The Anatomy of Investor Rejection

Did your startup got rejected before? Did you get responses like "This offer is out of our scope", or "We aren't interested", or got no response at all? That's completely normal. I’ve been rejected 145 times out of 385 investors whom I've reached out to in the last 5 years and I’ve engaged with thousands of founders & pitches I’ve never seen a startup succeed in its first shot without multiple rejections along the way.?

So here I’m encapsulating the rejection experience, the hows, whats, and whys. I’ll try to answer questions like; How to interpret, avoid & respond to rejection? Where do investors drop & how to save them? What to do internally after being rejected? Why investors don't provide a reason?

Table of Content

• How to interpret a rejection? Types of Rejections
• What does rejection mean & doesn’t mean?
• How to avoid rejection?
• Where do investors drop & how to save them? Rejections Reasons
• The 3 Investors’ Patterns
• How to respond to rejections?
• What to do internally after being rejected?
• Why Investors don't provide reasons?
• The Bottom Line

How to interpret a rejection? Types of Rejections

Clear rejection: This should be your favorite type of rejection because it saves you time and frees you from speculation.

No response: This isn't a one-time non-responding but the continuous reading & ignoring of your emails and messages, promising to get back to you, and never does.

Maybe is a No: This type is where investors get engaged with you in a very stalling and non-progressive way, asking for lengthy or nonsense requests like rebuilding your financial models or changing your vision before even showing serious interest..etc

Rejections come in two flavors, Reasoned and Non-reasoned and almost always all rejections don't come with reasons, especially in early communication. I’ll explain later in the article the full reasons behind why it’s so common not to mention rejection reasons.?

We can also classify rejections into soft ones and hard ones. Soft rejections are the ones where the main reasons are temporary like “not the right time or stage”, on the other hand, hard rejections are where an investor will never invest in your core business model or geography anytime soon. This process will cost you an extra few minutes but will surely optimize your fundraising conversion rates and will help you keep healthy relationships within your professional network.

What does rejection mean & doesn’t mean?

It means nothing and also means everything, here is how.

Is for Evaluation: Throughout the process, you will know whether your business is defensible, you will know if someone can get under your skin, and how you handle rejection. It will also test your storytelling & negotiation skills.

Isn't personal: Rejection isn't personal and doesn't mean that you are a failure, and of course, doesn't define who you are. Your idea or business got rejected not you, they don't know you.

Never Permanent: Here is the good news: no’s are never permanent. It’s so common for investors who passed or rejected your idea to get back in touch with you in later stages and sometimes after years.

Not the only fish: Every time you will get rejected you will have a tempting feeling that this was your last chance, but keep reminding yourself that this is only happening in your head and that investor isn't the only fish there are always more.

Isn't always right: Not all investors are sophisticated as you might think, if so we would not see that high percentage of well-funded startups fail. Also, you will interestingly find that investors among themselves have very different and opposite opinions and visions, I once had 5 extremely opposite opinions from 5 potential investors on how they think about the business model's future. So yea it might like a cliche but investors are humans, they do mistakes, tons of it.

So each time you get rejected, you are free to decide if you want to move forward or you want to withdraw, but either way, you have to decide that for a reason other than your feeling of rejection.

How to avoid rejection?

Fundraising is simply like a sales/marketing conversion funnel. To maximize your closed deals, you exclusively have two ways; either to increase the top of funnel feed or to increase the conversion rate or of course, you can work on both

For instance, if you have 100 leads, you get 20 responses, you get 5 meetings and you close 1 deal. To close 2, you either need to get 200 leads or just double conversion rates, optimize your process to get 100/40/10/2 leads/responses/meetings/deals.

So it's not about how to avoid rejection but rather how to maximize your chances, that’s why in the next section I will walk you through where investors drop & how to save them along the way.

Where do investors drop & how to save them?

Early & Immediate Rejections:

The great mass drops in the very first interaction, the introduction before even having a look at your pitch deck, it’s closer to ignoring than a rejection. Here only you might lose about 80% of your approaches, for the following reasons:

1) Irrelevance & Deal Breakers:

Investors don't improvise, they are committed to the fund investment scope and requirement. So they might change their scope from fund to fund but never within the same fund. And they don't have such a degree of freedom unless it’s a wealthy individual, not an institutional investor.

