16 min read

20 Reasons Why Investors Say NO

Investment Scrabble text

Investors get to see hundreds of pitches every month, but only one or two will get an investment. 

Make the investor believe in your dream. The attitude you’ll have can’t be that I just want to get the money, and here’s the game we are building. It needs to be about something big, something that will require many things to go right, and that there is a journey that you want the investor to be involved in.

Here are the twenty reasons why investors will say NO to your gaming startup.

#1 Doing beginner mistakes

I often see founders who’ve acquired a spreadsheet file that contains a list of three hundred VCs and their email addresses. These are happy founders. They think the spreadsheet is a goldmine. They’ll start emailing the VCs one at a time. They believe this will give them high odds at landing an investment. At least one from the list will provide me with the investment, right?

There are a few problems here. 

Founders don’t usually do the extra legwork of research the VCs on the list. What stage are they investing in? Are they familiar with gaming? If not, are they comfortable at investing in gaming?

Investors don’t always like “cold emails.” There are exceptions, but many already have too much cold outreach coming from all over the place. The best option would be to get an introduction from another founder who knows the investor. The reason it works is the other founder is acting as a gatekeeper, only connecting the investor with people who matter.

Another beginner’s mistake is to ask the investor to sign a non-disclosure agreement (NDA). In short, investors don’t sign NDAs. Asking them to do that will make you look like you don’t know what you’re doing, and there are a few reasons for that.

  • On average, investors see twenty companies a week. That amounts to over 1,000 companies per year. Signing an NDA could potentially prevent them from having a meaningful discussion with any potential investment after yours.
  • There’s a legal mess involved. If each investment proposal comes with an NDA attached, then each NDA must be negotiated. Also, the investor must comply with that web of NDA’s even if the investment proposal gets rejected. Many businesses start from a similar business concept or model. How many pitches are along the lines of “This game will blow up the [fill in the blank] market”? An investor may struggle to demonstrate compliance with NDAs when it receives investment proposals for basically the same business opportunity from separate founders. It’s a legal claim waiting to happen.

Anyways, investors won’t require detailed technical information in the initial meetings. In your pitch decks, remove any sensitive information and don’t go into technical, confidential information during your presentation. As you progress through a series of meetings with a prospective investor, you can hold information that you believe to be sensitive for later talks. Later, you will have built a stronger relationship with the investor, and when you think that any perceived risk of giving out the information has been balanced by the higher likelihood of an investment happening.

#2 Lack of clarity on money to be raised

I remember pitching my first game company in 2007 to investors. I started first by asking for $4,000,000, then went to $2,000,000 in a few months, then to $8,000,000. Finally, a year-and-a-half later, I ended up raising a total of $550,000 from two investors. The reason why I was jumping between the numbers was that the only source of what I should raise from investors was what I had read about online. I was also interpreting the advice of “raise as much as you can” in a way that it’s better to ask for more than you need. I didn’t know what I needed. I just wanted to keep the company alive for another year as we were trying to make our game work.

Now I know the main reason that you raise money.

The money is meant to be used to operate on the next level. Let’s think about company building as a video game. You start on level 1. You make your way through the obstacles and challenges, finally beating the End Boss, and graduating to level 2. To overcome the end boss, and go to the next level in company building, you often need investor money. But you don’t raise money to stay on level 1.

What this means is that you aren’t raising to pay a better salary for yourself. You raise money to make a difference in your efforts. You raise to be able to hire more people to work on more things. You can pay yourself to survive. Not to take expensive vacations.

The investor will ask you for a projection on how you’ll be using your cash in the following six to twelve months. We here at Elite Game Developers have created a tool for projecting Cash Flows. You can get our template from here. https://elitegamedevelopers.com/gaming-startup-cashflow/

#3 Not thinking about the fit

In 2007, I was meeting with investors who didn’t have a clue about how gaming worked. That has changed, and today we have dozens of investors who are globally investing in gaming companies. Nowadays, I urge founders to gravitate towards the investors who have operational experience in gaming. They can be helpful in the high-level strategy for the company, but also in day-to-day activities like hiring and product.

It’s hard to keep gaming investors as a priority in your outreach when you are running out of money, and you need to raise soon. That’s why founders should start to think about the investors that they want and how to get them early on. Don’t focus on the investor’s money. The investors will be happy to hear the reason you’d wish that, especially they to invest.

