15+ Ways a Venture Capitalist Says “No”
If you like this article, check out another by Robbie:
The Uber of Startup Lingo: A translation of 47 startup one-liners
Since this made it to the front page of Hacker News, I’ve added more to the original 15 after incorporating several suggestions.
For new entrepreneurs, raising money can be a daunting task. It’s unlike anything else you do in the business world. Even if you have experience running a department at a big company and have to make yearly budget requests, it’s not the same. Trying to convince strangers at an unrelated firm to give you hundreds of thousands or millions of dollars for your new idea and minimal track record is not a natural act.
To top it off, the dance you have to engage in with potential investors is just as unnatural. Investors are inundated with pitches, so very few are that interesting to them, but when one is interesting, they get really enamored by it.
For most entrepreneurs, this translates into lots of rejections and a small number of commitments. Given the sheer number of rejections that venture capitalists dole out, you’d think they would be better at it. Unfortunately, most are not. VCs are notorious for not saying “no” even though they have no intention of investing. It’s in their interest to keep you on the line as long as possible just in case you become an interesting company they get enamored with later on.
That means it’s easy to misread the signals a VC gives. Below are 15 different types of responses I’ve heard between my own fundraising efforts and companies I’ve advised. They range from being a direct form of “no” to a more insidious and subtle deflection that still means “no”.
Note: I’m normally not this cynical, but this article was fun to write 😎
VC response: <no response>
Translation: I’m not going to engage in a conversation about how bad of a fit you are for our firm. Maybe I’ll develop a reputation has a hard-to-contact VC that only responds to the top entrepreneurs.
Comment: Perhaps the most common way to say no is not to respond. Instead of being forthcoming about your lack of fit with their firm, it’s easier for them not to respond. And never fear, they are getting your emails! Rarely do they actually go into the person’s SPAM folder even though you convince yourself that’s what has happened. Otherwise they would have responded by now, right?
VC response: <When he realizes you aren’t going away> Your other four emails must have been caught by my SPAM filter. I took a quick look and you don’t seem to be a fit.
Translation: I give up. You clearly aren’t going away, so I have to give you some sort of reply. We’re not interested. Happy now?
Comment: Your emails didn’t get sent to their SPAM folder. It’s the oldest excuse in the book. At least you made them capitulate into giving you a firm no. Mark them off the list.
VC response: We’d like to wait six months to see more progress.
Translation: I don’t have faith you will hit your overly optimistic estimates, so I want you to prove it to me. I don’t expect to see you in six months.
Comment: This is a very common version of “no.” Investors want to wait as long as possible to make a decision and entrepreneurs want to wait the shortest time possible. With more time, investors can “derisk” the investment. For entrepreneurs, your cash-zero position isn’t improving and need money to stay in business.
VC response: We’d love to get in on this as soon as you find a lead investor!
Comment: This is especially insidious because it’s a conditional yes. It feels like you are making progress, but when you stack up several of these it can make you feel closer than you really are. If I just can find a lead, the rest of the round is done!
VC response: We’re really interested and we want to do the deal, we just need to wait to hear from partner X who is currently out of town.
Translation: We are about to fund one of your competitors, and we want to string you along as far as possible in the hopes that we can distract you from other fundraising efforts so that you will be less of a threat to our new baby. (h/t to lisper)
Comment: It’s not a “yes” until the check clears. (And even then you should probably wait two weeks just to be sure.)
VC: You are a little early for us. Keep us in mind for the next round.
Translation: I’m going to blame you being a young company as the reason I’m not doing the deal even though we do deals with companies younger than you all the time.
Comment: Sometimes you’ll get this with larger VCs that don’t like doing seed or early stage deals. In most cases, they have some early stage deals in their portfolio, but they just don’t want to take the risk on you.
VC: Thanks, but this isn’t a fit for us right now. Let’s keep in touch.
Translation: You aren’t a fit right now or in the future. Let’s NOT keep in touch. Oh, unless you become a potential under-valued unicorn, THEN let’s keep in touch.
Comment: The classic waffling response is to say you aren’t a fit right now — maybe later though! I’ve actually had an investor tell me this and invest in a later round, so I shouldn’t be as harsh about this response. It’s about the most honest response you’ll get it.
VC: We are near the end of our fund and aren’t making new investments.
Translation: We are raising money for our next fund and are just as desperate as you are. We can’t even think about investing in your company. Do you know any LPs that would like to invest in our firm?
