Ways a VC says no without saying no
unsupervisedmethods.com
unsupervisedmethods.com
The worst No's are the ones where they ask to do Due Diligence and then never open the dropbox folder. Or if you are on your fifth meeting and they just keep trying to pump you for competitive information.
So how do you know when you get a Yes?
When you get a wire or a check. That's the only way.
Even a signed note or Equity docs don't mean anything until that money clears.
The best No's I've had were from Bessemer and a16z years ago. Almost immediate and right to the point that they wouldn't invest, with specific reasoning/metrics behind them. A++ would get told no again.
Don't you mean "without specific reasoning/metrics behind them"?
> Almost immediate and right to the point that they wouldn't invest, with specific reasoning/metrics behind them.
I'm not sure we ever got a VC to give us one of these waffling "no"'s without apply serious pressure.
> When you get a wire or a check. That's the only way.
YES to this.
15 years ago after the funding I'd arranged to start a company fell through after about a year of travelling to raise it...we finally went to a VC. He insisted that he could not sign an NDA because of the precarious position it put him in hearing so many of these pitches. At that point we figured, this was basically our last option anyway so we gave him the pitch.
He really liked it and wanted a local company to build it that we weren't comfortable with, so we parted ways.
5 years later I found out he had the company build it about as well as he could from memory of our pitch. It had plenty of flaws but it was a company that ended up selling for several million. As far as I can tell, it was re-sold and the company had a complete shift of focus afterwards.
Meanwhile, in NY 2 years after my meeting with the VC an enterprising group of people who were not affiliated with that VC at all pursued and built a business out of one of the core features of my original platform. As it turned out, that feature stood as a business on it's own. I'd included it in the overall system because as an integrated feature, it facilitated a lot of efficiency gains.
My platform was a comprehensive information system for public schools designed to make it easier for teacher's to focus on their students, reduce their workload and make it easier for them to communicate directly with parents. As a part of that system, there was to be a market place for teachers to sell and exchange lesson plans. This was back in 2003 and now smaller companies have popped up doing various parts of what our original plan was for.
In NYC, Teachers Pay Teachers has made a business out of that aspect and for what it's worth, I'm really happy that they have been successful.
The whole experience was really eye opening and I've been extremely reluctant to pursue funding for any of my business ideas because of it. I wish that wasn't the case.
Did the platform you built attempt to create a shared curriculum libraries? If so, was the focus on the school, district or national scale?
Happy to take a response via email so as not to derail the thread (see profile).
It's a topic of personal interest. I believe teachers are far too isolated in their lesson planning/curriculum creation which leads to significant redundancies in labor, glacial curriculum improvement, and contributes to the difficulty serving the needs of my individual students.
I may publish the business plan one day just for fun in case anyone else wants to follow through on it. :)
A couple months later our founder has another possible investor and we go through a Due Diligence again. This time we were already wary from our first DD (plus the investor had a bit of a reputation of being a scammer in the past) and lo and behold their IT guy wants to have full access to our software packages / pipeline, source code and databases, so they "can assess the quality". (...) I didn't end up giving them any of our source code, which they were fine with after a while. This whole spiel went on for another month where they "focused" more on other processes. Eventually they went quiet and their CTO asked me privately if I wanted to jump ship to join them, because they need someone with my expertise...
Does this happen often or did we just have some bad luck? Also has anyone ever been asked to provide the source code to their product? (that seemed kind of outrageous to me)
Plus I think a write-up of guide lines or red flags that one should watch out for during a DD or when talking to a VC might help more than just name calling. What worked the last time: Google their names and go past page 1 (Most seem to know how to alter their search results)
That's just one sided. They can steal your ideas (because they didn't signed the relevant NDA), and you can't even name the bastards if they do?
I have zero experience in this stuff, but it looks like in this situation, one should either refuse to sign this sort of non-disparagement clause, or have them sign the relevant NDA.
We've had our own little revenge though. The competitor is funded well but has a very weak technical team. We used numerous holes in their systems to obtain critical data about their business. Shall we use it or not is another moral question, but it gave us great insights and let us adjust our strategy without spending our own or VC's money and time on getting to know it.
I did some searching now and it seems that intent to deceive/defraud is required at least in some states. Common sense would say you wouldn't get any company shares or other things until your check clears, so if it bounces, is it actually fraud? Or just being a jerk?
I think all cases of writing a check you know isn't covered is fraud. The cases when you thought it would be covered but you were mistaken are difficult to judge, need to prove what you knew when.
That's quite an extreme mischaracterization.
It is VERY unlikely that you are going to be arrested for bouncing a single $50 check.
Generally the people who get arrested for bouncing a check have something extra on top of it. They immediately sold the purchase (so it can't be reversed). They have bounced many checks up to this point (you mentioned repeat offenders). etc.
There is genuine injustice in being poor. That "bounced check charge" disproportionately hits the poor. And banks were going out of their way to reorder transactions to make things bounce. Parking fines, usage fees, etc. all are meant to tax the poor.