#4 It’s not the pitch that matters, it’s the conversation after the pitch

Loads of people prepare for investor meetings by perfecting their pitch deck with countless iterations. What founders should be looking forward to is having an exciting conversation with the investor about the idea they have. 

I get it. You just want the investor’s money. But investors can be helpful in more ways than just money. Investors hear hundreds of pitches every year. They see things become big. They see companies that aren’t going nowhere. Investors start to see patterns in company building. They will most likely be able to give feedback on your business idea.

When I say “business idea,” I’m talking about expanding your mind outside of the game you are making, to look at the bigger picture. 

Some of my favorite topics that I like to ask gaming entrepreneurs are:

  • Why do you think now is an excellent time for your idea to exist?
  • What are the ways that this can fail?
  • How will you navigate around these failure situations?
  • What have you achieved so far?
  • How did you fund your efforts so far?
  • Why are you raising now?

#5 No knowledge on business basics

You might think that it’s all about making a game. You might be treating the whole “business” thing as a great mystery. As an entrepreneur who is building a company and raising money from investors, you need to understand the basics of the business you are in. 

Here are some aspects that you need to know about your business: What is your customer like, who is the competition and what prevents them from taking over your business. Know your numbers. What are you going after in revenues? How much will the customer acquisition cost look like in your industry?

Investors like to hear a big vision. The reason you are raising money is to build a big company, no to fund a game. Try to find ways to talk about the game you are making as being the first step in creating a big business.

#6 Only pitching an idea, not showing progress

I wrote extensively about this topic in the article 7 Ways A Gaming Startup Can Show Traction https://elitegamedevelopers.com/7-ways-a-gaming-startup-can-show-traction/ 

To summarize the article, you want to show clear progress to the investor before you can expect them to fund your company. In the article, I talk about having critical team members join, a prototype becoming ready for testing, or that there are metrics already available from a test. 

To be sure that your actions qualify as progress, it’s essential to focus on real players, off the street, interacting with your game. Giving feedback or providing metrics. These kinds of findings will go a long way to impress the investor.

#7 Exhibiting technical skills, not product and market understanding

I meet a lot of people who are looking to found their first game company. Often these people have expertise in building games, and they can talk about free-to-play metrics and monetization.

But the problems start when founders are focused on these technical skills. They see a game as a system of loops and virtual economy taps and sinks. They lose sight of really understanding what a great customer experience looks like in gaming. 

You need to understand a wide range of topics from player psychology, user experience, and how to create challenging moments for players. Investors will want to hear that you can go deeper into understanding your end-user.

#8 Lacking focus

Trying to do too many things at the same time can be difficult. Focus helps. What I often talk about is short-term clarity and long-term thinking big.

Short-term clarity is about

  • What are the top 3 things that need to happen in the next six months
  • To show real clarity is to state what you’re not going to do

Long-term thinking big is about

  • Having a vision and a mission for the company
  • Building a leadership team for the long term. What kind of “multiple hats” can the team members wear for now? What type of role will they take as the company grows?
  • Masterfully managing inputs and outputs. When you focus on the inputs, the output takes care of itself.

Having a leadership team might sound strange for the person who just left a gaming company to start their own thing. It reminds them of big companies, where things don’t work well. “Why should we also have a leadership team and hierarchy?” they might think. Those things don’t work when there is a bad company culture, and it starts with the CEO who needs to uphold a healthy and robust culture. 

You can do better on the cultural side, but you need to realize that a leadership team isn’t to blame. It’s letting down and forgetting to uphold a strong culture that matters.

#9 Lacking unique insights on product and distribution

Both are needed. We already covered product, which is more than just technical skills, but more on the psychological level of understanding what the customer experience should look like. 

Distribution, I think, is more important than ever in gaming. Long gone are the days when publishers would take care of the distribution. Now it’s all in the hands of the developers, and they need to know what are the current dynamics and how the market will change in the coming months and years.

#10 Not being a storyteller

Don’t be humble and unexcited. You should sell your story to the investor. Tell a compelling story. Investors bet on big dreams. You want to create a situation where the investor is having the dream of the story you just told them.

Avoid being arrogant. Make sure that you have a story where there are a lot of winners, and you can take a slice of an ever-growing market.

Example: Amazon didn’t pitch about owning Whole Foods when the company started in 1994. They talked about selling book over the internet. But they did mention that if they’d achieve that, they could take on more businesses.

