The Art of the Pass

As venture investors, we see hundreds of deals a year. Even the most active firms invest in less than 20 (we’re at about one/month pace for last 2 years), so you can do the math on the number of “no’s” that have to go out. Here are some insights and opinions on how to deliver (and extract) value in a rejection.

Venture is a people business. So treat people well.

We all (should) remember the Golden Rule…”do unto others as you would have them do unto you.” Many of us were at one point founders. Putting ourselves in their shoes will help to do the right thing. Remember, your reputation is everything, and founders talk to eachother and to other investors, constantly. Use this to your advantage.

A rejection is better than silence.

In my experience from both sides of the table, investors are afraid to outright reject for two reason:

1) they don’t want to lose the opportunity to ‘change their mind’ and invest at a later time

2) as humans, they tend to avoid conflict

Let me rebut each one of those:

1) if you follow the themes in this post, you will often strengthen your relationship with said founder

2) Silence actually creates more conflict. A rejection at least provides clarity, which is valuable in and of itself to a founder, who has limited bandwith to manage investors, follow-up, etc.

You’ll also feel better yourself. It’s called closure.

The ‘phase out’ is just as bad, if not worse.

I was a repeat offender of this during my dating days. You all know what I’m talking about — you already know that you’re going to pass, but instead of just saying it, you kick the can down the road, delaying phone calls and meetings, provide vague responses and timelines, waiting for them to reach out just to reschedule again..until the other person gets the hint, or loses interest themselves.

Don’t do it. It’s not fair to the entrepreneur, and it’s just flat out exhausting to pull off properly.

Provide real feedback

This goes back to investors’ fears of creating conflict and losing future opportunities. But I’m amazed at investor responses that either provide no reasoning/guidance, or just complete bullshit. Some examples:

“It’s just not the right fit for us”

“It’s too early”

“I liked it, but just couldn’t get the others on board”

“We need to see more traction”

This is selfish, and founders deserve better. It also can come back to hurt you later on.

· Real feedback will, you know, actually help the entrepreneur. Isn’t that what we are here for?

· There isn’t a much better feeling than when a founder who you passed on still thinks enough of you to intro you to new deals.

· Having to express specific analysis to founders helps investors do their job better.

So next time, be honest. Tell him/her that you have real doubts about the market size the way they are calculating, or that the team is not experienced enough to tackle this problem, or that because of your experience in _____, you struggle that X will pay Y for Z. Just think their idea is stupid? Tell them! It will also give them an opportunity to come back to you in 3, 6, 12 months and know exactly what hurdles they needed to overcome.

Get to the Point

First tell them you are passing, then go on to say whatever else it is you are going to say. Please do not heap praise on them for 2 paragraphs, to soften them up for a rejection. It’s just cruel.

Everyone Deserves One

Again, clarity and any response, is better than none. So we do our best to respond to every direct inquiry we get where at least some effort was made. I’m not counting copy/paste jobs, or when we are obvious BCC w/ 100 investors. But if you did your research, found a way to get in touch, mentioned why you are a good fit, I’ll at least respond with candid feedback.

My Template

No, it’s not an actual template. But there are some common themes.

Hi (founder),

I’ve enjoyed getting to know you, and learning about (company). After careful consideration and analysis, we have decided to pass on the current investment opportunity. There was a lot we liked about the business, specifically ________________ and _______________, but we couldn’t get comfortable enough with the following:

· 2 or 3 bulletpoints on specific concerns, weaknesses, or assumptions that are yet to be tested/proven

I’m happy to jump on a quick call and provide more clarity around our reasoning, if you’d find that valuable. I’m also willing to revisit in the future — feel free to update me with your progress. If there is anything I can do that’s helpful, don’t hesitate to ask.

Rooting for you to prove me wrong!

David

I’d love to hear from other investors and founders. What do you find valuable in giving or receiving a ‘pass’?