However, even multiple bounced checks are unlikely to result in prosecution without something to add to the pile.
Incidentally, some time ago, I used Bank of America. I had about $300 in my checking account. I made about $300 in purchases for the month, like groceries and gas and this kind of thing. Then, something happened with the car, and I had to take it in to the shop. They could fix it for $250. I knew I didn't have it, but I decided I was willing to pay the overdraft fee (of $35) in order to get my car fixed, since... I needed a working car. Anyway, I made the charge on my card. Then, the next day, when all those charges posted, Bank of America rearranged the order of my posts so that the $250 charge went on the account first, and then charged me about ten $35 overdraft fees. They rearranged the post order so the largest transactions went first. Anyway, scumbag banks aside, they were actually sued for this in a class action, but through some "miracle" for the bank (a shredder), they "lost" all of their records for that year, including my $350 in overdraft fees that they charged me. So I wasn't able to get my money back even years later. Class actions are total ripoffs.
Was going to comment on the article itself: You shouldn't walk away from a VC without this in hand. Kind of a general sales concept - never take "no" without a good reason.
If you give a specific reason, they will challenge it.
"No, I don't want this product, because I'm not interested."
"I'd like to cancel this credit card, because I don't want to have this credit card anymore."
http://jamesclear.com/copy-machine-study
Of course a salesman is more likely to push back than a random bystander, whatever reason you give.
That being said, I'm not a telemarketer, I work with high end Integrations and before you get a proposal we've had a few conversations. If the answer is no, I'm respectful of that and I want to know what we can do better next time.
I'll keep following up until I've gotten an answer.
I've known people who claimed to be from a VC fund that had $10MM raise out of $50MM and was making investments.
In reality they had no money raised but signed $11.5MM in investments with startups.
It's a crazy world out there. Vet your investors.
I'd wager approximately zero. There is more to the above story. As described, these VC's wasted tons of their own time. How did they even have offices?
Perhaps these VCs were expecting money to come in but in the end their fund fell apart?
OP said "had no money raised but signed $11.5MM in investments with startups". maybe they mispoke.
An example: say you acquire a company worth $10m and have no money in the bank. You could pay 50% of it in stock ("you'll be part of an amazing growth story, and the $5m stock you get today will be worth $50m in 5 to 10 years") and then go borrow $5m from a bank (or go through an equity investor) to fund the other 50% of the acquisition price. But often you'll need a binding LoI to get a loan.
Doesn't always work, but if you're someone who is well connected then it's quite doable. I've seen it done.
Another person that comes to mind is David Baazov: https://www.forbes.com/sites/nathanvardi/2014/12/01/the-king.... He aligned things well and put deals together, and ended up making a ton of money because of it.
They thought they could raise the money once they had the portfolio.
"LOOK AT ME LOOK AT ME LOOK AT ME! Ok, what do you have? 40 slides that tell me nothing other than you have a big vision and if you own 10% of <insert market here> it will be worth a lot."
At this point, VC options are:
1) Hard pass (crazies, maybe 60% of people pitching), but you want them to still refer their friends for better deal flow, so <insert excuse here> that makes them feel better about rejection.
2) Soft pass (30%): maybe they have something, hard to tell without spending weeks figuring out what they really meant, and if the team is even the right team to be solving the problem, much less actually competent. Give them some <come back when> that doesn't ruffle them too much.
3) Next stage of funnel: The 10% that actually got their concept across, explained why they are a good team to implement it instead of the other 10 people you heard with the same idea, and why now is the right time. Enter diligence, and hopefully you can convince the other partners that you aren't crazy by taking a chance on them.
Self-awareness is huge. You should know the reasons why a VC might not want to invest in you, regardless of whether it ever comes out of your mouth or goes on a slide. If a VC is interested but has concerns, they're going to ask these questions, and you'll be better prepared to address them. It's up to you - and situational awareness matters - whether you decide to speak to these points even if you're not asked.
No. Having a list of risks and assumptions you can send folks is good, and shows maturity. But it doesn't belong in the deck, which should be for introducing yourselves and telling your story.
If most of the VC's concerns are on your list of challenge milestones, then they will be more likely to believe the rest of your pitch as being accurate.
Do you really think these people are that emotionally fragile?
That they really can't take (let alone appreciate the value of) a simple and straightforward "No", with metrics and reasons?
As in any other context where one hears lines like these -- the only person who's meant to "feel better" after giving excuses like these is the person giving them.
The basic message it conveys is: "We're secure. You're not."
Even so - I find the stance "You're super easily hurt / offended / etc" (or as the above commenter put it, "ruffled") - "and I'm not, so I need to do what's best for both of us, and talk down to you" - to be distasteful, on multiple levels.
Why do I find this helpful? Because I watch my own reaction to the experience. I've just met this person. They've just told me their dream, the thing they quit their job to do, invested years of their life in, and it's an absolutely terrible, terrible idea. What do I do?
If I can, I give them good advice within the confines of what they are trying to do. And in almost all cases that's as far as I can go.
