Broad Strokes: Why VCs say “No”?(Real Reasons)

A few “NO(s)” don’t mean anything—

Some plausible reasons include :

• He / She has had a bad experience with another company in that category,
• Or he / she had a bad experience with another company with a similar model,
• Or they had a bad experience with another founder who has characteristics like you
• That their car engine blew up on the road that morning—it could be anything.

Go meet with more VCs.

If you meet with 20-25 VCs and they all say no, it’s not a coincidence → Rethink the plan

Decoding the VC lingo

It’s a true — cliche that VCs rarely actually say “no”—more often they say “maybe”, or “not right now”, or “my partners aren’t sure”, or “that’s interesting, let me think about it”.

They do that because they don’t want to invest in your company given the current facts, but they want to keep the door open in case the facts change.

Investors' Perspective

If you’re an Venture Capital investor, you are managing someone else’s money and you need to minimize risk and optimize returns.

Investors look at the risk around an investment as if it’s an onion. Just like you peel an onion and remove each layer in turn, risk in a startup investment comes in layers that get peeled away—reduced—one by one.

The challenge for an entrepreneur seeking venture capital, the goal is to systematically reduce these layers of risk until the risk in your startup is reduced to the point where investing in the startup doesn’t look terrifying and merely looks risky.

Some common questions that go inside a VC’s head when they think risk ?

( In { } are possible ways to think about mitigating such risks )

Founder risk:

• Does the startup have the right founding team? A common founding team might include a great technologist, plus someone who can run the company, at least to start. Is the technologist really all that? Is the business person capable of running the company? Is the business person missing from the team altogether? Is it a business person or business people with no technologist, and therefore virtually unfundable?
• {Consider the capabilities of your founding team. Address concerns that VCs may have about the strength of key team members. Be open to changes if necessary}

Market risk:

• Is there a market for the product (e.g. using the term product and service interchangeably)? Will anyone want it? Will they pay for it? How much will they pay? How do we know?
• {Validate the market practically by acquiring customers or credible prospects who can affirm the market's existence and demand}

Competition risk:

• Are there too many other startups already doing this? Is this startup sufficiently differentiated from the other startups, and also differentiated from any large incumbents?
• {Ensure your differentiation from competitors is clear and strong. Avoid claiming you have no competitors; instead, discuss how you stand out in the competitive landscape}

Timing risk:

• Is it too early? Is it too late?
• {Demonstrate that your timing is right by making progress and acquiring customers}

Financing risk:

• After we invest in this round, how many additional rounds of financing will be required for the company to become profitable, and what will the dollar total be? How certain are we about these estimates? How do we know?
• {Carefully reevaluate your funding needs and explore ways to reduce them, such as cost-effective planning}

Marketing / CAC risk:

• Will this startup be able to cut through the noise? How much will marketing cost? Do the economics of customer acquisition—the cost to acquire a customer, and the revenue that customer will generate—work?
• {Sharpen your differentiation and calculate customer acquisition economics to show profitability potential}

Distribution / GTM risk:

• Does this startup need certain distribution partners to succeed? Will it be able to get them? How? (For example, this is a common problem with mobile startups that need deals with major mobile carriers to succeed)
• {Address distribution challenges or consider alternative plans if dependent on key distribution partners}

Technology risk:

• Can the product be built? Does it involve rocket science—or an equivalent, like artificial intelligence or natural language processing? Are there fundamental breakthroughs that need to happen? If so, how certain are we that they will happen, or that this team will be able to make them?
• {Develop your product or reach the beta stage before seeking funding to mitigate technology risks}

Product risk:

• Even assuming the product can in theory be built, can this team build it?
• {Focus on building a robust (not necessarily pretty) product to reassure investors}

Hiring risk:

• What positions does the startup need to hire for in order to execute its plan? E.g. a startup planning to build a large-scale hiring platform will need a VP of —will the founding team be able to hire a good one?
• {Identify positions of concern for VCs and consider adding them to the founding team, even if it involves dilution. Ask investors for feedback}