Raising money. Part 5 - 50 shades of VC No

Ernests Stals / September 06, 2022
 12 min read

Photo: Rejection, William Bromley (1868)

This is a 5 post series to prepare you to raise venture capital:

  • Part 1 - How VCs work
  • Part 2 - Reaching out to VCs
  • Part 3 - Short story about the pitch
  • Part 4 - Questions to ask VCs
  • Part 5 (This post) - 50 shades of VC No

We already have covered how VCs operate. In general, VCs are in No saying business. They will make a couple of dozen investments over 5 year period. There will be a lot of No's along the way. VCs look for winners and evaluate if your company has "it" to return the whole fund - are you the One?

It is amazing how much this interaction resembles Neo and Oracle meeting in Matrix. The startup is a bit confused, and a bit shy but at the same time has its story. VC in turn has this power position, set of questions to ask and rituals to do. And most of the time it will end with "I'm sorry, kid!" This, of course, doesn't help much for you as a startup.

Let's explore different types of No's and what you can learn from them.

Silent No

Sometimes VCs won't give you an answer at all. This is the rude and bad treatment of someone who has spent their time and energy. Don't worry about it, it wasn't worth your time anyway. You want to work with someone who can give you uncomfortable feedback, challenge your views, and have basic manners.

You should follow up, though. VCs are busy chasing unicorns and sometimes simply forget about you. The startup ecosystem is network-driven and VCs know that you have to treat people well or no one will so business with you. It's people's business.

Too early No

This one is common as it is really easy to give. Partially it is a lie. Yes, you probably are too early to prove that you are an actual business with traction. But that is the whole point of venture capital - to take risks with unproven teams, business models, and markets.

Most of the time there will be an actual reason behind this No but a particular partner/associate was shy or afraid to give you fair feedback. As Oracle said - I don't like to give bad news to good people. Ask to elaborate and show that you are open to feedback.

Team No

You might have a great idea, even some early traction but the team doesn't look like the one which can deliver. And it is not just about the ability to technically build the solution. It is about the ability to create a big organization - hire and lead people, and raise capital.

There can be a lot of aspects here.

  • Tech team has an outdated stack which simply will slow down development and it will be hard to hire good developers. Sometimes stack itself is miss-aligned - LAMP stack for machine learning idea.
  • Too many business people and no one who could actually build this.
  • Too many techies and no one who could speak with strangers aka. customers.
  • Lack of team chemistry. In a call or a meeting, one can sense how you work together. Are you on the same level and complement each other's story or do you interrupt and correct each other?
  • No product gene. The team has been in the service industry for a long time and can serve a single customer but they don't know how to build a product.

Market No

This one is typical for very technical solutions. Tech wizards have come together and created a marvelous piece of tech. But who is the user? What kind of problem are you solving, and who has it? Hammer solutions that are looking for a nail.

Nowadays, you can observe this kind of solutions in the crypto universe. Amazing piece of tech but who is going to use it?

Without a market, there is no business. You have to show that you understand who are your potential customers. How big is the market, which segment you will attack first, and why?

Some years ago there was a company called Juicero with a revolutionary juicer. Tech? Just listen to this tech review. The market size for a 699$ (original price) machine that will make juice only if you have WiFi!? Let's say that it's small!

The product No

You may have understood the pain, you have a vision, but there is no actual product. Or the existing version is nowhere near solving the problem. By this I don't mean that you have a crappy first version. I mean when you pitch that the future is AI generated design but in reality your first version is only manual work without any algorithmic component.

At the very beginning, you can sell the vision. But you have to walk the walk and prove that you are evolving your product towards the bright future.

Business model No

Unit economics doesn't make sense. Who is going to pay for what and how much? Do you have an understanding of B2B sales process if you are in B2B? What are your CLV and CAC?

Yes, you may not know what kind of business model will you end up with. It is not just about the numbers but also about how you think about them. And sometimes it is clear that you haven't spent enough time to understand how your chosen market exactly works.

Play with spreadsheets and numbers. Get the feel of how economics change based on pricing. What are the key levers which will increase revenue or burn rate? Know these numbers by heart.

Industry No

There are industries with multiple past disruption attempts but no solution has succeeded. Once in a while, someone comes around and tells "this industry is broken and we are here to fix it".

If you don't have a clear unique selling point that differentiates you from the past warriors, it will be a hard sale. Usually, VCs have been in this game for quite some time and have seen companies come and go. They will ask you why you are different from this and that company from the past. You should know those past warriors and show that you know why you will make it and why "the time is now".

Cap Table No

You might have covered all the ticks - the tech is top-notch, early traction is there, and the team consists of superstars. What could go wrong? Cap table. Remember those early days when you were desperate for the money and accepted that offer from that angel? Yep, now it bites you.

There might be some toxic clauses in convertible notes. The core team has less than 50% at the seed stage.

Remember, VCs want to have a big return. The Cap table has to reflect that. Founders should have enough equity to motivate them. There has to be room for an option plan for key employees and also enough space for later-stage investors.

In the early stages (pre-seed, seed) investors don't want to buy out past investors or angels. They want to invest capital into product development and bring it to the next level. They don't want simply purchase a seat at the table.

The feel, integrity No

Sometimes there is a lack of chemistry between a startup and a VC. Something is simply off. At the end of the day, this is people's business, and people have emotions.

Also, you as a startup shouldn't take money from people if you don't feel that this will be a good relationship. Investment is a marriage where both sides come together to have the good and the bad times for the next ten years.

Coachability No

VCs usually have seen a lot of different startups and have business experience on their own. They don't invest just money but also their know-how and network.

If you can't listen and can't take feedback, it will be a big No.

Single founder No

So you are a lone warrior? Red flag. Will you be able to grow the team? Can you collaborate with other people? Can you persuade anyone to join your quest? Why you are alone in the first place?

It takes a village to raise a child. The same applies to building companies. Not that there are no examples but the odds are against you.

Ambition level No

VCs are looking for Go big or go home solutions. You can have a good or even great product, but if you don't have the ambition and vision to change the world, sorry, this might not be the VC case.

Raising too little money

The amount you raise should be in line with your goals and strategy. There are times when the amount founders are raising and goals are not aligned. VCs see a lot of cases and have seen a lot of strategies unfold and thus have a rough understanding of what amount of money might be needed to accomplish certain goals.

When you lay out an 18-month plan that involves hiring people, launching marketing and sales campaigns, and then drop "We are raising 75k", eyebrows will be lifted.

Raising too much money

This is the opposite of the previous one. First of all, there is some advice out in the wild - raise as much as you can. Yes and no. Yes, you should get the best deal and if you can have more cash in your bank account, do it. It could prolong your runway.

Investment is not simply cash. It is capital that has to be deployed. And here is the problem. If your product/service is established and you have built your growth engine, cash will accelerate your growth. But if you don't have this engine ready, cash can create problems. You will hire people, you will spend money on smaller projects, and make costly partnerships. Why? Because you can. All this also creates new problems. Now you have a big headcount and you have to work with those people and deal with people's problems. Every new project is a commitment and you have to support it.

I love the way Christoph Janz has put this - "Raise cash but don't spend it" (https://www.thetwentyminutevc.com/christoph-janz/). Easier said than done. When you are small and don't have resources, priorities become straightforward. You simply don't have the resources to do everything.

Salary vs. stocks

You should pay yourself a salary. The point of VC money is to give resources to accomplish the mission and don't worry about your salary. But again "but". Your prospects should be to earn a big buck after exit and not earn your living from salary. This is the point why you should have a stock option plan. You should aim to hire long-term people who are motivated by long-term games and not short-term returns. If someone works just for the money, there always be someone who will pay more and they will leave.
Lower salaries also increase the runway.

Haunting No

This one is not related to you per se. Sometimes VCs have startups that haunt them. They might have invested in a particular idea or industry years ago and it didn't work out. Now they have this feeling and resentment to do anything in this field. It's not about you. It's me!

Opportunity cost No

For you, your company is the most important thing in your life (it should be). But for VC you are one of many startups they spend time on. There is nothing that couldn't be fixed over time. Screwed cap tables, crappy go-to-market strategy, business model, team, etc. But that time can be also spent working with other companies where these issues have already been fixed.

The same applies when talking about valuation. Yes, you have a great company, nice MRR and you have figured out that it will have a certain valuation. From VC standpoint investing capital in your company means, not investing in other. And vice versa. In other words, 1m ticket in your company means not investing 2 500k tickets. And those two founders will probably be as enthusiastic as you and idea will be as big as yours.


VCs won't always give direct feedback. No one likes to deliver a bad message. "You are too early for us" is a easy escape. But you can always ask to elaborate on it. It might not be comfortable answer but now you will have this perspective. And don't take it personally. The whole investment industry is discussion around future prediction. No one knows how it will unfold but everyone can have a guess. Single No is just a data point. Speak with at least 10 VCs and you will start to pick up some patterns.

VCs will be wrong. Behind every anti-portfolio (aka. we had a chance to invest but we didn't) company, there is a story. We said No and now they are a unicorn. Saying No to Skype, saying No to Angry birds, saying No to AirBnb. I have heard these stories from VCs. Those are hard lessons learned and the reason why even after saying No, they will keep doors open by saying something along the lines of "keep me posted", "let me know how things are going" or "let me know if I can help you". VCs will want to stay in a loop. This is a long term game and you might come back with your next idea.

This concludes article series about Raising money. Hope it was valuable and let me know if you are interested in other topics. Legal documents?

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