I just met this person and they just met me. It's not my job or my place to crush their dreams and the odds are vanishingly close to zero percent they'd listen to me if I tried, so I don't (think about all those VC rejections, how many of those VC rejections caused the entrepreneur to drop the idea? The answer is probably pretty close to zero).
Even with close friends, it's very dicey whether to say "I think that idea is a mistake" because most entrepreneurs are so driven by passion (and need to be).
Each time I hear one of those terrible pitches, I try to remember this is why VC's don't want to tell people solid no's, and this is why I should be so appreciative for every hint of criticism I've ever received. Because people will absolutely tell you your idea is great and they'll almost never tell you what's profoundly wrong with it. I put as much truth and as much insight into my answers and observations on those painful pitches as I think the entrepreneurs can hear, and hope they'll eventually internalize it and pivot in a better direction, because "please, for the love of god and your family and mortgage, stop what you're doing now" simply isn't an ansewer the entrepreneur will be able to hear from a stranger (or probably even a close friend).
Talking to other founders can be very enlightening, if a little depressing.
The same thing can happen with people you know well. Several years ago, my closest friend, an older gentleman retired and living on social security and his wife's income, got into a notorious MLM scam called Photomax.
Their pitch was that for only $50/month, they would store all your photo files in a secure facility, and would even allow you to order prints at extra cost.
But wait! There's more! The $50/month didn't just buy you photo storage, you would have the opportunity to sell this service to all of your friends and start making big money on your downline.
Of course they also provided sales training. One day he invited me to eavesdrop on one of their training calls, where he and his cohort listened on a conference call while their upline cold-called potential suck^H^H^H^Hprospects.
Of course none of these calls went well. But why let reality stop you? My friend decided that to really succeed, he needed their advanced training, which would only cost $10,000.
As gently as I could, I tried to explain that this exact same service was available from multiple providers such as Flickr, SmugMug, 500px, etc. either for free or for a tenth the cost of Photomax, and this smelled very much like a scam to me.
He said, "Mike, you're just being negative!"
We remained friends, but I was sad to see him throw away that $10,000 and all the time he put into this.
One thing to note that may be non-obvious… Typically when I provide a detailed reason for the pass – regardless of if it's team, market, strategy, etc. – I don't exactly expect to receive the response "that's a great point we haven't considered, maybe it won't work out for us." Instead, I expect that the response will be a challenge to the point's I have made. Sometimes valid, but most often it comes down to a matter of perspective, but it is unproductive to engage in email debate with every founder where we don't pursue an investment in their company. It comes comes down to the tradeoff between professional responsibility and limitations of my time.
There is almost no idea that is a mistake. Barring some idiotic stuff like "tinder for my garden plants" (on second thoughts this might be good. maybe users want to cross breed plants?)
Twitter would sound obnoxious if it was pitched today. There have been more "snapchats" before snapchats (I think tigerchat). AirBnb was rent Air Mattress and then pivoted. Ebay was selling broken goods (started with a broken laser pointer). Everything sounds idiotic. Share my ride uber? Share my bedroom airbnb?
We are all sailboats in the river of life. And money is the wind.
VC response: We're really interested and we want to do the deal, we just need to wait to hear from partner X who is currently out of town.
Translation: We are about to fund one of your competitors, and we want to string you along as far as possible in the hopes that we can distract you from other fundraising efforts so that you will be less of a threat to our baby.
Comment: It's not a "yes" until the check clears. (And even then you should probably wait two weeks just to be sure.)
Saying "no" makes people really mad. People remember how you made them feel, not necessarily what you said or did. Thus, it is most important to look after the feelings of the people you contact, even at the cost of saying or doing things disingenuously.
If you make people feel like you're interested in them and their ideas, that's much better than making an enemy who has sworn to prove you wrong. The best way to do this is to make them think you're 100% on board and that you're only being stopped by a technicality or some high-friction process that you're helpless to overcome.
Only a relatively small handful of people will eventually put two and two together and realize that you're intentionally stringing them on; most people prefer to believe the flattering interpretation that the deal is pending, it's just hung up somewhere along the way.
The reluctance of <AVERAGE_PERSON> to misrepresent things for commercial or political convenience only allows those with fewer scruples to rise to the top of the heap.
Recently there was a post on HN about the reasons you should have a start-up. I wonder if starting a startup always requires these sorts of "Social Engineering Hacks"?
Their website states we "We’re based in Berlin, but we invest all over the world." but I got their rejection letter: "Sorry, We do not invest in India"
Apparently, India is out of this world.
My startup is registered in Silicon Valley and I am not even an Indian resident or citizen.
But then again, this doesn't give them excuse.
Why are there so many ways to say No? Because just saying "no" is rude -- although some of the 15 alternatives in the Medium post are even worse because they waste a founder's time. It's like if a recruiter reaches out to you: most people don't reply, or they reply with something like "sorry, this is not a great fit" or "I'm not looking at this time."
