However, there are certain enduring patterns, or “Danger Zones” (to reference the legendary Kenny Loggins), that VCs often find particularly challenging when making an investment. If your startup falls into one of these Danger Zones it doesn’t mean you won’t attract VC investment, but you will have to work harder and smarter to find the right VC. Below, I lay out four of the eight Danger Zones to lookout for:

Danger Zone #1: You are addressing a small market

In short, VCs need large Total Addressable Markets. The objective for the VC is to create a portfolio of investments with the knowledge that a significant proportion of these investments will fail (the “Losers”). Here are more insights about the importance of the market slides and how VCs think about the Total Addressable Market.

What can you do about it?

• Find a bigger market: if you really want to seek VC funding, assess whether your product or solution can point to a different market or adopt a different route to market.
• Explain that this is step 1 of a larger journey. Try to build a story to explain that this is just the first step for your company and that you have a pipeline of other products or solutions that can help build additional revenue streams to create a larger market.
• Demonstrate that you are creating a new market with a view to convincing the VC that simply looking at existing market data is not the right way to assess the opportunity.

Danger zone #2: You are a consumer-facing business (B2C)
Many VCs simply will not invest in B2C businesses. Some VCs will say this upfront, others will not say it at all. Why? VCs like to keep their options open (just in case)! Here are the full insights about how to approach VCs if you're building a B2C company.

What can you do about it?

• Find VCs that specialize in B2C businesses. They are not always easy to find but they are out there and you will find discussions with B2C VCs to be a breath of fresh air since they “get it.”
• Pivot to B2B2C (i.e., your business sells to other businesses who in turn sell to consumers instead of selling directly to consumers).
• Target angel investors. In the absence of finding a specialist B2C VC, it may make sense to seek out angel investors rather than a VC, at least in the early stages for B2C businesses.
• Crowdfunding platforms can be ideal funding sources for B2C businesses so this is an alternative funding route I would recommend exploring.

Danger zone #3: Your business is a double-sided marketplace
When an investor looks at a double-sided marketplace, they see every investor risk doubled! Twice the chance everything will go wrong. Marketplaces are notoriously difficult to get off the ground with all the moving parts described in the full post.

What can you do about it?

• Find marketplace VCs. They are out there, but they are not that easy to find and often only in larger markets.
• Prove your business case in a particular niche and raise funding against the metrics in this niche. If you can be laser-focused on achieving a small part of your bigger vision, this may provide the data investors need to believe in the bigger opportunity.
• Lock down one side of the marketplace. If you already have supply or demand figured out, then adding the second side of the marketplace as the next step in your proposition is a less risky endeavor for investors. This could be because you are an incumbent in the marketplace, and it means you present investors with at least a partially de-risked proposition.

Danger zone #4: You are a hardware business

In investment hell, there is a graveyard full of investors who have literally lost their shirts investing in and losing that investment in hardware startups. Issues here include the challenge of the one-off nature of the revenue, the risks around production and supply chains, and the high working capital requirements, and much more outlined here.

What can you do about it?

• Find a hardware VC. <Again, there are a small number of VCs out there who do invest in hardware. This is especially true for sectors like healthcare, for example, where there is an active medical devices investment community with investors who understand the investment journey and time-to-market for these types of devices.
• If you can build a recurring element of income into your business, this can help open investment possibilities significantly. (e.g., Nespresso makes more money on recurring purchases of coffee capsules than machine sales.) Embedding a software as a service component or another recurring model into technical hardware can be attractive for certain VC investors. An investor I really like in Chicago, Nick Moran of New Stack Ventures, not only hosts a great podcast (The Full Ratchet) but has a specific investment thesis around hardware businesses with an embedded recurring revenue model.
• Partner with your hardware supplier to de-risk the production elements of the business so you can focus on sales and other challenges of scale.

Here are more danger zones covered in my full post:

• Danger zone #5: The wrong team with the right idea
• Danger zone #6: You have a terrible idea
• Danger zone #7: Zero traction or customer validation
• Danger zone #8: Your cap table is “messy”

These last four bullet points are more common danger zones that founders need to be aware of when pitch VCs. For both founders and investors, I recommend reading my full post to know how to address these individually from both sides of the table.

Are you a startup and need help with fundraising? We've partnered with Zendesk and few amazing VCs to host a pitch deck teardown event on March 15th to give founders the feedback they need to be investor ready. Here are the top tier VCs on the panel and how you can participate: