What To Do When a VC Says No
It can be very disheartening to be rejected by investors. Especially when you’ve got an amazing startup idea and you’re putting everything (days, nights, weekends) into it. And of course the preparation for an investor meeting can be quite extensive. As an investor at a venture capital fund, it’s my least favorite part of the job to tell people no and unfortunately, I have to do it a lot. Less than 1% of companies raise money from venture capitalists, so the bar is incredibly high.
If a VC passes on your investment, there are a few best practices to consider in your response and reaction that will increase your chances of getting funded in the future:
No news is usually bad news
First, it’s important to remember that it might be a few weeks or more before you hear back from an investor. It’s also helpful to understand what the investment process looks like for a venture capital fund, and know that it’s rarely going to be a simple yes after one meeting. It varies amongst different VC funds, but in general, here’s what you can expect:
First meeting: This is typically an introductory meeting where you pitch your idea to a junior member of the investment team. While every fund is a little different, I would strongly advise being respectful to the junior person and taking this meeting seriously. Even if the person you’re pitching isn’t a partner, they could have a lot of influence over whether the partner ever speaks to you (I can tell you this from experience!).
Subsequent meetings: If the first meeting goes well, you’ll get to meet other team members such as partners. Given how busy a partner’s schedule is, it may take a few weeks to get this on the calendar, even if they’re excited to meet you.
Due diligence: If the meeting with the partners goes well, the investment team will want to analyze your business more deeply during due diligence. This would include a review of financials, legal documents, and maybe even customer references, depending on the fund’s process. It’s possible that due diligence may be able to start after the first meeting, but it usually takes a few weeks.
Investment committee approval: Once due diligence is complete, the investment has to get final approval from the investment committee, which is the group of decision makers at a fund.
Paperwork: The paperwork may be simple for earlier-stage companies, but it can also be a longer process with lawyers. Sometimes this can be done in tandem with the rest of the process, but it can take up to a few weeks if lawyers are involved.
As you can see, each step can add weeks to the timeline, so it’s smart to start the process as early as possible. During the first meeting, it’s appropriate to ask the investor what their process looks like. In rare cases, investors can expedite the approval for an all-star company, but that would be the exception not the rule.
If you don’t hear back about next steps within a few weeks, it’s most likely because they passed and haven’t told you yet. It’s uncommon that they simply forgot. You can always reach out to check in, but keep in mind that the investors who are excited about you will get you to the next step in the process fairly quickly. If you do choose to check in with an investor, always go to the person you met with and not over their head – I promise that does not increase your chances of investment. Creating a false sense of urgency (i.e., telling VCs the round is closing in a week when that’s not the case), doesn’t usually work either. Of course, if this is true, by all means tell the investor and understand it most likely means they’ll have to pass depending on how strict their investment process is.
Don’t take it personally
It can be difficult, but try not to take the rejection personally. Depending on the size of the firm, the team may be evaluating over 100 companies in any given month. It’s important to remember that your company is never going to be analyzed in a vacuum, it will be compared to every company in consideration at the time. Investors typically deploy capital over a period of several years and usually only make a handful of investments at a time (again, depending on the size of the firm). There are always competing priorities.
Additionally, venture capital funds usually have specific industries and stages that they focus on. The reason for the rejection may be simply related to those areas. Oftentimes, the fund’s website will give you some insight into these requirements, so make sure you do your research ahead of time. It’s also appropriate to ask the investor what their areas of focus are. If they say they invest in FinTech companies with over $1M of revenue and your company isn’t aligned to that, it’s probably (but not always) going to mean a no.
Try to get feedback
When an investor says no to an investment, they may provide feedback or insight into the reasoning behind the decision. There’s a few things to keep in mind here:
If you don’t receive any feedback, it’s appropriate to ask for it.
Don’t be surprised if the feedback sounds vague. A lot goes into these decisions, but VCs often keep the inner workings of their process to themselves.
It’s smart to keep track of this feedback somewhere so that you can pick up patterns. Investors are often looking for the same things, so certain areas will keep coming up (e.g., a lack of traction, a part-time founding team, a small market size, less experienced team, etc.).
In addition to centralizing the feedback, you can implement changes in your business or at least your pitch to address common investor concerns that you learn throughout the process. There’s a fine line here because some investors just won’t be right for you, so don’t feel like you have to take every piece of feedback. Just be open-minded and take in what resonates with you.
No can also mean not right now
Investor relationships are often built over a long period of time. When a VC says no to an investment, it isn’t usually a no forever. As I mentioned above, your company may not be the right stage for a certain investor, or the investment might not fit in the capital deployment plan at this time. This doesn’t mean the process was a waste. At the very least, hopefully you learned something to strengthen your pitch for the next investor. The best thing you can do is treat the process as the beginning of a long relationship.
But relationships need nurturing, so keep potential investors updated on your business. The best companies send monthly or quarterly updates to not only current investors, but potential investors as well. This way, investors are reminded of you periodically and can follow your progress. It also shortens the next diligence process because the investor is already largely up to speed on your business.
If the fund mentioned certain milestones or requirements to you, such as breaking $1M in revenue, keep track of that. When you do hit that milestone, it’s a good time to reach out personally to the investor for a check-in.
Find other investors
For most companies, fundraising is a lengthy and frankly exhausting process. Try to prepare for this by starting 6+ months before you “need” to. It is a numbers game at the end of the day. You’ve probably heard the saying ‘every no gets you closer to yes.’ That’s true here.
Google is your best friend (this includes sites like Crunchbase, LinkedIn, etc. as well). There’s a lot of ways to find investors and it’s not hard to find their emails. A lot of funds let you submit a pitch deck right on their website. Of course, if you have advisors or current investors with relationships, start there. When that’s exhausted, start the cold outreach. While you want to reach out to as many funds as possible, it’s also smart to make sure you’re aligned with the fund based on their website. You can look for longer lists and databases to start, and narrow it down by things like stage, industry, and geography. You can also look at which funds invest in companies similar to yours.
Sometimes, startups will ask investors ‘what other funds should I be talking to.’ Personally, I would advise against this. In some cases, an investor may actually suggest other funds to you. However, the investor doesn’t usually have an incentive to do this for you, especially if their fund is passing. If the investor really liked you but you weren’t at the right stage for that fund, they may be open to introducing you to other investors. The bigger issue here, in my opinion, is that the question is presumptuous and makes you look like you haven’t done your homework. The best case scenario is the investor may offer introductions to you without you asking directly.
I hope this was helpful to companies in the fundraising process.
Again, this is all just my opinion based on my experience, and you should take what feels right to you. At the end of the day, the best advice I have for the fundraising process is to go into it with the right mindset and expectations. A lot of investors will say no and that’s ok. You want to find the investors that are right for YOU at your current stage. Try to treat every conversation as the beginning of a long-term relationship and a learning opportunity!