When I was a venture capitalist there were lots of reasons why we did not make investments in particular startups. My goal was to try to provide some honest feedback/guidance as to the reason for passing on the opportunity. Given the deep deal flow at my fund, this was not always possible, but if I had used up more than a few minutes of the executives’ time learning about their company I tried to give a little bit of the color behind the rejection.
This ranged from “the end market is too small” or “you need more user traction” or “it is too competitive of a market” or “we are not comfortable with this particular technology.” But the fact of the matter was, sometimes there were not great reasons for passing on a company. Many times these were just excuses hiding the real reason:
We didn’t like the founders
The real, untold, reason that most startup founders don’t get traction in their venture capital fund raising process is that the venture capitalists don’t think the founders can do it. Either they don’t inspire confidence in their ability to market the product, produce the technology, manage/recruit a team, think strategically… etc. VC’s are extremely picky in choosing who they work with.
But as a venture capitalist, you can’t easily say to an entrepreneur, “I love your idea and technology, but don’t think you are good enough to pull it off,” without coming across as a dick or getting into a confrontation. (Yes, I did try this a couple of times, and I’m pretty sure I just sounded, well, like a dick.)
VCs who like a company idea but who do not like a founding CEO will often try to feel out the founder to see if he/she is open to a different CEO coming in to run the business. This is usually done pretty subtly, for the main reason that this is a delicate subject and the venture capitalist does not wish to be offensive to the founder. These subtleties may be why founders don’t usually understand what the investor is saying. Or it could be that these particular founders are not great at getting subtle signals. Regardless, I think that VCs often talk past the founder and so the founder never ends up realizing that he/she is the real reason that the startup isn’t getting fund raising traction with the VC.
A few ways to tell if you aren’t getting venture funding because the venture firms don’t like YOU
Since lack of confidence in the founder is such a common reason for rejecting a venture investment, but yet so rarely effectively communicated to the startup’s founder, here are a few ways you can tell if YOU are the reason your startup keeps getting rejected by venture funds.
- Lots of meeting, lots of rejections from those meetings. If you are getting a number of initial meetings with venture capital firms but funds are rejecting you this may be a sign that your end market is interesting but the investors are not digging your team. This isn’t a clear cut sign that the VCs don’t like the team, but if you see it in conjunction with the following signal then there is a good chance the team is the reason for the rejections.
- There is no consistency across reasons behind the different VC firms’ rejections. If the funds all have different, inconsistent and seemingly poor reasons for rejecting you this may be a sign that the various firms did not like the team and are inventing various reasons in an attempt to be polite and to make you leave them alone. If you hear the same reason over and over from the funds, then they are probably rejecting your for that particular reason, but if you hear different excuses then it could be the team, and the stated reasons from the VCs are literally just excuses.
- You keep hearing “what are your thoughts on the team.” This could be code for, “do you need to be CEO of this company.” Even less subtle is “what do you see your role being in the future.” If a venture investor asks you about the role you anticipate having in the company this is a clear sign that they are wondering if you are open to bringing in a different CEO.
A way to diagnose this problem is to say that you are open to having a different CEO come in and have you transition to a different role. If the venture fund you say this to begins diligence, when all others have passed, and starts introducing you to experienced CEO-types then you’ve found your answer. (I’m not saying you have to actually want to do this; I’m merely suggesting this as a means figuring out if this is the reason that you are not getting fund raising traction.) Of course, what you do with this answer is totally up to you.
I realize that this post probably makes me look like a dick. However, I feel that it is such an important point that is so rarely disclosed that someone had to speak out about it. And, since I’m no longer a venture capitalist, I think that I can publish this truth without appearing to be such a jerk. Or at least I hope I can…
There is a pretty thoughtful discussion going on at Y-Combinator’s Hacker News on this post. If you are interested in hearing other people’s thoughts please check it out.
About Healy Jones
Healy is a former venture capitalist with Atlas Venture in Boston and Summit Partners in Palo Alto. He is now the head of marketing for OfficeDrop. OfficeDrop is a cloud filing system, scanning software provider and document scanning service that helps small businesses manage paper and digital documents. OfficeDrop provides tools that sync businesses’ desktops and scanners with an online search engine and cloud filing cabinet. The affordable service saves businesses time and money by enhancing paper based collaboration and workflows, and by bringing paper to digital platforms.
May 27th, 2009 at 1:32 pm
Great post.