FWIW, there are many VCs (though probably not the majority) that give concrete reasons when saying No. When I got into venture capital 5 years ago, many peers told me to be vague in order to maintain option value in a company's future fundraises. That sounded dumb to me because if I were a founder I would want feedback, so I try to give useful feedback when I'm passing. That's worked out well over time, and founders whose companies I passed on often introduce me to other founders, or reach out when they're fundraising again.
It makes it sound like all startups out there have a RIGHT to be funded, and annoying, idiotic VCs just say no them... how mean of them.
But plenty of startup ideas are BS, plenty of founders are incompetent, and they don't automatically deserve a VC's ear, let alone their money. Why do they think they have the right to an audience? I know that you can have exceptions (Harry Potter was rejected by some 12 publishers before Bloomsbury took it), but if no VC is willing to even listen to you, consider that you are the problem, and not the VC industry.
I know that a bit of boundless optimism on behalf of the founders is needed for startups to succeed, but exercise that optimism in your own time and on your own dime.
Sometimes its harder to crush someones dream than to just lie to them and not respond to their emails later.
But most people don't say it that way. They go all "See mom you didn't believe in me but I told you I'd become something".
Well your mom didn't believe in you because you were smoking pot and failing all your classes when you were 16 and had half a foot in prison. Good for you if you managed to turn your life around but don't blame mom for her lack of confidence.
Want to innovate? Get VC blessing and money.
Want to create something? Get external validation first from a funder.
Even thought the vast majority of startups are self-funded, the mindshare of VC messaging in the space is dis-proportionate.
This leaves a real question, if getting funding is about leverage, getting some traction and revenue first is not a bad thought. It's really nice to see YC being a beacon of support in this regards too.
No one deserves money. The predominant VC culture doesn't deserve the right to shoot down people by stringing them out, or making them feel they aren't adequate, when no one is. Ideas are rarely good in the beginning and need time to form and develop like the entrepreneur... but the idea that you can't get anywhere without funding is a big fallacy. A word like deal flow on the wrong kind of VC's lips is cringeworthy.
Even learning to get good at freelancing, contracting and consulting teaches you enough business skills that are transferrable to most startups, not to mention being able to make some amount of seed money that would be available through funding.
I wouldn't say this about YC because they have a true founder support culture to go with the value add from leadership. I really hope this model of funding and investing in the person over the idea spreads widely.
The best funding and validation is from your clients. Scaling and growth funding is much easier to find.
Shocker: most VC's will have a very different conversation with you if you've put a little time into building the relationship before you ask them for money!
Most VC's success stories go something like "oh yeah, I met this crazy person, and they just kept at it, and at some point I was convinced and put money in! Now its AirBnB!"
Most of their early success was in NYC yet that didn't stop Sequoia from funding them. Now Wilson keeps a box of their "Cap'n McCains" cereal in the board room to remind him.
As it is you got a hard "no, because of your location."
I am shocked that you think location doesn't matter and that it was not the truth.
whoever advised you of that is wrong. of course it matters. why do you think more deals happen in silicon valley than elsewhere? because there are no good startups elsewhere?
shockingly misinformed/in denial. you should have believed the reason you were very clearly given. or falsified it by moving to silicon valley. or realized that actually, you are the one saying no.
Translation: We don't really believe in your idea or you, but if you get a big player to put some money in we'll be happy to follow them.
"We'd be in for 300k if you can find someone who leads at 500k," or something like that.
If they're willing to invest a small amount of money it means they think it's interesting and they'd like to basically 'bookmark' it by putting up a small amount of capital in order to receive your company updates and have a small piece of the upside if things go well, but they don't have enough understanding of the product or conviction that it will work to drop everything and make a huge investment in it. And I don't think that's a bad thing at all.
E.g. there are a lot of folks who own a few hundred bucks worth of Bitcoin, so is it wrong that they haven't yet invested a large portion of their net worth into blockchain/crypto? I don't think so, I think it just means they're dipping a toe in the water and trying to get a feel for what's going on.
The reason they say no to begin with is because you are not pitching in a vacuum, you are pitching together with another 1,000 or so companies in a year, 900 of those will get 'no' right off the bat, 100 will get a meeting (or two) dedicated to reviewing their proposition in more detail, 10 of those will enter due diligence (at substantial risk to the VC in case the deal does not go through) and maybe 8 out of those 10 will get funded.
The amount of time wasted on worthless pitches by people that don't stand a chance of getting funded is very large, and no amount of feeling that you are entitled to funding is going to get you funded unless you manage to convince the other side of the table that you are one of those 10, which means you need to look better than the other 990. Good luck!
What exactly is the "substantial risk" that VCs take on by doing due diligence on ten companies a year?
A failed DD says as much about the VC as it says about the company, it more often than not translates into 'VC didn't do their homework', and it can really eat into the '2' of the 2 and 20, those DD costs will come straight out of the operating capital of a fund. Especially for smaller VCs this can really hurt.
