#VCs #preseed #investment #startup #niche #industry
Are you a new founder seeking pre-seed funding but facing roadblocks because VCs deem your industry too nichy for their investment portfolio? 🤔 You’re not alone in this struggle. VCs often prefer to invest in more mainstream markets with the potential for massive paybacks, which can leave niche industries feeling left out in the cold. But is this rejection really valid, or are there ways to overcome this challenge and secure the funding you need to grow your startup? Let’s dive into this dilemma and explore practical solutions to help you navigate the tricky world of VC investments.
## Understanding the Issue at Hand
As a new founder, it can be disheartening to hear VCs dismiss your industry as too nichy for their investment criteria. But before you get discouraged, it’s crucial to understand their perspective. VCs are constantly seeking high-growth opportunities that can deliver substantial returns on their investments. This often leads them to favor markets with a broader appeal and larger potential customer base. While niche industries can offer unique opportunities for innovation and disruption, convincing VCs of their profit potential can be a tough sell.
### Identifying the Root Cause
One common reason VCs may shy away from niche industries is the perceived lack of scalability. In their eyes, niche markets may have limited room for expansion, making it challenging to achieve the 40-50x payback they typically seek. Additionally, VCs may have a preference for industries that are already established or trending, as they offer a clearer path to success and profitability. This can make it harder for startups in niche industries to attract the attention and funding they need to thrive.
## Overcoming the Obstacles
While facing rejection from VCs can be discouraging, there are strategies you can employ to address their concerns and secure funding for your startup.
1. **Market Expansion Plan**: Outline a clear roadmap for scaling your business beyond the niche market. Highlight adjacent markets or product offerings that you can tap into once you’ve established a foothold in your current niche. Demonstrating a vision for growth and diversification can help alleviate VCs’ concerns about scalability.
2. **Proof of Concept**: Show tangible evidence of traction and market demand for your product or service. Metrics like customer acquisition, retention rates, and revenue growth can make a compelling case for the viability of your business model, even in a niche industry.
3. **Targeted Investor Approach**: Instead of casting a wide net and approaching VCs indiscriminately, focus on investors who have a track record of investing in niche industries or have a personal interest in your market. Tailoring your pitch to align with their investment preferences can increase your chances of securing funding.
## Final Thoughts
Navigating the world of VC investments as a founder in a niche industry can be challenging, but it’s not an insurmountable obstacle. By understanding VCs’ concerns, addressing them proactively, and targeting the right investors, you can increase your chances of securing the funding you need to grow your startup. Don’t let being “too nichy” hold you back – embrace your uniqueness and showcase the value you bring to the market. Remember, success often comes to those who dare to venture off the beaten path. 🚀🌟
How many VCs have given you this feedback? I’m not a funding expert by any means, but did get several million dollars in VC debt term sheets. It’s a bit hard to say you should do X or Y without knowing the specifics, but some food for thought.
1. Not everyone will give you their real reason for rejecting you, as you suggested. This could be the reason why they are rejecting you, or it could be something generic they are saying while hiding the real reason why they are saying no.
2. What one VC feels is too small, another VC will see as a blue ocean. You can give the same pitch to 10 different VCs and get different reactions. So it doesn’t mean that the first VC says no, you should change your approach completely for the 2nd one. Ironically, I think the bigger more funded VCs are more okay with niche plays because they are willing to take bigger bets.
3. If your messaging is clear (make sure it is clear) and the VC still doesn’t seem the opportunity, then they aren’t the right fit anyway. Of course I understand, when you’re low on capital you just want any investment you can get
unless they have a narrow market hypothesis that is unrelated to tech, most VCs are either investing mostly in AI, or they are waiting to invest until they understand how AI will change their domain of expertise. so unless you have an AI startup, it’s hard to raise right now.
VC’s might claim to be looking for blue ocean markets, but they often fail to understand what those markets are. They may not understand your idea, or they may not see things the way you do.
Either way, you may have the wrong person for your idea, or legitimately have a bad idea. More likely, they just don’t see how you’ll make back their money.
Ultimately, VC’s are only one source of funds. Angels, family offices, etc are all out there as well. Not every idea is appropriate for a VC.