So prepare a list of potential investors with their investment scope, stage, geography, and sectors. Unless you are Elon musk and you are building rockets, it’s so uncommon for an investor to suddenly jump to investing in Africa instead of the US, DTC instead of SaaS, and Pre-Seed instead of Series A. It’s not impossible but seriously what’s the possibility?

There is one exception where you can be so fit and relevant for the investor but he has to turn you down immediately because he is committed to a competitor and his fund policy doesn't allow investing in competitors.

NP: To understand how VCs work; please check this article

2) Wrong Channel/Person:

Congratulations, you have narrowed down your list to the right investors, now what is the next problem? Yes, you might find the right investor but still connect with the wrong person or even with the right person through the wrong channel.

In VCs, there are General Partners, Partners, Principles, Associates, Analysts, Scouts

Gatekeepers, you always need someone to reach someone. The difficulty of reaching someone is relative; the larger the investor or the higher the person's rank, the more the gatekeepers & the lower the rank you need to approach.

So you might find yourself directly connecting with a Partner in a $25M fund, with a Principal in a $100M fund, and with an Associate in a $1B fund (Dummy numbers for elaboration). And of course, I talk here about early communication because in the end the deal will be finalized and closed with a partner anyways.

Don't you believe how vital warm introductions are for VCs? There are some VCs who explicitly write on their website that they don't have contact information and if you are a founder who builds a great product then you will find your way to us through the community.

3) Cold Vs Warm:

In the cold approach, you might find yourself filling out an online form or application, sending your pitch to a generic email address, or even sending an email out of the blue to a specific person whom you don't have any mutual connections with. In cold intros, remember to be extremely cautious and respect the investor's time, be brief and concise expecting to take only 1-3 mins of their attention deciding to respond to you.

To warm up your approach, either you build up a relationship with the investor himself, which will take time or the easy way is to find someone in common to make an intro to this investor. The same rule applies, the more difficult the investor, the higher the gatekeeper or mediator you will need.

Sometimes you will not be able to build a warm approach so it’s important to differentiate between cold and warm approaches for the sake of prioritization not excluding. Since still some of these cold approaches do get replies and close deals but with a significantly less success rate than warm approaches.

4) Communication Etiquette:

There is etiquette for everything, right? It’s the set of rules and behaviors that a group of people feels comfortable with. Unfortunately, not all of these rules are global but there are a couple of common practices that would improve your communication:

Do’s:

• Address an investor with his name, written and spelled correctly so you build a personal connection.
• If an investor didn't read your email/message, kindly remind him with a follow-up.
• Keep email/message short and to-the-point - 3 Mins Max - so you don't waste their time.
• Make email/message easy to read and appropriate - using emojis in formal communication isn't appropriate.

Don'ts:

• Don’t spam their inboxes on personal channels like Facebook or Whatsapp.
• Don’t write in all upper case - this makes it look like you are shouting!
• Don’t communicate at inappropriate times like weekends and midnights.
• Don’t send your pitch deck in your first introduction, and don't make it too long.

5) Timing:

This reason has nothing to do with you, an investor may have just closed a couple of deals, and may lack any appetite for a new one. Investors also prefer to invest in hot markets. If your sector is out of favor, it may be harder to sell your vision.

6) Unprofessional/Personal Reasons:

This might be surprisingly harsh but it’s real to the core. In some rare cases, you might be rejected for your religion, political opinions, or your gender. And in more common cases, you might be rejected because the investor just did not like you for no specific rational reason, just the chemistry isn't right.

This reason is a double-edged sword; on one hand, there is discrimination that may work against you and on the other hand, there is an affinity that may work in your favor. Affinity is a natural human trait and it’s about liking someone because of similarities and shared characteristics. So you can find affinity groups including women, black, or any other underrepresented group where the chemistry would be probably right.

Middle-way Rejections:

These are the rejections that relate more to your core business and usually take place after a quick review of your pitch deck, business plan, or application, broken down by pitch components:

Market Size: The market size isn't large enough (Usually if <$1B), or if the investor doesn't believe your TAM. Investors are in the business of multiplying valuation and they want your business to be able to scale up, they will not be able to achieve that if the market size isn't large enough. Not only do investors look for “big” markets but more importantly “growing” markets, because what’s the use of a big market that is declining?

