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“The oldest, shortest words – ‘yes’ and ‘no’ – are those which require the most thought.”
— Pythagoras

Fundraising sucks. It can be an insufferable slog; time consuming, emotionally draining, distracting, and unproductive, all at the same time. Well-intentioned VC investors unwittingly contribute to the problem; and as investors we haven’t always gotten it right!

As erstwhile founders and operators, our team have experienced this firsthand. In 2016, I was the founder and CEO of veri.vote, a startup which used blockchain to make voting electronic and secure. In raising a seed round, I spoke to many investors, some of whom expressed strong interest, but then never replied to follow-ups. Even though it’s now been four years since we closed up shop, I’m still none-the-wiser as to whether those investors wanted to invest.

Unfortunately, these kinds of stories are all too common. But that doesn’t mean it should be the accepted norm.

This article provides our perspective as early-stage investors on why founders hear ‘no’ more often than not, reaffirms our commitment to show founders respect through saying ‘no’ properly, and openly invites founders to hold us accountable for any bad behaviour.

Why ‘no’ is the default

The VC business model requires investors to say ‘no’ much more often than not. This is because portfolio returns tend to follow a power law distribution; a handful of wildly successful companies are responsible for the vast majority of a VC fund’s returns. As such, when a VC makes an investment, they must be able to imagine a world in which the company they’re investing in has the potential to return the whole fund.

This means investors have an extremely high bar for making an investment. As a rule of thumb, investors invest in one out of every hundred startups they review.

Why investors say ‘no’

The reasons investors have for passing on an opportunity will vary. Luckily, VCs don’t all see the world the same way; the mental models we construct over time form the lenses through which we evaluate startups. Some models may be more accurate than others, but none are perfect. This means it’s impossible for VCs to be sound in their decision making all the time: nearly all successful startups have stacks of rejection emails under their belts, and nearly all the best VCs have anti-portfolios that haunt them. I certainly do.

Sometimes it’s not you, it’s us (really)

We’re ignorant: We don’t know the sector well enough to form an actual opinion, or we don’t back ourselves to deeply understand the design and defensibility of your product.
We’re gun-shy: We invested in / tried to build something similar, and it ended in flames. We’re still nursing our war-wounds and aren’t quite ready to ride into battle again.
Conflict: We’ve already invested in a direct competitor.
Mandate: You fall outside our investment mandate (e.g. stage, geography, sector).

Sometimes… it’s you

Market: We aren’t convinced there are enough people struggling with the ‘problem’ that you’re trying to solve, or that it’s a problem they’d be willing to pay you to help them solve.
Product differentiation: We aren’t convinced that your product meaningfully differs from what’s already available (i.e. the ‘Isn’t this what Atlassian does?’ reaction).
Product love: We tried out your product and found it unintuitive and frustrating to use. While we don’t expect early iterations of your product to be perfect, we believe inspiring customer delight from the outset sets you up for future success.
Customer love: We called your customers and they were apathetic at best. They said they wouldn’t mind or notice if your product suddenly wasn’t available.
Team: We don’t believe your team has the right skills and experiences to tackle this specific problem, and we’re unsure whether you can attract the right talent into critical roles. (This is the hardest feedback to give!)
Units of progress: We’re not bowled over by how much you’ve achieved in the time you’ve been building, and we’re unsure you can accelerate at the pace needed to achieve venture-scale growth.
Deal: We don’t believe your cap table is set up for success: you’ve given away too much equity at the early stages, and won’t be able to raise subsequent rounds of capital while maintaining an equity stake that keeps them incentivised.

Most of the time, we will love many aspects of a startup and founding team, but ultimately fail to gain conviction on a couple of these points. Sometimes we’ll be right; but we’re equally happy when we’re proven wrong. Ultimately, our lack of conviction traces back to our own fallible biases.

How we say ‘no’ should matter

If ‘no’ is the inevitable conclusion of the vast majority of interactions VCs have with startups, saying ‘no’ respectfully and in a value-adding manner ought to be a key performance indicator and an opportunity for VCs to differentiate themselves.

Unfortunately, most early-stage founders are all too familiar the following forms of ‘no’:

A ghostly, unnerving radio silence.
A generic, impersonal, templated rejection email, with an exceedingly vague explanation.
A ‘not yet’ - “Get back in touch when you hit $1 million in ARR / have 10,000 customers / have successfully landed a rocket on Mars”.

And then, there are the ‘no’s that aren’t really ‘no’s…

An ostensible expression of interest and excitement, but no clear indication of whether they are keen to commit to a round.

Tyre kicking - when an investor keeps asking for minor data points, without having thought deeply about whether the answer to any of these points would meaningfully move the needle on their investment decision.

For founders, these responses are useless and frustrating, especially when they’re receiving a similar response from dozens of investors. Founders are intelligent, passionate, hardworking, tenacious people, working hard to manifest their dreams. Rejections which obfuscate investors’ true rationale squander founders’ significant potential to refine their thinking and do things differently.

Why are we like this?

This isn’t a pity-party for VCs, but truthfully, it’s awkward, time-consuming, and deeply un-fun to reject founders. It’s certainly my least favourite part of the job. This is particularly true when we loved many aspects of the opportunity, but couldn’t build conviction on a couple of aspects we thought were key.

Additionally, investors will often say ‘not yet’ in order to maintain their optionality. Fear of missing out is seared into our mentality as VCs. Since we know that a few rocketships return the majority of funds, we are always tempted to ‘keep the door’ open so we can invest if your company starts to look like the Next Big Thing.

We believe investors shouldn’t be able to have it both ways. The right to optionality should be earned, through at-minimum, thoughtful feedback along with their ‘no’ or ‘not yet’.

Our commitment

We admire brave people, striking out on their own, trying to create something. We are in the business of early-stage investing because of our deeply-held respect for entrepreneurs, and because we want to work alongside entrepreneurs on their long and arduous journey from anomaly to icon.

This article represents our commitment to a process imbued with efficiency and respect, and an open invitation to criticise us if we fail to walk the talk.

What this look like

We can’t reply to every cold email, but if you go out of your way to explain why you’re a good fit for our mandate, we will take the time to carefully consider the opportunity.

If we meet with you, we will take the time beforehand to truly wrap our minds around your business. After the meeting, regardless of the outcome, we will follow up with a transparent view of our initial thoughts. If the answer is ‘no’ at this stage, we will tell you what it was that we failed to gain conviction on.

After we’ve met with you, we send you a survey on your experience with us. In this survey, we ask founders to score us (out of ten) on clarity, our understanding of their business, our respectfulness, and we invite them to tell us what we could do better. Early results have been encouraging!

Our hope is that a commitment to ‘saying no’ respectfully and in a value-adding manner becomes more standard practice across the whole industry. We truly believe that this would bear untold dividends for the ecosystem, by giving founders the inputs and support they need to continuously improve as they build.

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