2% of the capital under management is a lot when a fund is large but when a fund is small (say 50M) it translates to 1M of operating capital for a year when all capital is invested. That's only the case at the end of the fund cycle, the time before then there will be on average only half of that available. If a full process DD (legal, commercial, technical, financial) costs $200K then even a single failure will substantially eat into the operating capital for that VC and may in fact harm their ability to do future deals.
Not having empathy for the other side is not very productive, either from the VC's point of view or from the point of view of the start-ups. I've seen more start-ups that try to play tricks than I have seen VC's (but I've seen both).
[0]https://medium.com/swlh/diligence-at-social-capital-part-1-a...
Technology due diligence (by an outside contractor)
- understand architecture
- interview CTO
- understand technology choices
Essentially the technical DD is whether your CTO knows what they he is doing and can actually deliver the roadmap.
Go-to-market DD
- call with your channel partners if you have them
Product DD
- call with a sample of your customers
- Actually try the product themselves
Team DD
- reference calls on all founders + backdoor references
- CV's of core team
Business audit
- P&L
- cashflow
- cap table
- sales activity (growth, churn, acquisition)
Due Diligence should not raise any surprises and confirm what you have pitched them. It's a very rational thing to do before you wire a few million into a company you have met only a few times.
This is key and something that I have explained multiple times over the last couple of years to people that really did not get why a surprise or two during a DD were a 'big deal'. DD is confirmatory, not discovery.
Us: how did you like our pitch?
VC: we're a no, because we don't trust your unit economics.
Us: fair enough. Could you please share some scenarios you've invested in where there were parallel unit economics to us? We'd like to understand what you know about our space and where those economics make sense to investors such as yourselves.
VC: certainly! We have an investment in <X> that's in your space, and their unit economics look great! The assumptions you have and the ones they have are about the same, but look at their margins!
Us: ummm, so that's a function of revenue/price that we don't believe is even feasibly attainable. Our margins are smaller because we think the per-unit revenue is going to be challenged. It's why our numbers are fairly skeptical.
VC: well, we believe they can reach that (unfounded) level of revenue.
Within a year, the company this group funded was raising a Series A to stay alive because -- drum roll please -- the unit economics were not panning out.
I say this is the best "no" because we had hard feedback on what worked for them. It also let us know they didn't really understand how price in our market space was going to have downward pressure. Our approach was to start very cheap, then improve over time. These investors weren't interested in that approach; rather, they went with the team who had "better margins".
We learned a lot, and kept learning, from this investor's "no".
Well, I mean, sometimes they are. But they're usually not. A $1B fund has roughly three years to allocate that $1B in resources --- that's nearly $1M a day. You need to make sure that the speed at which you're expected to invest doesn't detract from the quality of deals, so your bar has to be extremely high.
I think a valuable skill to develop as a founder is to recognize the difference between; "no, but I like you" and "no, and I don't like you / don't care." This industry is built on relationships. Unfortunately there will be a ton of people who just don't give a shit about you. But the ones that do, they're going to help unlock doors for you, and even if you get a "no", focus on recognizing real "clicks" with people.
"VC response: We’d love to get in on this as soon as you find a lead investor!"
The first is "talk to us when you have a lead". That's not helpful and it's bullshit. When you have a lead you can always raise as much money as you want - I do not contact these VCs back when I get a lead.
"We are 100% committed for at least $X00,000 if you get a lead or fill out the rest of the round" - very helpful, shows conviction, etc. This version is still not great, but look everyone can't be a lead, and having good folks 100% committed with $$ amounts shows a lead you have interest and will quickly fill out a great round around their check.
Don't do the former, only do the latter.
"Here's a test for deciding whether a VC's response was yes or no. Look down at your hands. Are you holding a termsheet?"
That's like saying "if an artist can't get a record label to sign them, I would also pass on them"... and now there are tons of ways to self-publish and crowdfund, including soundcloud and patreon and kickstarter!
Also, you think all VC deals are fair and square? Naive.
Also, crowdfunding only works with consumer products -- crowd funding a B2B product is almost impossible.
Board seat(s) go to a representative of the CF platform.
So technically you don't have a long cap table but it's anyway not a good sign for next rounds so you're, in practice, right.
For instance what if the CF platform goes under? It's magnitudes of orders more likely than a VC...
The bankruptcy trustee that takes over the CF platform hires some third party to service all the shell companies. Could result in substantial additional costs to the investors or the company. Who pays depends on how much value is left in the bankrupt platform, what's in the contracts, the efficacy of third parties involved in the bk, and the whims of the trustee and the judge.
Because raising equity via CF implies your deck of slides immediately end up in the hands of your competitors (I know that once you've started your roadshow you have to assume everything is public but you can expect a little bit of latency and/or release some information at latter stages).
Also, probably because I am only familiar with smaller investment/startup communities (Paris and especially Brussels), every information is traded between large investors (both funds and individuals) and once you're "in" you hear about "largish" rounds (or companies going out of business) by grapevine sometimes weeks in advance.
It's already hard enough to raise with noise around, it's hard enough to manage a business, don't get on a soapbox and reveal your strenghts and weaknesses publicly...
In France, lending CF is growing. I invested a few euros on one of the platform just by curiosity. They are mostly industrial companies looking for sub 500k loans to acquire/replace equipment. The rates are outrageous, up to 8%. You get a detailed market and financial analysis, you see companies 20 years+ old, with stable numbers, doing like 2 or 3M a year in sales. Why the hell didn't their bank lend them 200k at 4 or 5%? French bankers usually don't play their role anymore, which is lend capital, take some risks, and push good projects towards friendly VCs (I must say that we're very lucky/happy our banker has the opposite behavior :) )
Ex-banker here. 8% is not a bad rate for such a loan. Most banks, in the US at least, don't want to do term loans for equipment for small companies because the transactions costs are high (same amount of work for a $5m loan, often less), there's usually a customer concentration problem, the borrower is usually overlevered already, the asset recovery process is just as expensive as a larger loan, and the collateral liquidation values are low. So if you're an established, small industrial company a bank will gladly give you either a real estate loan or a line of credit at 4 or 5% collateralized by your receivables, but that's about it.
Edit: There are specialty finance companies that have sprung up in the past few decades that make equipment term loans, and their rates are 5-12%. There are also "hard money" guys lending at 15%+ to riskier borrowers.
Never thought of it that way but makes perfect sense. My view was distorted by the fact that my banker easily opens lines of credit for my company where the collateral is virtually non existent (SaaS startup). I compared that to industrial companies where, to me, assets are more liquid:a truck or whatever industrial equipment probably can probably be sold more easily at an auction than the software IP of a company. While true, I neglected the fact that the auctionned truck will go for probably 25% of its original value and the bank will not refer its funds...
My banker is not trying to earn something on our lines of credits, he is betting on the fact we will do a lucrative exit and that it will, in the end, be beneficial to him.
It takes time to broker a deal. (Of course, that doesn't mean every single person is being straight up honest with you every single time they communicate.)
This article kind of admits to being perhaps unnecessarily snarky. ("Note: I’m normally not this cynical, but this article was fun to write ") I don't have experience trying to woo VCs for an investment. But closing a big deal tends to be time consuming due to the slow process of gradual exposure of pertinent info on both sides.
So, I am reluctant to take this article too seriously.
"We see you have X reference clients, and usually like to see X+2 reference clients"
"We'd like to see you get a little further along in terms of product/market fit, and then let's talk"
Different types of investors attract different types of entrepreneurs would be my guess to explain the difference you see.
The best people I've worked with have always gotten back to me right away with a concrete yes or no. I do the same, anything else is a waste of time. As soon as someone starts giving me anything like the responses in the article I move on.
My personal annoyance is how prevalent it is in dating now, given the number of people who respond violently to rejection (thereby training people to avoid dishing it out). I gave this serious thought and realized I'm 100% on California No style rejections ever since moving here, while in other places I've lived I'd get "sorry, I'm not interested," or something similar.
California No creates ambiguity -- do I continue asking? Did this person get hit by a bus? If you think you're doing a favor by avoiding saying no, you're not. Say no. Every time.
Also, the situations are strongly related. It's a general theme of being unable or unwilling to say no, whether in business or personal relationships. It transfers the ambiguity of the situation to the asker: are they saying no? Did they lose their phone? Did the e-mail go to spam? Did the investor's mom die? Am I being too persistent by following up? This must be balanced against feeling entitled to a response, though, because nobody owes you anything. It's a fine line.
My personality type strongly prefers closure, and open issues like this nag me incessantly through no control of my own. I literally lose sleep over California No, trying to think of the explanation, whether business or personal. I cannot control that despite much effort. Was it something I said? Then I replay the entire conversation in my head. Then it's 4AM. The next generation is already learning that it's normal, and those of us who like (nay, need) "no" are now the diminishing minority.
In my experience, someone who can't say no is not being polite; they are being quite rude. Stringing people along is rude. It is far more polite to outright tell someone that you are not interested and then everyone can move along. Even for dating, I can't speak for other people, but a simple "not interested" is more polite than being ambiguous. There is no "growing number" of folks who react violently because violent reactions, in general, have decreased over time -- and if anything, a clear "no" is likely better than being unclear. In my experience someone would be more angry at being misled over a period of time.
I think a good approach is to recognise the different styles and, where appropriate, to help your counterparty to do so too.
This is vastly-overinflated risk, and honestly part of the mess we're in is due to people treating suitors as potential rapists or axe murderers.
> If you're unsure give 'em one more "I'd love to hear from you." before deleting their contact info and moving on.
This sort of brush-off means that a) you're going to be surprised when they show up again and b) they're definitely going to be more annoyed when they find out you ghosted them.
If you don't treat others with respect, it makes things worse for everyone.
I don't think it is. I don't know a single attractive woman who hasn't been physically abused by at least one of their exes.
Being careful who you socialize with is smart no matter what.
> This sort of brush-off means that
I wouldn't call it a brush off, it's an invitation to respond (or not) without further pressure or expectations.
