Why Do Investors Say “No” More Often Than “Yes”?

I’m relatively new to the venture capital world, and am certainly not an insider. But I’ve been observing it for 3+ years, and am now actively investing through my seed fund Backstage Capital. I’m dedicated to inclusiveness, access, and transparency on my journey, and thought it would be fun to share a few answers to FAQ’s with you guys along the way.

Q: “Why did X investor say ‘no’?’

A: They might not be that into you.

…and that’s ok. Because the reasoning may be far less personal than you think.

In my first fund, the goal is to invest in ~30 companies at check sizes between $25k and $100k. For every 1 company I invest in, it averages out to seeing a total ~40 companies. In some cases those companies come to me — either through direct contact by the founders, or through someone in my network introducing me. In other cases, I find them — through online research, attending demo days, or just simply already being a customer & fan of that company.

So what was it about the 39companies that didn’t get a yes? Do they suck? Are they doomed? Are all investors geniuses who only choose the next ubers and facebooks? Naw. Of course not. Something to keep in mind when writing to me and other investors — whether via cold or warm intro — is that in some cases it’s simply a numbers game where as much as I’d like to be part of your current round, it may not be physically possible.

Most seed funds are between $5mil and $100mil. There are some that are much bigger, and some that focus on Series A and beyond that can reach billions under management, but let’s just focus on the ones you’re probably reaching out to as a company in your seed round.

So the funny thing is that at some point — maybe even currently — these guys had to do the same thing you’re doing: fundraise. Let’s create an imaginary fund that you’ve recently read about that has raised a debut $40mil fund. They have 2 partners, work out of a co-working space, and share 15+ years of investing experience between them. One of the partners probably worked at a huge brand name fund for years, where they made $90k–350k/yr. The other one may have founded a company that had a decent exit and they may be sitting on a couple million bucks. They’re both comfortable now, but usually have other family members to take into consideration, and are planning for their future security. They’ve known each other for a while, and get along, and are looking to move beyond writing angel checks or working for someone else. So they form MeToo Ventures with a target of $50mil.

Ok…so how did they get here? Well they probably spent months, if not years meeting with potential investors (at that size, usually funds-of-funds, family offices, corporations, universities, endowments, pension funds, and high net worth individuals). I know of some funds that have raised all of their money in a matter of 6 months, and some that took 3 years. There are a ton of factors at play, but the bottom line is that its not easy for even the most seasoned venture capitalist to raise a first (or second or third) fund.

They themselves probably heard 25 ‘no’s for every 1 LP (“limited partner,” or investor in the fund) they met with. And now that they have the money (and only 80% of their target, at that), they have to be very careful how they spend it. They’re investing other people’s money and all eyes are on them, just as all investor eyes are on you as a founder.

As a startup founder who is fundraising beyond their friends and family round, it’s important to understand how venture funds are formed, operated, and how capital is deployed. It’s important to remember that most funds with any sort of decent network is seeing dozens of companies for every 1 they can invest in.

My advice is to spend a LOT of time researching. Reach out to the funds that have portfolios that make sense for what you’re doing. Most funds have a website (mine is coming soon:) ) that tells you what their investment focus is. READ THAT SECTION before emailing or getting an intro to them. Know a little bit about them first. Focus on why you want to be partnered with them. Have a plan. Keep track of who you speak with at each fund, and what the current state of your conversation is. Spreadsheets are your friend.

When an investor says a hard ‘no’ to you, this can sting. If its the 50th ‘no’ in a row, or if this was a fund you were especially hoping to get, it can feel like several daggers to the heart. But again, this is a numbers game. Buck up and keep it moving! One foot in front of the other.

I did the math, and I have heard ‘no’ 4,000,000,000x in the last year. Ok my math may be SLIGHTLY off. But I’ve heard it a LOT, my friends. Yet I never gave up, never stopped moving (some could say…like a…shark, even;) ), and now things are looking up.

