Only 1% get funded. Imagine, out of 100, only one gets funded. Let’s face it. You’ll hear a lot of “NOs” before you get a YES. So what is it about the 99 companies that didn’t get a yes? Do they suck? Are they bad? Are they doomed!?
I understand you’ve poured your heart, soul, dreams, blood sweat and tears into getting your company off the ground. Raising capital is hard, and the majority of investors may not respond to your pitch, in fact you’ll hear quite a lot of radio silence. And the last thing you want, when you do hear something — is a person on the other side of the table, after spending a few minutes on your pitch — saying “NO”. Instead of chasing them — chill…
Why Investors Say “NO”…
We all know you’re superhuman, and we also know that to you — your company is the most important thing. But I want you to develop some empathy, if not sympathy for the “poor” investor. And you can only do that if you think like an investor. There are bunch of nice ones out there like yours truly, and we do try to respond to every entrepreneur, but please do think about how fast our inbox gets filled.
Welcome To “The Land Of No”
Investors have a tough job and saying “NO” is the toughest part, and that’s because they have plenty of deals / opportunities come their way — so they have to say ‘no’ 99% of the time. And trust me, there are many ways to say ‘no’ without offending you, but don’t mistake an investor’s politeness for weakness (ok, maybe he’s just being respectful).
Now there are three types of responses or answers you will hear — Yes, No and Maybe. The last one is the worse… it’s just as bad as silence. There are plenty of reasons why investors give these responses, but we’ll touch upon just a few that are important:
Some investors, give precise reasons why they don’t want to invest. If you get this, consider yourself lucky, because it’s not normal for the investor to give an explanation why — he’s not into free consulting. Every business has it’s challenges — the question is what’s the magnitude of the challenge, and can your product / service / company / team solve it.
Missed Opportunities Are The Price
There’s no financial upside to saying ‘no’. You need the investor’s cash and connections, they want a stake in your potential growth and return on investment. However, there is a price the investor has to pay for saying ‘no’ most of the time in order to be actively investing. There are many such opportunities and investors who understand the investing game, accept this — we’re not always right, and there are chances for regret down the road. Just look at Bessemer Ventures’ Anti Portfolio or Union Square Ventures’ reminder in the conference room for not investing in Airbnb. It works both ways, investors have probably seen very recent failures on their existing investments — and they’re trying to figure out whether yours is the next one. The odds are stacked up against him — 80% of businesses fail after five years, and imagine how many of them he’s funded!
Series / Stage
Look at the fund / investor and try to identify which series they’re investing in. If it’s a smaller Seed / Series A — expect a fund size between $5 to $50 million. As you move down the investment stages — the sizes get larger as well as the funds. Just as investors do due diligence on you, you should be doing your due diligence on the investor.
Sometimes investors may not have the mandate or experience to invest in your sector / industry / segment / type of company. Investors generally like to invest in areas they’re familiar with, sometimes entire funds are created just for a specific type of investment. Accept this. If it’s not in their scope — don’t waste more time on them, move on.
Let’s put it this way, an investor has only a finite amount of capital (if it were unlimited, life would be easier). So if they can only make 10 or even 1 investment per year — the stakes are high to take a decision on finding that one investment that will put their money to the best use possible. So there are fewer investment opportunities to choose from. Whilst an angel may see 10 investments in a week, a venture capitalist may see 100 in a month and private equity investor may see 100 year in year. When they say yes to one investment, they are saying no to another — it’s a binary decision. It may sting when someone says no — buckle up, and put one foot in front of the other. This is a numbers game, buddy.
Paradox Of Time
Whilst the numbers game is one part of the investor equation, the other part is the time the investor has to evaluate and decide. The trick in this business is to spend very little time on a lot of deals, and then a lot of time on very few deals. And talking about time, never use time as a pressure tactic on an investor — the default answer will be… you guessed it, ‘no’. Some even say it in less than 1 minute.
OPM (Other People’s Money)
Just like you’re raising funds for your company, (and unless you’re an angel investor who lucked on an exit) — the “investors” you meet probably have some years of experience working at a larger firm and have now started a ‘ME2 Ventures’ by raising funds from other limited partners (our lingo for other investors like funds-of-funds, family offices, corporations, universities, endowments, pension funds or high net worth individuals) following months if not years of meetings. Now, these guys have a fiduciary obligation to find good investments and generate a return for those other investors (and not just cover their salaries, which they get from charging a ‘2%-3% management fee’ to the other investors) — and that’s not easy. Raising capital / funds is not easy per se, deploying those funds and taking responsibility is even tougher. They’re investing other people’s money (opm) and all eyes are on them, just as their eyes are on you as a founder. And keep it mind, that it is possibly at such a time that you’re presenting to him.