Business Model: You confuse investors about what you do; you have too many products, services, revenue streams, and segments, and you are fighting on all fronts with a clear lack of focus. Investors like to see a clear core business model and then it can be supported later with more activities & services.

Scalability: This isn't standalone component scalability is a shared characteristic between business model, technology, and market size, and investors are looking for companies with scalability dynamics to be able to multiply their valuation.

Numbers: Your numbers and metrics are not good enough for this stage. Your revenues & margins are too low, your unit economics aren't healthy, or your growth isn't stable.

Problem & Idea: If you are not solving a real problem and you built a solution you are the only one who would use it. If your idea is too generic or too weak.

Defensibility: If it’s a red ocean and saturated market where each target customer is already satisfied with his current solution and it’s not clear what you offer differently and can't be cloned by anyone else.

Team: If it’s not the right team to achieve the vision, missing a technical co-founder, industry expert, or entrepreneurial experience. Also being a second-time founder will boost your chances.

Technology: You are not solving the problem with technology, you are just trying to stick technology into the equation.

The Plot: I’m stealing this from movie-making, but are you familiar with these movies that get Academy Awards for best actor, director & song, and yet you don't understand a thing from the movie and you feel like it’s missing the plot? It’s the same, sometimes every pitch component looks fine on its own but yet there are too many unconvincing assumptions, the numbers don't add up or the vision isn't aligned with the product roadmap.

Later Rejections:

1) Financials & Valuations:

This may include disagreement about the final company valuation, the dilution, the liquidation preferences, the use of funds, or the overall deal structure. It may also be about Cap Table; if dead equity is given to people who are no longer involved in the business like advisors and former co-founders.

2) Terms:?

This may include disagreement on whether the investor should take a board seat or not, voting rights, liquidation preferences..etc

3) Due Diligence:

If founders lied or hide any facts about the company such as lawsuits, IPs, founder's commitment, or anything else related to company liabilities and governance.

The Conclusion about Rejections Reasons:

Each step in the communication with the investor has its reasons since it’s very unusual to get rejected in the very first communication because your financials don't add up and it’s nearly impossible to get rejected in your advanced discussions because of market irrelevance.

• Losing leads at an early stage will save you time, but the higher percentage will probably mean that you did not prepare & research well on your investor's list.
• Losing leads at the Middle-way stage will give you the most insights about your business, but the higher percentage will probably mean that you have severe issues with the business model & conviction that needs to be refined.
• Losing leads at a later stage means there is a real opportunity to be approached. Still, the higher percentage will probably mean that there is a lack of investment readiness, and company structure issues to be solved with your partners, investors & legal team.

The above reasons don't have the same weight in different investment rounds, so in Pre-seed/Seed the Team & Defensibility may be more important than Numbers. In later rounds Growth, Technology & Business Model may be more important than Defensibility and so on. It’s also important to know that you rarely get rejected for a single reason, you most probably will have a combination of leading and supporting reasons for the rejection.

The 3 Investors’ Patterns

I have noticed 3 patterns for investors when it comes t discussing your business:

1) Investors who attack numbers:

This investor consumes most of the time in analyzing your financial documents and forecasts, and metrics like Market Size, valuation, revenues, margins, and unit economics. Most of the discussion will vary from maximizing the margins & volume or negotiating the valuation.

2) Investors who attack vision:

This pattern of investors will have a discussion about; if the business model should be X or Y, if the roadmap should be A or B, and what the preferred endgame or exit looks like. This is the most tricky pattern because you argue about intangible matters with a high degree of subjectivity. And it’s risky if you deviated from your vision so you need to balance between having a solid and clear vision and also not being stubborn or arrogant.

3) Investors who attack Growth Patterns:

These investors don't care much about your current revenues or business volume, they are obsessed with your growth patterns and strategies both in history and in the future. Most of the conversation would be like; should you grow horizontally or vertically, what are the desired growth multiples, why there is seasonality, and what speed should you grow at…etc

How to respond to rejections??