Investment funds are spending other people’s money and trying to make the best investments they can to reach a certain pre-determined return target. They’re doing this so they can earn their 2–3% management fee each year, but more importantly so they can make their 20-or-so% “carry” or profit share once companies start exiting. You may have an awesome team, and be an incredible person, and you may even have a really cool product that’s going to sell millions, but if that fund doesnt envision you making back 10x or 30x or whatever their internal criteria is, it just isn’t for them. Venture funds are super corporate at the end of the day. Even the chillest VCs have someone to answer to.

If you’re talking to angel investors, they’re investing their own money. Their checks may be smaller, but they’re usually able to make decisions more quickly and wire funds faster than a VC fund. The truth is though, they’re usually working with the same internal criteria.

Let’s say someone who has $5mil net worth decides to invest 10% of that, and of that, dedicate 20% to the venture asset class each year for 5 years. They then decide to invest in 5 companies per year, at checks between $10k-$25k. That’s 25 companies total, and a total of $500k capital deployed. Most of the time investors like to measure the success of their portfolio returns by looking at yearly IRR as it compares to the public market, but in our case let’s just talk about cash-on-cash returns.

Let’s assume the angel we’ve created wants a 3x overall return for the portfolio. This means they want to make $1.5mil from their $500k investment. Investors are operating with the data that over a 10 year period, 50% of their portfolio co’s are going to die out completely, 25% might return capital (or 1x…barely), and the rest may 2–3x. But if you did the math, based on just that, that would NOT be a good investment portfolio and not really worth the time and effort. Therefore, they’re also banking on that elusive 1–5% that has historically eked through to save an entire portfolio. This is one that 20x or 50x or ?x.

An investor of any size, whether they’re investing their own money or out of a pool of investors, when analyzing EACH company for possible investment, HAS to imagine that your company can be that special one that does well enough to return the whole fund. You may think it can be — and most founders I’ve met do (and should), but the investor who sees 25–100 companies for every “yes” they give out, may not.

And that’s OK!

Know the game, play the game, be fine with the moves, and MOVE ON! Keep trucking. Keep improving. Keep talking to your customers and staying connected to why you’re doing this to begin with. They always say “do your best and the money will come.” Well I personally think that’s bullish*t cause like…its HARD OUT HERE, y’all. But there are definitely options and opportunity. And learning the art of war in this investment game will help you not waste time or tears.

If you’re raising funds right now, if you’re able to afford it, grab some books on the subject and bone up on your knowledge. These are all also available on Audible.com which has been a lifesaver for me recently.

Read Brad Feld and Jason Mendleson’s “Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist,” David S. Rose’s “Angel Investing,” and Peter Thiel’s “Zero to One” (hopefully one day there will be a ton of venture investing books by women). Read Joanne Wilson’s blog, Brad Feld’s blog, Fred Wilson’s blog, bryce.vc and my blog (you can think of me as the Cliff’s Notes to all of those other one’s) :)

Google the investors who are changing and challenging the game, like Marlon Nichols, Kesha Cash, Charles Hudson, Susan Kimberlin, Jocelyn Goldfein, Troy Carter, Hunter Walk, etc etc.

Try to follow these guidelines when emailing me and other potential investors to make it a bit easier to get back to you promptly:

  • Keep it brief (I should be able to read it between General Hospital commercial breaks!) No seriously —I used to write novels as intro emails and tell my life story when really 1 or 2 small paragraphs is ENOUGH!
  • Don’t ask for a phone call or meeting, let us ask you
  • Be cool. Don’t come at me, boo. Passive aggressiveness is odd and uncomfortable and should be reserved for American Airlines customer service.
  • If you don’t hear back within 7 days, please send a reminder email. If you don’t hear back from me after a couple of weeks, give it some time and only reconnect with some news about your company that will catch my attention (this isn’t a fast and hard rule, but a good idea in general)

I’ll continue to write about my epic journey breaking into venture capital. Feel free to send in your questions!

I’m the founder and managing partner of Backstage Capital, a seed investment fund that backs high-potential, underrepresented startup founders. I am also a tour manager, currently working with New Zealand Music Award winner Janine & the Mixtape.

For interviews or to set up one-on-one “office hour” sessions at your event, email ARLAN@BackstageCapital.com with the subject “interview request,” or “conference appearance request,” etc.