It’s Business Baby
Unless you’re targeting an impact investing fund — if you’re approaching a typical investment / venture fund, know this — it’s business as usual — just like any corporate, they’re in this to make a profit (and investors have a profit sharing formula, usually a 20% carry or carried interest above and beyond a hurdle rate). In short, if they don’t envision you helping them make 10x or whatever their internal return criteria is — they’re not going to invest in you. It’s all about the money, honey. If you’re talking to angel investors, the cheque sizes are smaller, and the decision making faster — but you still need to generate a return for them. So imagine a situation where the last few investments the investor has done hasn’t turned out quite well or is doing badly — you bump into him and land a meeting… do you really think he’s going to say yes just like that?
Know Your Stuff
Investors don’t know everything, which is why when they see someone who knows their shit — they’re impressed, and they’re interested. If you haven’t done your homework — and you get quizzed by an investor, that’s going to look bad on you. Don’t pretend to know everything, but don’t be ignorant either. If you know what you’re up against (a sense of reality vs. optimism) — investors will respect that.
The last thing an investor needs is a person with attitude, an entrepreneur who thinks too much of himself or thinks he knows-it-all. Don’t act like a jerk or act cocky. Be confident, but not arrogant — there’s a fine line between the two. Investors see a tonne of opportunities like yours and can keep passing on deals — there will always be another one to invest in. Even if the pass has left its station, another one will come.
Don’t bash your competition or say you don’t have any — it’s amateur and investors will think you have no clue of the real world. You will always have competition, if you don’t — there’s no real demand. It could be indirect, but it is there. Changing behaviors is tough and a first mover advantage is not an advantage, it’s what happens when you lead from the front — followers shoot arrows in your back. Leave that to the big players, those with deep pockets. What’s more, when the investor finds out that you’re a direct competition to his portfolio company and he can’t take a stake with yours without a conflict of interest, he’ll just entertain you in hopes of gaining some market intelligence about you and your company.
When it comes to the point of “The Ask” — investors will either be put off or show great interest at your valuation and/or investment terms. If it’s too high, then no matter how great your company or product is — the two of you shall never meet and you won’t reach an agreement. This is what we call a valuation gap i.e. gap between what an investor wants and what an entrepreneur wants/thinks his company is valued at. Some investors believe that it’s not the entrepreneur who decides the valuation but the investor — and whilst this is true, it’s not always the case. In any transaction there should be a willing buyer and a willing seller. The key word is “willing”. Whilst investors will try to push the valuation down as a buyer, as soon as they get their stake — they’ll turn around and start pushing the valuation up as a seller for the very same reasons you gave (and perhaps come up with more). To learn more about how to value your company — check out the Valuations 101 Guide for more details.
I personally don’t like investors who say the team lacks credibility. Who are we to even judge? What if the founder asked you… what experience do you have running a fund? At the same time, don’t say your team is the secret sauce and competitive advantage — no one has a lock on people. I honestly feel it’s the most difficult thing to say to a team — that they’re the reason an investor isn’t investing, especially when everything else fits well.
One of the biggest mistakes (in our humble opinion) is when entrepreneurs neglect to address how the investor is going generate a return on his or her investment. The exit strategy is the entrepreneur’s opportunity to demonstrate what a probable exit looks like, when it will likely occur, and what type of return can be expected. Mind you, every investor is thinking about this from day one.
No Particular Reason
Sometimes, an investor may like the market, like the idea, even like the early traction but just can’t place a finger on why he should say YES. Maybe it’s the founder, maybe it’s the gut, maybe it’s the weather. Who knows…
Last but not least, in fact we think it’s probably one of the biggest reasons why Investors say no — is because you didn’t follow up. If you don’t hear from an investor within a week, send a reminder. If you don’t hear back again, after a month — send some exciting news about your company. If you promise to follow up with some additional information and don’t — you’re flagged as unreliable — someone who drops the ball, and let things fall through the crack. That’s pretty much an indication that you can’t deliver on your promises of the future.
Want to read more?
Ok, we’ve given you plenty of reasons WHY investors say ‘no’. If you’d like to read more about HOW they say ‘no’ so you can identify a ‘no’ from a ‘yes’ and what to do WHEN they say ‘no’ — join us at PitchProcess to gain access to the full guide as well much more.