When VCs say ‘No’

It is usually nothing to do with your amazing company

Phil Morle
Main Sequence Ventures

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For most of my career I was an entrepreneur. In this work, I was constantly trying to convince people to back me and my companies. Those of us who have experienced this, know that the process can be brutal.

I am incredibly proud of what I do and my ego takes a beating when people say ‘No’ to my ideas but I work hard to step back and learn lessons from the experience.

Now I am a VC and can share some observations from the other side of the table that I hope will encourage you to keep going and find VCs that are right for you.

Most ‘Nos’ you receive are nothing to do with your amazing company. There are other forces at play which cause most of them.

‘No’ Reason 1: Your company does not qualify — stage, location, industry are not a fit

Funds specialise in making certain kinds of investments. The principles that describe this are enshrined in a prospectus that they took to their LPs and in the guidelines for their investment committee. They invest within a certain range of a company’s lifecycle which matches their capability to deliver value and the return profile they have promised their own investors.

For example, some funds are optimised for early stage development. The way they work accommodates the increased risk of total failure, but needs the multiples that are possible from companies that succeed.

Other firms are focused on later stage investments. They need more proof and they don’t know what to do with startups without customers and proven business model.

Similarly firms have a preference for areas of the world that they can best support and industries that they know well.

Some of this is obvious and declared on the firm’s website, and sometimes you need to ask.

If your company does not fit with a firm’s qualifying criteria, they can’t invest — even if they love what you are doing.

For Main Sequence (the firm I work for), a potential investment needs to be an early stage opportunity (Foundation/Seed/Series A) with:

  • science driving its core value
  • a connection (prior or planned) with Australian public research
  • a location that is probably in Australia.

‘No’ Reason 2: Your company does not match the firm’s current thesis

This can be harder to pin down. Firms develop theories around categories of company that they are excited about. This will be driven by market trends and networks where they have some advantage that can feed the portfolio. Often they are still open to investments outside of this thesis — after-all, we’re all looking for that unicorn-to-be that no one else has seen — but if your company answers a question that an investor is asking, you are much more likely to see them lean in.

Sometimes this is a personal passion of individual investors and you will need to ask them. Sometimes it is at the firm level. Often it is a blend of both.

At Main Sequence, we have our 6 Challenges that drives our proactive search for companies.

‘No’ Reason 3: The investor is too busy

Investors have very long days which are spent supporting multiple portfolio companies, making new investments and building their firm. Like all jobs, a VC might be too flat out to go deep into understanding your company. Ironically, the bigger the idea, the more challenging this can be. You need to break through the noise of other stuff. Really think about that if you have 30 minutes on a Zoom call for the first meeting.

It is valuable talking with VCs over months before you need money. Build a relationship and give it time for the potential of your company to sink in. In your conversations, be clear on timings and ask what is possible from the firm.

If you pitch for capital within weeks of a close, and the investor hasn’t heard of your company before, it is very unlikely that you will be successful.

‘No’ Reason 4: They have a company that is too similar in the portfolio

Some investors will happily make multiple bets on the same kind of company. Some will resist it. In general, firms investing at the earlier stages are more hands on with their portfolio and avoid situations where they need to chose between companies in their own portfolio when they have some value to add.

‘No’ Reason 5: They’ve been burned with a similar company

Just because an investor has already backed a company in your field, appearing to qualify your company with them, it is possible that their experience has been bad. The market may be more difficult in practice than they imagined when they first invested, or they may have learned things about the category which make investments of this kind (in their mind) less likely to deliver the returns that they originally imagined.

If there is a company that is in their portfolio that is like this, ask them about it. What is working well and what is harder than they thought? Perhaps you have a breakthrough that they would love to understand.

‘No’ Reason 6: The investment category is ‘off the boil’

Investment markets go through hype cycles and it is possible that the category your company is a part of is ‘off the boil’ in the mind of the investor. This can happen because investors get excited about some new trend or technology and then everyone piles in. Then all those companies are going for follow on rounds and struggling to raise in a crowded market. If investors feel that they will struggle to build syndicates in future rounds, they will struggle to get to a ‘Yes’.

It is worth looking at your company and your category in Crunchbase and learning what your company looks like from the outside.

What you can do

Do your research. Qualify the fit as much as you can with online discovery and asking other people before you speak with an investor. When you meet with an investor, ask direct questions to qualify the fit.

If you find yourself in a meeting and you believe that there is no immediate fit, don’t waste the session. Declare that there may not be a fit from what you understand of the investor priorities, but you would love to brief the investor for later or so that they can give feedback or make suggestions for other people to speak to.

Don’t give up, keep hunting until you find investors who are able to back you and join your mission. There are literally millions of investors out there today, each with different fits.

Go and find yours. They are looking for you too.

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Phil Morle
Main Sequence Ventures

Deep tech VC — Main Sequence Ventures. Ecosystem builder. Maker. Director. Startup Scientist.