> a) you're going to be surprised when they show up again
Yes! Delightfully surprised!
> b) they're definitely going to be more annoyed when they find out you ghosted them.
I've never had a bad experience with it. Most people who do decided to get back to you after an extended absence have a pretty good sense of humor about the situation. Ghosted is the last thing I'd feel if someone's last message to me was "I'd love to hear from you!"
I have contact some VC using emails and showing my MVP. Usually they ask some questions, or give some advice. Sometimes they say No, but for now... Other times they said that it is not a fit for us. One of them say that we are in a different country and that he preferred to talk in person.
I don't see what's wrong with this. It's a clear no without slamming the door on a future investment should the scenario change. If the VC would say "VC: Thanks, but this isn’t a fit for us ever" that would be shortsighted.
Also there 0 downsides for them just stringing you along as other pointed out. "We are totally interested, lets see your details blah blah" then pawn you off to Hayden.
Emphatically no. Nobody's radar is that good. Waving a hand to attract some attention directly works, if you have something to back it up.
Now get back to work!
Yup, from my experience, the OP has what a lot of VCs do.
One thing for an entrepreneur to do is to read some remarks from a VC or their firm about what their interests are. Then, when their interests well cover my startup, I write them and explain how their interests cover my startup. So, sure, I rarely hear back with anything and otherwise nearly always just as some in the OP.
So, then I get pissed: (A) They said what their interests were; (B) I wrote them showing how their interests covered my startup, but (C) they ignored my contact. Bummer. So I used to, sometimes, wait a week or two and then write them and say that they were so unresponsive that there would be no way we could work together successfully and stated that I withdrew my application.
Since then, in part I wised up. By process of elimination, I began to conclude some basic facts about VCs.
(1) Mostly their stated "interests" don't much matter.
(2) They actually do have some interests and these are nearly universal across VCs and their firms: They are interested in traction, significant and growing rapidly, especially in a large market.
(3) Really, the situation is essentially as in the old Hollywood line, "Don't call us. We'll call you." Or, really, VCs want to learn about the startup from existing buzz, virality, etc. They want to see the product/service, play with it, and try to estimate how successful it will be in the market.
(4) For a first step, for a VC, (1)-(3) is about all that matters.
Actually, (1)-(4) seem to be so astoundingly uniform that they must have some common cause. My guess at the common cause is the larger LPs, e.g., pension funds; they insist on (1)-(3).
For me, I'm a sole, solo founder, toilet cleaner, floor sweeper, ..., computer repair technician, systems administrator, ..., programmer, user interface designer, data base administrator, software designer, product manager, CTO, COO, and CEO with a tiny burn rate. Some venture funding could have made some of the work go faster, but really I haven't needed venture funding and don't really need it now.
But with all the above, there is a surprising situation: My burn rate is so low that I can continue self-funding until my Web site is live. Then, if users like my work, soon I'll have enough revenue from routine efforts running ads that I will have plenty of free cash for organic growth without equity funding. If I get that growth, then I'll have a life style business with, again, plenty of free cash for more organic growth.
About that time, some VCs will learn about my startup and give me a call. They will expect that my company has about five co-founders, each with maxed out personal credit cards, has a business bank account close to $0.00. They will assume that the company and each of the co-founders is just desperate for an equity check on just any terms, say, because each of the co-founders has a pregnant wife. Then the VCs will believe that they can play hard to get, strike a hard bargain, and grab control of my company for next to nothing.
At that time I will check my computer, confirm the name of their VC firm, and let them know the date long before when I sent them a description of my company they ignored. So, I'd inform them that they were too late, that my plane has already left the runway, and no tickets were for sale.
So, now sometimes I write VCs just for fun, so that if my startup does work and they do call me, then I can tell them that I wrote them and they ignored my contact!
To me a biggie point is that apparently the VCs want nothing to do with any business planning, crucial core secret sauce technology, etc. To me, such things are the keys to the big successes the VCs must have to get the investment returns their LPs have in mind to invest in VCs. Further, such planning, special technology are the keys to the many amazing technology successes of US national security.
Well, again, apparently VCs want to wait for traction significant and growing rapidly. Maybe that approach will usually be okay for VCs: At least apparently the VCs believe that on the way to a big company, a startup will nearly always need some equity capital.
But for a sole, solo founder with a tiny burn rate and writing software, the VCs can miss out: That is, by the time the VCs want to invest, the founder will no longer want or need the investment.
A big example of such a sole, solo founder success was the Canadian romantic match making site Plenty of Fish.
A blunt fact is, that the VCs very much need big wins, commonly, say, 30% ownership in a company with exit value $1+ billion. Moreover, even more seriously, to get their limited partners (LPs) excited, they need some ~30% ownership in another Microsoft, Apple, Cisco, Google, or Facebook. That's just the facts of life. To pass the giggle test, that's the game they are playing, the business they have chosen.
