It’s not me it’s you: the untold reason startups don’t get venture capital
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.