Fred Wilson and Michael Eisenberg write about turning down entrepreneurs from the VC’s perspective. Michael Eisenberg says:
Personally, I find the hardest part of this business is telling an entrepreneur that we will not invest in his/her business…
…When saying “no” I get 2 sinking feelings in my stomach:
1. Is this really the right decision? Am I missing something that could be the next big thing?
2. The second is the horrible feeling you know the entrepreneur has after working hard in the diligence process and realizing that he needs to restart a process with another firm or angels. And, in the worst case, will need to give up his dream.
I thought I’d add an entrepreneur’s perspective on this. Here’s how I would rate the possible responses from a VC on a scale of 1-100:
- “Yes, we want to invest” – 100
- “No, we’ll pass on this” – 95
- “We like the company, lets continue talking” – 2
A few years ago I think I would have ranked this differently, in a way that would fit Michael’s description above much better. Hearing from a VC that they “like the company” and want to continue talking would get us all excited. We hated the VC’s that rejected us because they were stupid morons that didn’t ‘get it’.
But after having pitched to tens of VC’s (and not getting funded by any), I started realizing that getting a straight “No” is 10x more valuable than the time-waster also known as “We like the company”.
As Fred mentioned in his post, it is technically impossible for any VC to invest in all of the companies they like. This means that mathematically, any entrepreneur pitching VC’s will *not* get funded by many more VC’s than those that will fund him/her.
Once you understand that, getting a straightforward “No” from a VC actually becomes a desirable answer, because it lets you move on in a more rapid way to meet that one VC in the mathematical equation that will fund you.
Oh, and by the way – Michael Eisenberg, while at Israel Seed, is one of those many VC’s I had the pleasure of pitching Quigo to, and I have to admit that I noticed none of the inner struggles he described in his post…. Good poker face?…
Over 95% of all startups do not meet the scalable, fast-ramp criteria of VCs and should stick with angel investors, who are usually more patient. Of those startups that pitch VCs, probably less than 0.2% actually raise VC funding.
Of those funded, probably 50% fail, another 20% to 30% are “walking wounded” (not making much money or growing fast enough), and perhaps only 10% succeed, so only a few out of tens of thousands of startups succeed big-time. I helped get 7 startups funded and only 1 has survived, which is par for the course. So funding is no guarantee of success, only winning loyal customers is.
Having worked with startups and VCs since 1983, my tip is to focus on validating your business model by selling to customers. If you have a hot startup with user buzz, VCs will find you and compete to invest.
We talked to a few VCs, found them so irritating to deal with that we decided we would just continue, bootstrapped and sold our company. In general, I don’t think VCs bring any value by investing money. If a company is going to succeed, it can do so without VCs. They do provide value in the sense that you can use them as a sounding board and it’s always worthwhile to have to defend your ideas.