We need to keep in mind, beyond Moore's law and the Internet, the examples Microsoft, Apple, Cisco, Google, or Facebook don't have a lot in common. So, we can't hope to extract much in the way of predictive patterns by just external empirical observations.
So, if VCs or anyone is to find another Microsoft, ..., Facebook, they they will have to look deeper than just patterns from external observation.
Also we should keep in mind, say,
http://www.kauffman.org/newsroom/2012/07/institutional-limit...
and
http://www.avc.com/a_vc/2013/02/venture-capital-returns.html...
on the average venture capital return on investment. One word summary, the average return is poor, not high enough to excite LPs.
Here is a hint at the nature of the radical change: At
http://a16z.com/2014/07/30/the-happy-demise-of-the-10x-engin...
Sam Gerstenzang, "The Happy Demise of the 10X Engineer"
with in part
"This is the new normal: fewer engineers and dollars to ship code to more users than ever before. The potential impact of the lone software engineer is soaring. How long before we have a billion-dollar acquisition offer for a one-engineer startup? "
So, a solo founder building a company worth $1 billion?
Of course, there is half of an example -- the Canadian, Internet based, romantic matchmaking service Plenty of Fish with a solo founder, with two old Dell servers, $10 million a year in revenue, all just from ads from Google. He added people and sold out for $500+ million. So, his ~$500 million is half of the $1 billion A16Z mentioned.
So, what are the causes of the radical changes?
(1) Cheap Hardware.
From any historical comparison, within computing or back to steamships, now computer hardware is cheap, dirt cheap; transistors are cheap; so are compute cycles, floating point operations, main memory sizes, hard disk space, solid state disk space, internal data rates, LAN and Internet data rates, etc. Dirt cheap.
(2) Infrastructure. It used to be that an information technology startup could expectd to have to build or at least wrestle with lots of infrastructure. Now quite broadly, getting the needed infrastructure is much easier and cheaper.
So, nearly any room in the industrialized world with a cable TV connection can be a quite active server farm because the rest of the infrastructure, to a local Internet service provider, a static IP address, a domain name, and plenty of Internet data rate for a quite serious business, is right at hand.
Of course, the big quantum leap in easy infrastructure is the cloud, from, say, Amazon, Microsoft, etc.
(3) Software. Now software is much easier. There is a lot of open source software, excellent software for quite reasonable prices, etc. And really it's much easier just to write new applications level software. Web pages, graphics, database operations, algorithms, etc., all are much easier.
So, with (1)-(3), a solo founder with a good idea for a startup to be worth $1+ billion can for darned little cash write the software, bring up the idea as a Web site, run ads, get publicity, and, if users come, get good revenue.
It's easy to argue that at current ad rates, a server costing less than $1500, kept busy, could generate monthly revenue $200+ K for investment by the founder of basically just their own time. Such a solo founder with that revenue, then, will just laugh at any suggestion that he should take an equity check, form a Delaware C-corporation, and report to a BoD. Instead he will just form an LLC and remain 100% owner.
Then, the main issue now is the evaluation of the basic idea of the sole founder. Or if the idea is really good and VCs wait until there is traction significant and growing rapidly, then the VCs will be too late. Or, the solo founder wrote the software, has one server from less than $1500 in parts connected to the Internet, has a static IP address and a domain name, has done and is doing some publicity things, and otherwise is running the business each month for not much more than pocket change, for less than a lot of people spend on McDonald's or pizza or Chinese carryout. Literally. So, the founder's startup is just dirt cheap to run. If enough users like the site to keep the server busy, then the founder is getting maybe $200 K a month in revenue, plenty to grow the size of the server farm, and in a few months buy a nice house, for cash, put several nice new cars in the garage, for cash, and spend a hour each afternoon in the nice infinity in-ground pool. Then a VC calls and wants to invest $10 million for 30% of the business and have the founder report to a BoD of a Delaware C-corp. -- we're talking LOL.
Does that situation happen very often yet? Nope. But now it is just such situations that the VCs desperately need in order to get a significant fraction of ownership in $1+ billion exit values.
Or, put very bluntly, the VCs desperately need really exceptional startups. For Microsoft, ..., Facebook, there are no visible patterns. The founders no longer need big bucks for a team of developers, expensive servers, and communications data rate.
Net, for the projects the VCs must have, by the time they want to invest according to their old rules, a solo founder with a good idea has already got plenty of revenue for rapid organic growth and a life style business and won't accept an equity check.
Again, so far there are not a lot of examples of such solo founder startups, but the radical change and the big deal for the VCs is that it is just such startups that stand to be the exits the VCs desperately need. So, for the next Facebook, etc., by the time the VCs call the founder, all they will hear back are laughs, and the VCs will have to push back their chairs, think a little, and realize that they just missed out. The VCs will see that, really, there has been a radical change and they must make some radical changes or just miss out and go out of business.
So, finally we discover that the core idea is what is just crucial because for a good idea a solo founder can do the rest alone for essentially just his own time as the investment. So, to evaluate startups, must evaluate the idea at just the idea stage and just hope that the founder will accept a check.