November 12, 2018 | 8 minutes read

Saying “NO” to Startups Raising Capital

By: Avi Eyal
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Startups raise capital from investors and don’t always understand why/when the investor declines. We articulate the NO Funnel.

We see over 1,000 startups every year. Inevitably, we cannot do every deal and in fact, we probably don’t do 99% of the deals. The downside of this is that it means over 990 startups are not funded by us.

These stats probably apply to most venture capital businesses, so it’s worth explaining to founders that a NO that’s given should be viewed in context. Generally speaking (and specifically so for us), it is not an exercise in arrogance or ill will. Rather, a venture capitalist will say NO based on its own understanding of the startup, its view of the industry/sector/product, or its view on the founders. Sometimes things do fall in the cracks, sometimes there is a broken telephone, but in all cases, we try to be helpful.

We’ve been through some of the data we’ve gathered over the past few years, and below are a few pointers for founders. This is by no means an exhaustive list. We’ve tried to funnel the NO’s below.

NO in the street — If you send us an e-mail as part of a mass campaign, cc or bcc us on a list of other folks, add another VC’s name or company in the body of an e-mail (usually by error), try ‘connect’ on LinkedIn with no specific message in the content, then we will simply not respond. Our view is that if you can’t take the time to invest in what you’d like to send us, then similarly, we won’t invest the time in you.

NO at the gate — Where a VC explains clearly on its website, LinkedIn, Facebook and other profiles that it does not invest in, for example, gaming, and medical devices, and you have not done the research to notice this, then you are in effect spamming. You won’t get a response.

NO at the front door — From an efficiency perspective, investors prioritize what they are willing to invest their time in. Usually if you’ve reached this stage, the VC has your deck and has read through it. At a high level, the VC will either like it or not. Not liking it may be related to mismatch between the team and the project, the VC having been burnt before in this vertical/solution space, Fund allocation to the sector, not liking the approach undertaken. This is a bit of art, and a bit of science. Typically, one can and one should receive a response back. Some of these responses could be:

“Thanks for sending your deck. We have reviewed internally and don’t feel this is an area we’d like to pursue at this time. Wishing you the best of success…”

“Thanks for sending us the deck. Unfortunately, it does not fit to the areas we are now bullish on and exploring. Please let us know how things progress as our views may change in the coming year.”

“It is quite impressive that you’ve managed to get this far on such small spend. Unfortunately, we don’t see much differentiation in this space and we do see a lot of competition globally, so we are not going to proceed. We do think, and hope you’ll build a big business!”

“We’ve done some initial research and contacted <X> in the US. There are at least half a dozen similar projects that are well funded, so I think you won’t have any real advantage there. I suggest what you do is build it in the local market if you are passionate about it, achieve success, and from there look at other markets.”

“We are invested in a competitor that is indirectly your space and accordingly cannot take a position in your startup.”

Investors who do not come back to you after a week, are probably not serious about the opportunity. Move on.

NO once inside. There are many factors that influence the thinking and decision of a partner at a firm. Sometimes, its shaped by real hard data and other times its qualitative. Some things don’t change : the size of market is a huge indicator of potential success, followed by the competence of the founding team and the impression that the specific founder can build a big business (at least to some next level). At this point, a NO should come from a deeper dive into the business and it is our firm belief that the venture capital firm OWES the startup more detail together with some direction. Typical answers one should expect are:

“We’ve reviewed the opportunity and discussed internally at length. We’ve reached a conclusion that we believe there is no room in the value chain for another solution in this space at this point in time vs. the more inclusive offerings your competitors <A>, <B> and <C> have. That being said, we truly believe you have a great team! Should the business pivot, we’d love you to get back in touch with us”

“We’ve debated the opportunity at length. Unfortunately, we still have a fundamental challenge with market, penetration, and business model. We are conscious of your time and we don’t feel we will get this over the line. Please proceed without us and we hope you prove our analysis wrong.”

“Thanks again for spending time with us over the past ten days. As you know, we have been researching the field and have made over a dozen calls to incumbents, funds, etc. to get a better feeling for the space. We feel that the space has matured a lot. The <A> companies are making acquisitions, the <B> companies like <C> have worked out the game and are growing into the space, and so your business is going to be squeezed between the <A> vendors, <B> manufacturer and <C> companies all coming into the space. That will affect margins. Your ‘moat’ being <….> is an asset, however, your transitioning into a vertical stack company is going to be tough, and as a horizontal player — on that we believe the ship has sailed. As an investor, we see the ‘size of exit’ that can be achieved down the line is not going to make it a great return for us as it will have a natural ceiling. And per your plan, you’ll need additional capital which won’t be easy to come across. In conclusion, all this added together means that we will not invest in the financing. I do feel that you should consider investing and bootstrapping the business, as this can become a good business for you and potentially a good return for you as an owner.”

NO…BUT — Visit us again. Very importantly, a NO could be a NO, BUT… — in other words, the startup could be on the road to obtaining funding but needs to achieve a few more milestones. This is not a ruse to keep the door open, and it’s not a way to placate the founder. At this point, we’ve worked together and have a relatively good understanding of the business and its KPI’s. Sometimes the investor is simply inundated with work and can’t get to you. It means what it means:

“We had our partner meeting today, and we have come out feeling that the opportunity is a bit early for us. We’d like to revisit in 2–3 months when we see there has been more substantial progress.”

“We’d like to wait and see some results from the initial bikes fitted before taking any step. Please keep us informed as the initial bikes roll out.”

“We had our partner meeting today and we feel that at this stage the opportunity is not the right fit for us. We feel there are a number of hurdles that you still need to solve with companies that provide <the product> in the UK. Please keep in touch with us you progress and hopefully as you obtain more definitive traction.”

“We are finding ourselves super busy and are just not getting to the opportunity. We don’t want to hold up your process, so please proceed without us. As things clear up here over the next month, and assuming you have not raised, please reach out to us again.”

In short, an investor that is serious and helpful will let you know where you are in its ‘funnel’ and provide you honest feedback.