#11 It’s not a good fit for us

Fred Destin from StrideVC said it well on Twitter:

”When VCs say “no” to funding you… they are saying “no” RELATIVE TO other opportunities they are chasing. It does NOT mean your startup is crap.”

At the end of the day, individual investors are looking at startups through their individual lenses. Each investor has a history on the cases that they’ve backed. There are things they’ve promised to their limited partners regarding the startups they will back, which they don’t publicly communicate or just happen to be vague about.

Why your company might not be a good fit? E.g. the investor doesn’t want to back companies that they don’t believe can achieve a $1bn valuation. They don’t tell it on their website, they don’t point this out to the companies. They just tell the founder who pitched them that “This is not a good fit for us.”

#12 Lacking domain expertise

I wrote about the A, B, C and D teams recently.

In gaming fundraising, it’s fairly common that only an A team, with VP or Director level experience from a significant gaming company, will receive funding from early-stage VCs.

Founder domain expertise is a term for the founder having skills and knowledge in the particular area where their startup will be operating in.

If it’s a mobile games startup, the founder with domain expertise would have lead a game team or a studio before, and have gone through the whole process from game concepting to launching and running a live game.

In any case, investors can become dubious when they see a team of founders, with a pitch deck, asking for funding. Gaming VCs love to see prototypes. And they can forgo the market evidence or soft launch data, and they will write the investment check when the founders have enough domain expertise.

#13 Postponing to get metrics

I’ll give you some examples on why investors will be interpret evidence on a startup moving slow as a red flag.

A) Team hasn’t made progress for six months. The CEO has been fundraising for six months. They have a game, which is ready for a soft launch, but they are postponing the soft launch until they raise money. The CEO has a reason for this postponement: They don’t want to jeopardize the fundraising process if the numbers aren’t great. They’d rather raise without numbers and then start the soft launch once funding has been secured.

B) The team has done a soft launch, but only with a few small cohorts. They might be developing the game, with each cohort being a snap shot of how an update to the game is performing. They aren’t worried about golden cohorts, and

There are investors out there who are happy to invest early, at the Powerpoint stage. And there are investors who won’t have the knowledge to assess the implications of limited cohorts. And these investors will invest.

But there is a bunch of investors out there, who do their due diligence work to figure out if the numbers will hold and why the team is postponing the steps needed to progress. They will also question your methods, where you optimize for short-term gains, and not for long-term progress like having the most accurate pulse on your game.

Don’t get numbers just to impress investors. Numbers should be the lifeblood of your startup.

The founder, who from day-1, obsesses over validating their game through soft launch as early as possible, will build their product and company on a strong footing. And they will also have the backing of all the investors out there.

#14 “You’re not in a market were we invest”

Investors have their own thesis on which gaming markets are growing, stagnant and not venture backable.

In the mid 2010s, VR and AR were the hottest sectors in gaming. When Pokemon Go came out in 2016, location based games were hot. None of these markets have so far in 2020 lived up to their expecations. VR headsets havn’t become a mainstream commodity and the only location based hit game is still Pokemon Go, even with several attempts with big IP like Jurassic Park and Harry Potter.

It isn’t only the hottest market that didn’t materialize, which will push investors away: they will say no to premium games, when they’ve been won over by the power of the free-to-play business model.

There’s nothing wrong with any of the above mentioned markets and founders might do very well with games in these markets. It’s just that you’ll need much more evidence on your success to get investors on board.

#15 Talking about an early exit

As a first time founder, I had launched the company with the plan to exit the company early. I still kept it to my self as a true Finnish introvert, but I did get pitching advice in 2007 on adding an Exit slide into my pitch deck.

This is what my deck said:

Options for exit in five years

  • Trade sale to a significant media company
  • IPO to Helsinki stock exchange

Later on, I’ve been educated by the fact that it’s not what you should be thinking about as a founder. Granted that an exit can be a long term goal, but it’s only one of the outcomes that might happen to you at the end of the line. A much more likely is that you run out of cash.

Spend your mindshare on thinking about how to make your company succeed in staying alive with customer revenue, then how you get to grow the company from there.

#16 Reference checks bounce

All the VCs will do reference checks on the founders. They will call up people from the founder’s network, ex-colleagues, ex-bosses, and ex-investor, to create an image on the founder.

