Understanding VC Rejections and Finding the Right Investors

I have been reading "The Venture Mindset" by Ilya Strebulaev and Alex Dang , and I find it deeply insightful as it reveals the deeper psyche of how top VCs think. This is a must-read book for all the founders out there. From the angle of founders, the more founders know how VCs think, the less discouraged they become on the path of fundraising.

As a founder, facing rejection can feel like a personal blow. However, understanding the venture capital (VC) mindset can help you navigate these rejections and find the right investors for your startup. Marc Andreessen, co-founder of a16z, famously said, "Our day job is crushing entrepreneurs’ hopes and dreams. We have focused very, very hard on being very good at saying no" (Strebulaev & Dang, 2024, p. 98). This statement encapsulates the harsh reality that most startups face when seeking funding.

Why VCs Say No

Venture capitalists often sift through hundreds of proposals, but only a few make it through each stage of their rigorous evaluation process. According to Ilya Strebulaev and Alex Dang in "The Venture Mindset," for every 101 opportunities sourced, only one typically results in an investment (Strebulaev & Dang, 2024, p. 99). This means VCs are incredibly selective, often rejecting deals swiftly based on initial assessments and key assumptions.

The Critical Flaw Approach

VCs use a "critical flaw approach" to quickly eliminate startups that don’t meet certain criteria. Out of 100 opportunities, 90 might be rejected after a brief review. The remaining 10 are discussed more thoroughly, but only one or two make it to the due diligence phase. This process ensures that VCs invest in startups with the highest potential for success while minimizing risks (Strebulaev & Dang, 2024, pp. 99-100).

Don’t Take It Personally

As a founder, it’s essential not to take rejection personally. Here’s why:

1. Volume of Proposals: VCs receive a vast number of pitches and must be selective to manage their time effectively.
2. Strategic Fit: Not every startup aligns with a VC’s investment strategy or portfolio needs.
3. Risk Management: VCs need to mitigate risks and often focus on startups that fit specific criteria and have a strong likelihood of success.

Actionable Insights for Founders

1. Expand Your Reach: Don’t rely on a handful of investors. Reach out to as many potential VCs as possible. The more you pitch, the higher your chances of finding the right match.
2. Refine Your Pitch: Make sure your pitch addresses potential critical flaws and highlights how your startup stands out in the market.
3. Seek Feedback: Use rejections as an opportunity to gather feedback and improve your pitch and business model. Understanding why a VC said no can provide valuable insights.
4. Focus on Fit: Target VCs whose investment thesis aligns with your startup’s mission and industry. Research their portfolio and tailor your pitch to demonstrate strategic fit.
5. Be Persistent: Remember that rejection is part of the journey. Persistence and resilience are key traits for successful founders.

Conclusion

Rejection is an inherent part of the venture capital landscape. By understanding the reasons behind it and adopting a strategic approach, you can improve your chances of securing funding. Marc Andreessen’s candid remark underscores the need for founders to be prepared for a tough journey, but with perseverance and the right strategy, you can find investors who believe in your vision. Keep refining, keep pitching, and most importantly, don’t take it personally. Your next yes could be just around the corner.

I could help you give some suggestions and point you to the right VCs to talk to. Schedule a 1:1 here: https://calendly.com/iandmy/1-1-with-founders