I haven't gone the VC route – http://SmartFlix.com and http://HeavyInk.com are bootstrapped / self funded. This turns out to be a win for a couple of reasons: (1) retaining control; (2) only playing with small amounts of money while my skills are still mediocre ( after 5 years, the two firms are barely past $1.5 mill/yr in revenue ).
After I hone my skills for a few more years, I might be interested in doing the VC route.
I can entirely understand that most would-be-founders would react negatively to hearing that they are the problem.
It would certainly be a hard thing to hear, but hearing that sort of thing, and learning from it, is, IMO, one of the most important ways that there is to grow as a person, and as an entrepreneur.
…which suggests an interesting test for a VC: start out telling EVERY candidate that the problem is them, not the idea.
…and then filter the candidates who respond well to the feedback!
Travis J I Corcoran, President
SmartFlix
–
http://SmartFlix.com/
web's biggest how-to DVD rental store
May 27th, 2009 at 2:07 pm
In no way did you come across as a dick. It sounds like you have a lot of empathy for the folks you're trying to help in the situations you described. This is great information, and I appreciate you being candid about it.
May 27th, 2009 at 2:26 pm
U JERK!
jk
May 27th, 2009 at 2:46 pm
Another way to think about this (without anyone being a dick, jerk, etc) is that early stage investors and founders are getting into a long term relationship (5, 7 years maybe?), since it will probably take a company that length of time to reach exit velocity. If the parties aren't comfortable with one another you've got a recipe for failure, or at least alot of ugliness and pain.
I hate to draw the marriage analogy but the early stage VC/entrepreneur relationship is kind of like marriage.
May 27th, 2009 at 2:55 pm
Isn't that just a nature of the game? The same reason why most people don't get the job they interview for. Because the interviewer decides within the first 60 seconds whether to like you or not.
Not much you can do about your personality. But you can rack up some brownie points before making the first impression…by having some user traction (better yet, profit!) or getting referred by someone the interviewer knows (and hopefully likes). There are no shortcuts.
But the problem goes both ways. No one wants to work with a limp dick nor a hard dick. A dick is a dick.
Dick.
May 27th, 2009 at 10:57 am
Get an idea to the point it interests others enough to take over – or be a saddled horse the VC will ride for years.
No question which way is most appealing. Show me those CEOs.
May 27th, 2009 at 11:05 am
[...] have heard this so many times recently, so it is quite refreshing to read this article by some VCs: The real reasons why people do not get funding. Rarely told. (Thanks to Paul Jozefak [...]
May 27th, 2009 at 4:18 pm
Certainly, there are ways to address the founders personality inadequacies with them in a more direct manner. Sometimes being a dick or jerk is part of life. You don't have to be an asshole about it, but there are always more charming ways to get tough points across. You are doing these people a disservice by not being honest with them.
As a VC I surprised by your attitude. Sometimes you have to be a dick for the betterment of the entrepreneurial gene pool. Give the founders some criticism, and give them a chance to address their own shortcomings. Giving a non-answer is cowardice and only exemplifies one of the very traits I am sure you would immediately reject.
May 27th, 2009 at 4:32 pm
this is awesome and is giving me flashbacaks.
May 27th, 2009 at 4:55 pm
Woz: Where's your beard?
Steve: In the sink. I shaved it off.
Woz: (incredulous) Why?
Steve: Because bankers don't like beards.
– from "Pirates of Silicon Valley"
–
Furry cows moo and decompress.
May 27th, 2009 at 8:44 pm
Having tried the text book model of using an outside CEO, recruited with the help of VCs, I have discovered that it is suicidal to bring in a Manager / CEO with an immature business model or inadequate traction. Both the product and the business model evolves rapidly under under a nimble Entrepreneur / CEO before the company is ready for disciplined execution. Premature hiring of professional managers creates a lot of pressures on them start executing, even with a flawed model. If I were a VC, I would get it in writing prior to investment that the entrepreneur agrees to take on a consultative role and install a professional CEO when the company is ready. This will set expectations for all parties and so no one is disappointed. A lot of VCs, during the boom years, hired F-500 CEOs to run young companies and lost their shirts. Look at some of the biggest brands, namely, Microsoft, Apple, Oracle, Intel, HP, Dell, IBM, GE, Wall Mart, Starbucks, and Disney were run by Founders with no prior CEO experience. Even Google and Yahoo got to the execution stage of a proven model before the Professional CEOs joined. The VCs should appoint a mentor to guide the entrepreneur privately, outside of the Board meetings rather than throw the high-energy, dedicated, and nimble founders. VCs should understand that entrepreneurs are like the first stage of the Saturn V rocket and the outside CEOs are following stages.
May 27th, 2009 at 9:06 pm
Although the analogy is a bit of a cliche, it is still true!
May 27th, 2009 at 9:15 pm
I'm not sure most VC's are out there for the betterment of the gene pool… most would choose good returns by building big businesses over any sort of social benefit. (This is something that most entrepreneurs should keep in the back of their minds as they interact with VCs too…)
May 27th, 2009 at 7:28 pm
[...] is with VCs and their false dichotomy when giving feedback about a company asking for [...]
May 27th, 2009 at 11:37 pm
So the choice is say nothing or be a dick. Sounds like a sound system with 2 settings for volume: "mute" and "maximum".
I have a more complete response here but the short version is:
Make feedback specific and actionable with no personal attacks on the entrepreneur. This is not hard. Just requires empathy.
May 28th, 2009 at 12:53 am
This is an excellent post that certainly rings true. As the above commenter noted, initial judgements are made in the first couple of minutes of the interview. Unless something goes very right or very wrong, these impressions won't change. It would be good if you express concerns about the team with sounding like a dick but that's like telling a new mom her baby's ugly. It still makes you a dick.
Great post!
May 27th, 2009 at 9:01 pm
[...] YOU are the problem: the reason why so many startups don't get venture funding | Startable (tags: vc startup) [...]
May 27th, 2009 at 9:07 pm
Nat, this is a very valuable perspective. There are too many stories like this; I got sushi with an entrepreneur last month who is currently trying to fix the mess made by a VC pushed outtside CEO. Thanks for sharing. As I mention in the post, you may very well not want to change leadership at your startup, but it is at least helpful to know if that is the unsaid issue…
Sent from my iPhone
May 28th, 2009 at 2:50 am
thank you for the brutally honest insight. i hope i get that kind of honesty out of every single venture capitalist and angel investor i meet once i actually pitch for seed funding. thank you again, i feel that these types of posts are the most valuable to the "getting funded" process.
- jason nadaf
May 28th, 2009 at 6:19 am
Good post – all I want to add is this knife cuts both ways. Sometimes entrepreneurs don't like the VCs after a first meeting. Entrepreneurs are even less likely to be up-front about it (making them potentially bigger dicks) because they naively believe they just need the money, and could put up with an arrogant jerk once a month for 7 years. This, by the way, is a very bad plan.
May 28th, 2009 at 7:59 am
Thanks Healy for this post (very much like your new editorial line).
A bad impression usually goes both ways. In normal social life, you get the clues fairly easily. But since there is more entrepreneurs needing money than VCs able to fund, the former are in more pressure and don't see the signals they would normally see. Sad but that's life…
May 28th, 2009 at 12:35 pm
Steve – very valid point!!
May 28th, 2009 at 12:38 pm
Yes, true.
May 28th, 2009 at 1:09 pm
Healy – outstanding post. Very true. Like most things, this cuts both ways. I've sat through about 1,000 pitches now. Watching my fellow VCs and angels, I have come to believe that the biggest reason entrepreneurs DO get funded is because the investors LIKE them. Most of my investor friends disagree, but I am sure it's true.
There is a very easy way to determine if this factor is the reason you aren't getting funded. Yes, I said EASY. Find a mentor who really understands the investment process. Have them work you through your pitch before you present. It's also essential you have them at the presentation. Make sure they get a chance to hear the feedback from the investors. If they are good, they will be able to tell you with an 80% certainty, what the investors are really thinking. If they are REALLY good, they will be able to tell you how to fix it.
May 28th, 2009 at 3:48 pm
I really appreciate your honesty – too many VCs find some official-sounding way to reject the people they don't like.
But I continue to be surprised that most VC’s rely so much on “gut” and seem oblivious to their biases. Robert Cialdini in his bestselling book “Influence” calls this “liking” effect “the friendly thief”. People prefer to say yes to individuals they like, and people like people who are like them. This narrows the pool of deals dramatically – peruse a few VC firm websites and you will be quickly struck by the homogeneity of the VC world. And this be-like-me view is reflected in what deals they will fund.
Relying on their gut and who they like prevents VC’s from actually assessing the merits of a deal. Relying on a social interaction is not automatically helpful – it is more likely to be misleading and reduce the quality of decision-making. When Fair Isaac replaced "gut" loan officer decisions with a mathematical score they ran an ad campaign with the headline ‘Good credit doesn't necessarily wear a suit and tie’. We need a campaign that says "Good startups don't necessarily have a CEO a VC will like."