The most common questions they will ask:

  • How do you know the person?
  • What is the founder’s super power?
  • What’s the founder’s weakness?

Most investors will give a lot of weight on these checks, especially around comments like “I’d never work with this person again”, or to “I’d invest in anything this person is doing.”

When you get good at reference checks, you start to pay attention to how things are said more than what is said. And you start to pay particular attention to what is not said.

The founder CEO’s reference checks will have the most weight: they should score well on integrity, i.e. how they treat people, how they wow people and how they deal with times of crisis.

How to avoid: Lots of negative feedback can lead to the decision not to invest. When a founder knows that they won’t receive positive reference checks, they should be upfront about their shortcomings to investors, and to build a narrative to avoid the bounce on the reference check.

#17 Cap table looks bad

A cap table is a breakdown of how many shares (also known as equity) every shareholder owns of the company. Usually, there are four different types of people or entities on a startup cap table: founders, employees, advisors, and investors. I’ve talked about cap tables a lot on Elite Game Developers, how you can model a cap table for future investment rounds, and how equity could be split between co-founders, and how startup advisors could be compensated for their work with equity.

Here’s the most common scenario where a cap table could look bad at the early stage fundraising: You’ve done several investment rounds and have diluted the founder ownership to under 50%, without getting to show that your game is working.

When the founders own less than 50%, they need to have substantial evidence on things working before a new investor will want to back a company. The reason for this is that the company might still need to do a few more funding rounds to achieve a state where they are growing with the customer’s money. That means that the founders will dilute even more and it will be much harder to keep up the founder’s motivation, versus when founders would still have 3/4 or 2/3 of the company.

How to avoid: Make every dilution matter, so that you get closer to growing your company with customer revenue.

#18 Already invested into something similar

Investors might be reluctant to invest in companies that are competing directly with companies that they’ve already invested in. There might be a company, tackling IP based games, or build n’ battle games in the investor’s portfolio, and they might feel uneasy about investing in a competitor.

This uneasiness usually comes from conflicts of interest: the investor might have trade secrets that the existing company has disclosed to the investor, so they will be in an uneasy position when it comes to giving advice to the founders, when it could be considered as breaking an informal non-disclosure agreement.

In gaming, many “deconstructions” of games have democratized data on how games work, so there is less stealthy trade secrets to go around. This is why I believe that this will be less of an issue, albeit it can exist with some cautious investors.

How to avoid: Position your company differently. Highlight the different team backgrounds and the different approach you have is a different take on finding a “solution to the market problem.” Investors want a big outcome, they want to be known for backing the leaders in different spaces, i.e. “we backed the #1 hyper-casual company” or “we backed the #1 MMO company”. Portfolio companies, taking different approaches to winning a big market, is one way for an investor to play smart and have a double chance of winning.

#19 Too much competition

Gaming VCs can have many reasons why they won’t back you, but one of the obvious ones is that “you are going into a market where there’s lot of competition.” This can happen to any developer, especially in markets where the winners will eat out all the oxygen in the market.

One example is hyper-casual, where the startups with the best user acquisition talent will run the games studio more like a UA driven games studio. If you’ve founded an art or creatively driven gaming studio, and don’t have a foothold in world-class user acquisition talent, a gaming investor can spot this as a problem.

How to avoid: Provide empirical data on the core audience being willing to play a similar game, or a game with some critical features that create a new meaningful experience for players that will make them fans of the game. This could be done by soft-launching the game and having good enough retention metrics.

#20 Not enough confidence in the game

This one is often the problem when the team is building a big game, where they are looking for funding to build the game out in the next twelve to 18 months. You want to convince the investors, but they just don’t feel confidence in your game idea.

This reason to say no is one that is quite hard to tackle. The big games, i.e. MMOs, strategy games, etc. are often hard to soft launch before all the systems are in place, and the game is up to the standards of a high quality demanding audience.

How to avoid: Even when you have a big game to build out, start collecting information on your target audience as soon as possible. Run experiments that prove out your hypothesis, i.e. “Our game is the one that players will want to play for years”. Push this data collecting effort to the max, and find out if you need to change direction before reaching out to investors.

Note! Don’t get data to convince investors, get data to convince yourself that you’re on the right path.

Next steps

I’ve written articles on how entrepreneurs should approach fundraising, how their mindset should shift and what kind of a company should they be building to enable VC backability.

Here are the next articles you should read: