The secret reason investors say no: they’re just not that into you.
Most startup investors who are public about the fact they invest are perpetually-slightly-overwhelmed by inbound deal flow. They’re trying to take a few cupfuls of water from a thundering waterfall each day, or more accurately, the best few cupfuls.
They learn quickly that telling the truth to a founder about why they’ve decided to pass on investing in your startup takes way too much time. Certain true answers will drag the investor into a lengthy series of questions and answers, or the beginning of a debate, and they don’t have time for that. They have to get back to scanning the waterfall, in case they miss the best cupful while they’re talking to you. And sometimes because it might disclose embarrassing elements of the investor’s financial situation or internal politics.
In venture capital a common reason is that the person you’re communicating with doesn’t have enough influence on the investment committee to get your startup selected for investment. They will have to persuade others in the firm to get onboard and they doubt their ability to do that or already know they won’t succeed.
Sometimes, it’s because there’s not a great fit with their fund’s stage and sector focus, but often it’s more because there are a bunch of more promising startups in their review pipeline – yours is good, but it’s in fifth place on metrics and there’s only enough capital to back three companies right now, for instance.
The person you’re dealing with might come back and tell you you’re not a great fit, but they probably won’t tell you it’s actually because you’re not quite promising enough. That’s a hard conversation to start and it’s too likely to lead to a lot of follow-up questions that a busy VC employee can’t easily answer without breaching the confidentiality of the other startups in their pipeline. They’ve got to pull their cup out and cut this short. So you get the ‘not a great fit’ reply.
Sometimes it’s because there are factions or powerful individuals on the investment committee who will use their veto power to block deals involving a particular technology, business model or market that they’re sceptical about. The person you’re dealing with might come back to tell you you’re a little too early or too late for their current focus perhaps, but they won’t tell you there’s a senior partner who’s a sceptic blocking deals like yours. Too much internal politics that they can’t risk being gossiped about. They have to pull their cup out. So you get the ‘not a great fit’ reply.
Sometimes you really are too early or too late for the stage that investor is focusing on, and they can’t admit that to you because their portfolio is full of startups like yours, so it makes no sense to say you’re at the wrong stage. But it’s hard for them to admit to you that the fund’s stage focus has shifted earlier or later since then. They’ve got to pull their cup out. So you get the ‘not a great fit’ reply.
I focus on co-managing the M8 Ventures syndicate with my venture partner Emily Rich.
When you’re pitching to an angel syndicate, first you have to persuade the syndicate managers (Emily and I) it’s the next deal we should do, and then we the syndicate managers (with your help) will work on persuading the syndicate members to invest. If we know our syndicate well, we already know if most of them won’t be interested in a startup like yours, even if Emily and I are.
But here’s the big reason most investors won’t tell you
Most investors will only very rarely tell you the real reason why they aren’t interested in investing in your startup. But Emily and I aren’t most investors. So here it is:
They’re just not that into your startup.
It wouldn’t matter how much capital we had to invest with, whether it’s mine, ours, or our syndicate’s. I could never invest in all the potentially successful startups I see, or even all the startups I meet that excite and interest me, or even all the startups that interest me, Emily and our syndicate.
(I didn’t start there, so if you go back through my portfolio there are some startups there that didn’t and maybe still don’t excite me. Not going to tell you which, obviously!)
But once I figured this out, I decided to focus on investing in startups solving problems I cared about, using tech I’m interested in, for customers I cared about.
I have to care enough about the problem, the tech and the customer to persuade Emily this is the next startup we should invest in, and I need to believe she’ll love it too. We have a lot in common when it comes to what we care about (that’s why we’re in M8 Ventures together) but we don’t see eye-to-eye about 100% of everything. That would be weird 😂.
Sometimes Emily and I are both onboard, but we know our syndicate members well enough to know it’ll be a hard slog to persuade them they should invest too. So sometimes you’ll hear back from us to say we think it’s interesting but our syndicate will disagree with us.
Finally, we and our syndicate members don’t have all the capital in the world, and a tiny fraction of the funding capacity of the tier one and two VC firms. You are very likely to hear from us that we like your startup, our syndicate would probably like your startup, but we have a number of other great startups in the queue, and sorry, but you’ll either have to find the money elsewhere or figure out a way to wait for us.
There’s absolutely nothing wrong with most of the startups that I say no to for investment, they’re just not doing something I can get passionate about. And I need to be passionate enough to want to do a bunch of persuading, to make the deal happen.
Does that make sense?
