You're a smart entrepreneur. You have a good idea. Your pitch is spot-on. So why can't you raise money? It's usually this simple: You're thinking like an entrepreneur, not an investor, so you're not getting through the "second filter". The key is to understand that the second filter exists, how it works, and how to get your company through it.
Filter 1: Team, Market and Product
Most smart entrepreneurs understand the first investor filter. Team, market and product are the starting point for any investor's analysis. And team is the top priority for most investors because they have seen enough company pivots to understand that A-quality teams with B-quality ideas will generally outperform B quality teams with great ideas.
When it comes to assessing a team, investors look for things like a deep understanding of the market or customer, high integrity, tenacity, a strong work ethic, and exceptional people skills/EQ that will drive great communications, leadership, coachability and allow for some charisma. (Here is more depth on what I look for in a leader.)
Entrepreneurs also generally understand how investors assess target market. It has to be big enough to support a decent-sized business based on reasonable market share assumptions. It needs to be accessible enough to break into. And additional dynamics like super-fast expansion, or extreme fragmentation, or maturity and readiness for disruption that will allow start-up hyper-growth, are also coveted.
When it comes to the product idea, what investors want is also fairly well-understood. It must be a smart concept--either novel in and of itself or a novel twist on the state-of-the-art. It has to be differentiated from what is out there in ways that actually matter to customers. And it needs to have the potential to form the basis of a defensible business. This might be intellectual property, or market share and customer lock-in, or some other network effect, but the business and its margins need to be able to withstand competitive assault, or the investor is not going to bite.
Filter 2: It's The Hidden "Three P's" That Kill You
So once investors have validated your great team, great market and great idea, why won't anyone invest? The culprit is usually the second filter. When narrowing down based on team/market/idea, experienced investors typically sift investment opportunities into "no" and "maybe" piles. What entrepreneurs don't understand is that your great team, market and idea will only get you into the "maybe" pile. From that point forward it's the second filter that has the potential to kill you.
Most experienced investors always have a bigger pile of interesting "maybes" than they know what to do with. So they need to apply a second filter to select the ones to invest in. Most entrepreneurs neither recognize the existence of this filter, nor know how to get through it.
People might use slightly different words, but the second filter always boils down to a basic assessment of what I call the "Three Ps"--potential, probability and period. All things being equal, an investor would rather invest in something with greater potential to be huge, a higher likelihood of succeeding, and a shorter period of time required to accrete serious value.
This assessment requires sifting through the pile of "maybes" which all have great teams, markets and ideas, and they asking themselves "which is most likely to be a big, fast, business?" In short, they stop thinking like an entrepreneur ("is this possible"), and instead think like an investor ("is this probable, and is this profitable?").
So what does this mean for entrepreneurs? To break through the "maybe pile" you must understand and be prepared for the second hidden filter. This means being capable of talking about your business in a way that harmonizes with how investors are ultimately going to think about it. Push yourself to move beyond the comfort zone of possibility, and be ready to argue the potential, probability and time period as well. The entrepreneurs who do this well will increase their odds of moving beyond the "maybe" pile because they've convinced investors of the superior attractiveness of their opportunity compared to the sea of maybes that haven't.