Go look elsewhere – VCs really aren’t a match for everyone.
Do you have a believable story for how your business could collect $100M every year by charging customers in your market? And believable means having a GTM strategy to get those paying customers, not taking 1% out of a Gartner number.
If not, VCs won’t be interested. There’s no money in funding niche businesses, they want to fund businesses which could plausibly have a big payout. Unless you’re willing to share your niche market, hard to tell whether you could plausibly get VC funding.
The conversations are a lot different once you actually get “first signs of traction”.
Until then, you’re just a pitch deck.
“Can this return the fund” and “Do I like this person” <- the only questions that actually matter.
It’s plausible that they don’t grasp the potential of course. Uber and Airbnb, for example, got turned down by a great number of VCs.
If you can show traction, the conversations will likely change.
At the same time, if it’s indeed too nichy for a VC, is that a problem? There are other ways if financing and build a great business
Maybe try angel investors then you can go back to VCs afterward ps that is what I did, or go through an accelerator program.
For example for every 10 startups funded or all the start ups they funded that year usually vcs make their money back from 1 startup, that’s why they look for something with huge potential.
So keep in touch them, show then your journey and that you get the job done and maybe later on.
Another thing you will find most VC say early stage meaning seed.
Avoid VCs at this stage and focus on the business. I made the same mistake and fundraising is exhausting. Takes time away from your core focus of building something that helps your customers. You may have to burn some of your own money initially to get the traction and show growth
It seems like they want to be assured of their investments. They expect a guaranteed return, which is a bit naive, to be honest.
And I never understood this “nichy market” remark. If you look at the luxury car companies, they have a nichy market but they are doing exceptionally well.
Improve your pitch until they no longer say that
There are 2 possible outcomes to your pitch no matter what your product is.
Positive
Negative or neutral
If you don’t take responsibility in improving rather than shifting the blame to the VCs, you will gain nothing and learn nothing. Therefore, regardless of them being right or wrong, they represent collectively the average reaction to your pitch.
As such, the better you make it, the better results you will get in the next pitches.
For example, it looks like what you said about adjacent markets should be part of the pitch rather than a sideline it would be your main pitch.
Then you can see the difference in response from the VCs.
A/B test your pitch
Investors are usually looking at the size of the market you are entering and the return if you capture 1%. For example, the global rideshare market is $100 billion industry projected in 2024 so if you were entering that market with your own platform and could capture 1% of the market then investors are looking at $1 billion. If you can find the total projected market for your startup and can capture 1% of the market then what is that number? The higher it is the more interest you will garner from investors.
Some markets are validated as already large. Examples would be customer support desk software or enterprise communications. Each supports multiple billion-dollar and/or public companies. So, as a startup, you would have to prove you can enter those markets and compete effectively with a differentiated product – but you would not have to prove their is a market.
Some markets are the other way around. You have an interesting product, some signs of customer interest. If you succeed, will it be a large market? VC’s will be skeptical of this until you provide evidence that there is a large opportunity. The chief way to get them to believe this is with actual growth traction numbers appropriate to their investment stage.
Execute like hell and try earlier stage funds.
It’s a legit question. Lots of companies go after niche markets where they can generate a few tens of millions of revenue. But then the market is tapped out. That’s not big enough for VC. Show that owning 10% can be worth $100m in revenue. If your market is too small you may be building a great lifestyle business but not a company that has the potential to IPO as a unicorn or a major acquisition.
At pre-seed the vast vast majority of companies fail. So you do need a plausible way to pay back 40-50x. That said – I’m a truly nichy market you understand. The best thing to do would be focus on product, win the market, have a cash flowing business.
If you really need VC money – you need to show that you can expect to win the current market and might be able to go after adjacent markets. On the adjacent markets you need some proof that there is a problem to solve and few enough competitors that you also have a reasonable chance at winning.
As described I would implore you to consider option 1 and not get caught up in investor money, owning the whole business will be better.
VC investable is 10-30x plus. They don’t understand it so they are passing. Find someone who knows the space (angels?) or a strategic. The VC’s will follow on smart angels and smart money. If both the smart, specialized money and vc’s still say no, probably the wrong space to raise money. If you’re a believer, bootstrap baby.