May 29, 2019
One considerable part of a VCs job is to say no every day. I think all entrepreneurs agree that very few VCs are great at it while most could use improvement.
One of the toughest things about saying no is how to package it as it’s not logical telling a hard no — instead of a nice one — in terms of game theory. VCs know the value of waiting for more information and saying a hard no will close that door for good. What if you’re wrong? What if they’re a decacorn in the making? It’s just not smart saying a hard no as VCs understand we’re wrong about a lot of things.
There are a variety of reasons for saying no that vary from product-related reasons to market, team, traction and timing-related reasons. I’ll try to highlight and speculate on some potential reasons why VCs might say no that aren’t as commonly said out loud.
Remember that VCs have different preferences and things they consider risky and this isn’t something that can be generalized for all — so consider this more of a thought provoking read rather than an absolute truth in the realm of high-growth entrepreneurship.
Let’s start off with the hardest to explain but one of the biggest determinants of investment when it comes to assessing chemistry with your VC. The gut feeling can’t really be pinpointed to a certain individual characteristic and it can’t be explained in a scientific manner although there has been a technique devised to quantify intuition. Even if the VC seems like a match, an entrepreneur might turn them down because something doesn’t feel right, and vice versa. I can’t define ‘gut feeling’ but I hope this hypothetical flow of thoughts gives you an idea.
The founder has something that’s a bit off about them but hard to pinpoint. Maybe it’s the fact that they seem to have a hard time thinking objectively about their business and they don’t seem to take critique that well. Or maybe it’s that they’re supposed to be the public figure of the company and the best companies are built by truly exceptional founders. This doesn’t feel special and simply isn’t compelling in a contagious way.
How, then, is the founder (1) able to make people listen and care, (2) convince people to work for them when they have multiple other options, (3) be able to sell to their first customers, (4) build partnerships or (5) raise the next round? My gut says that this just doesn’t feel right.
Note that being exceptional doesn’t necessarily mean you’re the extrovert hot-shot CEO. You can be the quiet tech marvel behind the product with the ability to transform complex concepts into an understandable vision. Regardless of your ‘type’, the key here is communication. And if you can’t communicate your message in an understandable way, more often than not, something just doesn’t feel right.
The hard truth is, a VC never says “It’s you” — but really it is you.
The way you talk and uphold the conversation has a lot to do with the chemistry match you have with your investor. Regardless of pitching in a meeting by yourself or as a founding team, there’s a tone that indicates potential problems — not necessarily immediately but a few years down the line.
“I did this, and I did that. I made my decision and I decided that we’re doing X.”
Using singular instead of plural is totally fine but using it excessively gives an impression that you’re here for you and not because of the team, company vision, and values. It’s a small detail in the structure of sentences but can be a huge indication of difference in attitude. Most all VCs invest in the (founding) team, and not a single founder.
The same applies for founders constantly interrupting each other or taking criticism personally. Great leaders recognize that leadership is not about them. On the contrary, true leadership is bringing out the best in others.
At some point in your talks, VCs will ask for a cap table. This is not only to understand who owns which shares but it also sheds light on the role of the co-founders, how employee rewards have been though out as well as how ready the company is in funding more growth aka getting follow-on rounds.
More often than not, a slight concern arises when one founder has 3–5x more shares than the other founders. This essentially means that only one person truly has skin in the game, and again, VCs invest in teams.
Equity is the biggest motivational chip for founders.
This isn’t always a challenge, but some VCs tend to keep their distance in this case.
Let’s look at a very, very simplified example. If 3 out of 4 startups fail, it’s already a risky endeavor to start with. The average divorce percentage is over 50% in the US (and higher in some EU countries), so a married founding team is, statistically, going to break up more than half the time so you’re adding unnecessary risk to an already high-risk endeavor.
If life gets complicated at home, it’s not going to get any smoother at work.
Let’s take another example where the CEO is one brother and the VP of Sales is another. Now if the CEO had to, for whatever reason, decide whose side to take, VP of Engineering or VP of Sales, things can get complicated. Engineering says challenge X is sales’ fault and vice versa. If the CEO takes the side of sales — even if it’s for the right reasons — the rest of the company feels that they’re siding with sales because their brother is the VP.
This is simply risk that most VCs aren’t willing to take when the goal is to maximize value. Similar difficulties arise when it’s time to give hard criticism or let someone go. When there’s a family relationship in the business, decisions aren’t based solely on business rational anymore. One of the most famous examples of a family feud is the case of Adidas and Puma but there are also great examples of related entrepreneurs such as the founders of Stripe.
I don’t think too many investors actually say this but it’s true. Your pitch deck — very similar to your website — is your business card to the world. It’s the first thing people usually see about your startup and it’s the place you make your first impression.
If VCs can’t understand the material or the design is from the 90s, it’s not too long a stretch to think the same amount of meticulousness goes into handling your business. Same goes for errors in grammar and spelling.
When beautiful design and communication are present it’s a small plus — but when they’re not — it’s a huge minus. A designer friend of mine always repeats the same mantra and I’ve experienced this to be an unconscious truth.
“Design is the silent salesperson”
From gut feeling to a 90s pitch deck, people inherently make decisions based on emotions. Facts, figures and numbers aid in decision-making, but it’s feelings that make most actual decisions. If you haven’t watched Simon Sinek’s ‘How Great Leaders Inspire Action’, a true classic, it’s worth a look.
When talking to VCs, it’s important to convey an authentic feeling of trust, vision, smarts, and passion. If you can’t do this and want to build a globally scalable company, start learning the art of communication or find someone who has. If you can’t get a VC excited about what you do, how can you excite others? And if you’re lucky enough to be able to pick between multiple VCs, I strongly suggest you pick someone as passionate about your business as you are — if possible.