determine if it can be bought out at a later date. It is also possible that venture firms don't like working with other firms already associated with the company.

During the business formation process, it may be a good idea to consider how the company will raise money. Ideally, a business will work with partners who have an interest in seeing it reach its full potential. In some cases, this means working with venture capital firms. In others, it may mean working with angel or other types of investors. An attorney may assist in reviewing an investment deal.

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