This is an advanced step that I’ve learned lately. When I was getting rejected before, I wasn’t responding, considering the rejection message as the end of a path. Now I deal with it in a completely different way. I recommend the following Do’s & Don’ts:

Do’s:

• Thank them for their time, at the end, not even all investors will have the courtesy to respond to you at all.
• Ask for high-level feedback or advice about your startup pitch. You can ask things like what areas of your pitch need to be improved? Did your pitch lack enough information? Are there any next steps the investors recommend you do? In the end, If you don’t ask, you may never know why.
• Ask for recommendations for other investors who may be interested in your company, or even potential customers.
• Keep the conversation open and maintain a long-term relationship with them, keep them updated with your progress so you might be relevant to them in the future. Also, circumstances change, they might go working for another VC or you might be working on another startup.

Don'ts:?

• Don’t ask for detailed feedback because it’s not practical and in most cases, you will not get it.
• Don't burn bridges and try to resist the urge to argue or reply with any rude response, it’s very likely to meet these people again along the way

What to do internally after being rejected?

1) Consider your business idea, is it Vc-fit?

You have to be honest with yourself and think rationally. Not all ideas are VC backable and this isn't bad news. Some businesses are great and can continue succeeding but they lack the growth dynamics that VC needs.?VCs require very high returns in a specific time frame that may not be relevant to your startup, maybe there isn't enough M&A activity in your sector.?

2) Evaluate rejection reasons & Revise your plan

It’s vital to analyze why exactly you got rejected. You might also need to update your revisit your vision, update your plan, refine your message, polish your financials, add the right people to your team, change your valuation or investment amount or even pivot if needed.

3) Know when to stop pursuing investment:

It’s a good practice to put a deadline for your efforts. If the result of evaluating your rejection reasons showed some significant flaws with your business or that it’s not investment-ready, you should be decisive and stop pursuing investment and get back to work on your business, fundraising is time-consuming and it’s not efficient for your business to keep your round open forever.

Why Investors don't provide reasons?

I believe there are more reasons but here are the top 3:

1) Because there is no reason:

Sometimes all conversations fall apart for no single “point of failure”. There is no clear & defined reason; it’s just that the opportunity is “ok” but not outstanding. In such a market where investors receive 1,000+ pitches per month, in most cases, they will be looking for a significant hook and unfair advantage to make you stand out from the crowd.

2) Because time & resources are constrained; it’s not feasible:

This is the most - if not only - communicated reason from the investors' side. Imagine that you receive 1,000+ job applicants at your startups per month, probably you don't give them individual feedback, the same goes with investors who receive thousands of pitches each month.

3) Because reasons are not politically correct:

As mentioned earlier, you might be rejected for personal or unprofessional reasons. Or you might be rejected because you raised red flags. There are endless examples of red flags that founders might unawarely raise while talking to an investor including lying about your numbers or any basic fact about your business, your story contradicting and doesn't add up, being too defensive, aggressive, and sounding sneaky.?

This will easily make the founder look untrustworthy and will push investors to walk away no matter how attractive the opportunity is, and for such reasons, there is no decent way to communicate them to the founder. It’s not only about the obvious red flags but also about friction like not being responsive or agreeable or too cautious. Think of your investor as a customer, what customer experience do you wish to deliver? It’s probably the same.

The Bottom Line:

Answering if fundraising is art or science, I believe it’s both. It’s the balance between individuality and pattern recognition; how to build a relationship with the potential investor, speak to their personality, engage with their thoughts and beliefs and also respecting the process, avoid the most common mistakes and decrease red flags.

Rejection is a part of the process, you’ll be rejected by customers, vendors, employees, and investors, and sometimes you will be in the opposite position who has to make rejection decisions. So this article isn't only about founders rejected by investors but also about any seeker rejected by a provider.?

It’s how you perceive rejection, changes in events, and crises. It’s the process of how we analyze, learn, improve, and grow. Remember, there are plenty of funding options out there and the investors that rejected you may not be the right ones and you might get a lot of rejections, but that one acceptance is the only one that matters.

NP:

This article is exclusively written for founders on how to understand & handle rejection and get the best results out of it. I’ll allocate another article about the other way around; when to walk away from an investor, the red flags, bad practices, and dark patterns I’ve personally experienced.