Ask an investor: Should an investor tell you why they said no?

Welcome to a new BetaKit weekly series designed to help startups and entrepreneurs. Each week, investors Roger Chabra and Katherine Hague tackle the tough questions facing founders today. Have a question you would like answered? Tweet them with the #askaninvestor hashtag, or email them here.

Yes, they should take the time to tell you why your company is not a fit for them.

However, the real question is WILL they tell you?

There are dozens of reasons why an early-stage investor won’t invest in your company. There are some valid reasons that can be easily shared with founders, and good citizen VCs will be truthful and quick with their feedback. However, many investors (ones who are generally good and ones who are generally bad) may not want to be truthful.

If you are struggling to raise a round as a founder, you need to understand to understand if the problem is the investor, yourself, or your company, product, or business model. Ask around for feedback.

Firstly, it’s just common human nature to avoid conflict and uncomfortable conversations. It’s not easy to say something that will likely offend someone. Secondly, VCs and angels these days want to be viewed as “founder-friendly” and some think that giving harsh feedback might taint that image. Most commonly, the investor doesn’t want to burn bridges with a founding team by being direct because they want to leave the door open for future investment opportunity in the company. Entrepreneurs have long memories, and if they have a bad interaction — or what they perceive as a bad interaction — with an investor, they will likely never go back to them for subsequent rounds.

As a VC, I can tell you that it is a struggle to find a balance between maintaining a relationship and being direct. Ultimately, I definitely believe that you are more “founder-friendly” if you are giving honest feedback — feedback that, however harsh, helps the founder and company become better. It’s still not easy to have these conversations with founders, though.

Let’s look at some of the common reasons that are relatively easy for an angel or VC to give you a “no” along with an explanation as to “why.”

• Not a sector we invest in or are currently interested in (i.e., we can’t be helpful to you beyond just writing a cheque or we already have too many investments in your space).
• You’re too early/late stage for me.
• Unrealistic valuation or terms (i.e., we need to own X% for a $Y cheque and we can’t see a way to do that right now).
• Worried about competitive or market dynamics in this sector (i.e., your Silicon Valley and NYC competitors have raised hundreds of millions or we have insight that Facebook/Google/Salesforce is launching a similar product very soon).
• Too capital-intensive for VC’s fund (i.e., we are worried we will get our ownership wiped out on subsequent financing rounds).
• Your product isn’t important enough to customers (i.e., it’s a nice-to-have, not a must-have, or it’s a “vitamin” and not a “steroid”).
• Don’t believe your company is venture-scalable and can get to a big enough exit.
• I don’t have a strong enough thesis after some work I’ve done on your company and I know you have other funding options, so I don’t want to waste any more of your time.

All of these are valid reasons that, if true, an investor should be able to communicate to you quickly and honestly. As you search for your lead investor, getting to a “no” is as important as getting to a “yes,” particularly in the early days of your fundraising reach out. Your time is valuable. Accept the feedback, adjust if necessary, and move on to the next names on your list.

Now let’s look at some of the other reasons an investor isn’t interested, and where they may not be inclined to tell you “why.”

• We don’t believe you are the right team to build a big company.
• Your pitch lacks clarity.
• I don’t have chemistry with you (i.e., I’m not sure we would work well together).
• You don’t seem coachable.
• I don’t trust you.
• Your burn is too high and I don’t feel that you will be capital-efficient with my money.
• You don’t understand the customer problem well enough.
• Your team hasn’t been successful together in the past.
• I don’t have a prior relationship with you.
• Your team is incomplete.
• I feel you are stalling me and waiting for another, better VC to make up her mind.

Obviously, all of these are much harder to be truthful about. Mostly because many of these are highly subjective, based on interpersonal factors, and can even be viewed as personal attacks on a founder. As an investor, it’s much harder to maintain a relationship and community image when feedback is taken this way.

You need a very thick skin and a strong internal compass to make it through the inevitable rejections that come with fundraising.

If you are struggling to raise a round as a founder, you need to understand to understand if the problem is the investor, yourself, or your company/product/business model. Perhaps you are approaching the wrong set of investors. If that’s the case, then that can be relatively easily adjusted going forward. If you are hearing a lot of similar feedback after your initial meetings with investors about the size of your market or the potency of your product, then those are harder to fix, but not impossible.

For instance, think about how to broaden your market applicability over time and tell that as part of your vision. If, however, after multiple initial and follow-on meetings with a bunch of different VCs you are getting superficial feedback that should have been shared much early in your process with them, then it’s time to dig further.

Perhaps go back to one or more of the investors that you have a better relationship with to get some more pointed feedback on what they are really thinking. Or search for feedback elsewhere, from your advisors, co-founders, or even one or two of your employees.

At the end of the day, this feedback is just another set of information for you to evaluate. Whether you choose to adjust based on it or not is totally up to you as the founder and leader of your company.

Katherine’s take:

Roger is right to say that investor feedback usually falls into one of two categories: feedback that is fairly easy to give and receive, and feedback that is both hard to give and hard to get.

I think that entrepreneurs should be prepared to take all types of feedback. I don’t believe that well-delivered, well-received feedback should damage the relationship between an investor and entrepreneur. That said, even though they may ask, not every entrepreneur is actually equipped to handle the truth behind an investor’s rejection. Some entrepreneurs develop deep insecurities and self-doubt following rejection and others go off track, drastically changing their business and strategy after each meeting in an attempt to please everyone.

You need a very thick skin and a strong internal compass to make it through the inevitable rejections that come with fundraising. The more resilient and receptive to feedback you seem, the more likely an investor is to be forthright in their response.

The one type of investor rejection that I think is unmerited and ill-advised is when an investor states with 100 percent confidence that they believe your company will not succeed. I had two investors tell this to me during my fundraising process, and I’ll probably never go back to either of those investors ever again. They could have been right, but they ended up being wrong, and it burnt a bridge. Our relationship would have been much better off had they simply bowed out gracefully. As much as an investor might believe their analysis of the situation, it would be extremely arrogant for them to think they have a crystal ball. It’s impossible for any one person to know with any certainty which ventures will and will not work out. The best investors give their feedback with humility, knowing that they may be wrong and that there isn’t anything to be gained by burning a bridge.

Got a question for the investors? Email them here.