Why Won’t Anyone Give Me Money? (Part 2: VC Speak Decoded)
In Part 1 last week, I listed the primary reasons why a VC firm won’t make an investment, or will delay making a commitment. Unfortunately, investors often speak in code when it comes to feedback about why you are having trouble getting funding traction. Below are a few translations of these code words and phrases, and what they most likely really mean, bearing in mind an investor might throw out any of them for other reasons:
1) “We need to put more money to work than you need and or are asking for.”
Almost always a red herring. Anyone would be delighted if you took $50K and turned it into $1BN. What they are most likely saying is that you haven’t made the case that the market opportunity is large enough. Suggest you would be willing to take more, and see what the response is!
2) “We would like to see more traction” or “Come back when you hit $XM in revenue.”
Either they a) aren’t confident enough in the team’s ability to perform without more track record or proof of market adoption, or b) they aren’t comfortable with the product/market fit.
3) “Your valuation is too expensive for our model.”
Most likely a) they are concerned about market size, b) they are being asked to pay a very high premium with little proof that the company can grow into the premium multiple, or c) it really is too pricey to provide a reasonable probability of a venture return (10x).
4) “The team is incomplete,” or “We need to meet the proposed CXO before we can make an investment decision.”
a) they don’t have confidence in the existing team or entrepreneur; b) someone on the team is really turning them off for whatever reason (often because the team member in question appears to have little value-add or detracts from the team in some way); or c) c) they are concerned about the entrepreneur’s ability to attract and hire the key CXO in a timely manner (and before the new capital is gone!).
5) “This doesn’t fit our current thesis.”
An easy one to validate. Most investors are pretty public about their focus. If you get this objection and you are certain your company does fit in their target area, you need to dig deeper on why they are pushing back.
6) “It’s too early or too late for us.”
Well, shame on you if you didn’t do your homework to figure out where the investor focuses their investments stage-wise. Presuming you did, then its most likely there isn’t enough proof of viability (team quality, reference customers, product maturity, traction) if they say it’s too early; or it’s probably because the anticipated valuation is perceived as too pricey if they say it’s too late.
7) “We don’t think we will be able to get enough ownership.”
a) often true, but what they are usually saying is that the amount of risk the investor is being asked to take, and the amount of work they believe they will have to put in to help make the company successful isn’t balanced by the ownership stake offered (or perceived to be available).
8) “It’s not a fit in terms of timing at the moment.”
Sometimes the investor is in the midst of closing another investment and doesn’t have the bandwidth or resources to focus on your company at the moment. Often though, this is code for their concerns about the team’s ability to execute, and they want to see if the team can actually hit the milestones they say they are going to hit for a quarter or three.
If you really have a viable idea that can scale (more on that in a minute), you should keep the faith. In my last company, while raising our Series A round, Sequoia Capital couldn’t quite get comfortable with the fact we had no traction, yet. Once we had a few customers, they pre-empted the Series B, before anyone else really had a chance. During the Series B raise, Accel Partners couldn’t quite get comfortable with the business model and limited timeframe available for their due diligence (Sequoia already had a termsheet in). When we beat our numbers for several more quarters, closing some big $ deals with marquee customers in our targeted vertical market segment (Crossing The Chasm!), they pre-empted the Series C round.
At the same time, if you are getting VC-speak, it’s time to look in the mirror. You just may not have an idea that is going to attract VC funding (or an idea that ultimately is even worth your personal time). And that’s not all bad. There is a real cost to venture capital. If your idea is viable but ultimately limited in scale, it very well may be better to commercialize your idea on personal or angel dollars, where you will get to keep a much larger share of the business. Venture capital works for the entrepreneur (and the VC) when a very big pie is built. Not so much when it’s a much smaller pie. Owning 40% of a $50M outcome is better than 5% of a $350M outcome.
I always encourage entrepreneurs to really grill potential investors whenever they get a no, a maybe, a not now, or a slow roll. You can’t improve, or make some hard decisions for yourself, if you aren’t getting direct, real and accurate feedback. Unfortunately, as all managers of people know well, it’s hard to give someone negative feedback, and takes lots of experience, practice and yes, even training – something not all investors have. But, it’s the least you should expect for taking the time to give them your pitch, and support whatever due diligence they have conducted. Don’t be afraid or intimidated -- ask for honest feedback, and many investors will give it to you.
Of course, the quid pro quo is that you have to be mature enough to take it. It doesn’t matter if the investor is right or wrong in their assessment. Sure, some investors may give feedback that you don’t agree with. Doesn’t matter! What matters is that something you are or are not doing is causing them to come to some conclusion that doesn’t result in you getting money. You need to understand what that is.
Many investors don’t give direct or honest feedback, because many entrepreneurs can’t handle it or worse turn around and disparage the investor. It’s your responsibility to tell a compelling story around the amazing company you want or have started to build. It’s also your responsibility to handle feedback and criticism in the spirit it was intended. You aren’t learning anything if your reaction is “that guy is an idiot,” even if it’s true. Somewhere in that feedback is useful data for the discerning listener. And one thing the really blow-out entrepreneurs are almost always gifted at is asking more questions, especially “why” and listening very hard.