Comment: Assuming this is true, you just caught them at a bad time. Every VC has to raise a new fund when they are at the end of their old one. Some of the more successful VCs can do this without slowing down their pace of new investments, but that’s not always the case.
VC: We love your company, but aren’t making new investments until we close our next fund. Can you give us three months?
Translation: I like the company and don’t want them to rule us out, but we need more time before we can consider investing in them because we don’t have enough “dry powder” (aka, money).
Comment: This is a more positive version of the previous response, but still a no. They appear to be really interested but know you probably can’t wait three months to get started with them.
VC: Sounds interesting, but I’m really busy right now. Can we meet in four weeks?
Translation: I’m very busy and I’m going to see if you can wait several weeks. If you can wait that long then either you are damaged goods or not desperate enough for me to get a good deal. Either way, I’m out.
Comment: This looks good on the surface, but really is a no. Fundraising is all about building momentum. If an investor is so busy he can’t meet for four weeks, he’s not that interested.
VC: Let me introduce you to my associate Hayden…
Translation: This is the fifth pawn-off to Hayden today. We warned him the associate hazing period would be intense.
Comment: In general, you should avoid anything less than a Partner at VC firms. I don’t have the numbers, but I’m skeptical of the success rate of deals championed by associates. In my experience, it’s not worth the time. Pawning off to an associate is an easy way for the VC to stay in touch without having to spend any time or effort on your company.
VC: Let me talk to my partners and get back to you.
Translation: I don’t want to take the blame for not investing, so I’m going to blame my partners.
Comment: This one sounds like a positive response and occasionally it can be. More often than not, it’s just an excuse to say no. Your main point of contact needs to be your biggest champion. She needs to convince her other partners, not leave it up to them.
VC: Your company doesn’t fit one of our current themes.
Translation: Woohoo! I’m glad we put a page on our website that talked about our “investment themes.” It’s an easy out!
Comment: Many VCs do have investment themes, so I don’t want to say this is never a valid excuse. It certainly can be especially if the firm doesn’t have an investor that specializes in your market.
VC: We are geographically focused and don’t make investments in <YourCity>.
Translation: Does this entrepreneur really think I’m getting on a plane once a quarter to visit <YourCity>? They don’t have a direct flight and my Cessna wouldn’t make it unless I refueled along the way!
Comment: This isn’t an uncommon response for companies based outside of Silicon Valley, NYC, and a few other locations. Check to see if their firm has invested previously in your location. If they have, you can give them another reason to have a productive trip. If they haven’t, it can be an uphill battle to convince them to visit you.
VC: One of our partners/associates left recently so we are shorthanded.
Translation: I’m going to use a fact about our firm (someone left) as an excuse for why I don’t want to spend time on this company.
Comment: The truth of it is for large firms there is frequently someone coming and going. It’s an easy out. For smaller firms, someone leaving is much more impactful and can put a busy VC behind even more.
VC: Your valuation expectations are too high for us.
Translation: I’m going to see if they take the bait so I can squeeze them.
Comment: This could be a maybe or a no. Blaming it on valuation is sometimes an easy way for an investor to get out of a deal when he knows the entrepreneur won’t negotiate. It’s essentially like saying “I want you, but you are too rich for us.” In some cases, this is how the negotiation begins for a term-sheet.
VC: We would be interested in a round where we invest in tranches.
Translation: We are marginally interested, but think this is likely not going anywhere. Because we’re feeling generous, we’ll do a deal with this entrepreneur if they take us up on the “try-before-you-buy” approach to investing (i.e. tranches).
Comment: There are some scenarios in later rounds where tranches are ok when your business is more predictable, but at the very early stage it is a bad idea. You need the money that you need, and you need investors that are bought in on the vision through the ups and downs. Doing a tranched deal is kind of like getting a prenup with an early termination clause. You aren’t starting out on a good footing.
So how do you know when you get a Yes?
With all these ways of saying “No,” how do you know when you get a “Yes”? Unfortunately, that is complicated too. Sometimes you might get a VC that is explicit and up-front about their interest. But even then, just because a VC says they are going to give you a term-sheet doesn’t mean they always do. In my experience, VCs remain pretty cagey throughout the fundraising process until they sign on the dotted line. As an entrepreneur, your best bet is to keep your options open all the way until the money is in the bank.
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