VC’s are decision making luddites. Let’s hope they enter the 21st century of unbiased and objective decision making sometime soon.
May 28th, 2009 at 4:54 pm
Excellent insight for us entrepreneurs. Although personally, I'd prefer you were honest and said, Michael, we like your idea but don't think you can lead the company. At least then I could work, maybe with the investor, to identify an appropriate CEO.
May 28th, 2009 at 6:43 pm
Meri, thanks for the comment. I hear what you are saying around the "Influence" paragraph. I wasn't a VC long enough to really get that great of a feel for how this might actually impact company growth/returns to investors, but there is a good chance that you are onto something.
Regarding the gut part of the comment. I think (or at least would hope) that VCs put a lot of time into doing diligence on the people they are backing. I know that I spent countless hours calling references, finding off the record references, etc when I was a junior VC looking at making an investment. However, the gut part does matter some, since someone who comes across as really disorganized or somehow difficult to work with at the outset is pretty likely to get rejected out of hand.
By the way, I really like your blog. People should take a look: http://www.competingonexecution.com/blog.html
May 28th, 2009 at 6:45 pm
This is the part where I was trying to help entrepreneurs understand the "VC code" ways of trying to say this… "What are your thoughts on the team going forward," or "what do you see your role as in the company…" It's not as clear as the way you've put it, but I think that VCs try to be too polite (or as I said, subtle) when bringing up this topic, so I was hoping my post could help this make more sense to company founders.
May 28th, 2009 at 11:15 pm
[...] You are the problem: the reason why so many startups don’t get venture funding — 8:20am via Google [...]
May 29th, 2009 at 5:41 am
Like the folks (every major record label in Los Angeles) who turned the doors (Jim Morrison and Co.) down until Jac Holzman at Electra Records signed them on, or Larry and Sergey shopping the patent to their technology around and nobody was interested in it so they started a little company on their own called Google. It happens more often than not. VC funds and Angels, alike, are just another example of hit-and-miss success stories. They have the money to light the fire, but their ability to see a great idea is just as clouded and convoluted as the next person, for the most part. Mutual respect and honesty are king, and so is cash!
May 30th, 2009 at 8:34 am
I'm with Michael, just being straight up honest is the way I'd have it. I'd want to know the REAL reason as to why I was being rejected. For me, although that would suck- it would still be a great thing to know if a VC is interested in the company if I wasn't CEO. And I don't know about other entrepreneurs, but I'd ask for the chance to prove myself, and if that didn't work out, I would easily step aside because I care more about accomplishing my goal than who's name gets the recognition for it.
Great post!!
June 6th, 2009 at 4:13 am
[...] The Untold Reason Startups Don’t Get Venture Capital [...]
June 28th, 2009 at 11:31 pm
[...] YOU are the problem: the reason why so many startups don’t get venture funding | Startable. [...]
June 29th, 2009 at 6:44 pm
[...] was joined by John McEleney, an experienced Boston-area CEO. As I’ve blogged about before, team matters when raising venture capital. (I know, I’m pretty much linking to Innovation Economy today. I guess Scott Kirsner is just [...]
July 22nd, 2009 at 1:21 am
[...] be quite offensive and VCs already have a fragile reputation to maintain – check out this post from Healy Jones, a friend who used to be at Atlas Ventures), make sure you pick an exciting/large/growing/hot market. Then figure out how to enhance your team [...]
September 30th, 2009 at 6:55 am
[...] have heard this so many times recently, so it is quite refreshing to read this article by some VCs: The real reasons why people do not get funding. Rarely told. (Thanks to Paul Jozefak [...]
November 30th, 2009 at 10:09 am
Sorry but if I want to work with a group of people who will use my business to make profits for themselves – and me, I prefer an honest team and honest communications than brownlipping. I cannot stand lying so how could I trust my investors if they try and hide their true opinions from me? Open communication is 100% important when you're trying to build a company. After all, its not a love affair; its business. Honesty and loyalty is more important than avoiding to say "your company cant have the success we envisioned if you lead it and you would do better as the second in charge." Dick or no dick, its better.
March 17th, 2010 at 11:16 am
[...] highlighting some of the difficult messages they have to deliver. It reminds me a bit of the “you are the problem” post I did when I first left the venture business last year. Stuart and Jim’s piece is [...]
November 17th, 2010 at 1:42 pm
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