VC Confidential: Why Investors Say No
Grow Your Business, Not Your Inbox
Raising capital for a startup isn’t easy. I should know. I’ve been on these quests and have sat on opposite sides of many fundraising conversations.
Before becoming an entrepreneur, I was a venture capital investor whose job it was to judge whether a startup was “investable.” For years, I made decisions about the work and dreams of other entrepreneurs. Today, as the CEO of a five-year-old fintech startup, I’m the one trying to convince investors to invest in my dream.
We have been successful in raising capital, but it certainly required persistence. I’ve gotten used to hearing the word no. In fact, this is the most important lesson I learned from my careers as a VC investor and a startup founder: The journey of entrepreneurship is a journey of no’s.
I’ve already lost count of the times investors told me no. But as the Journey song says, "Don’t stop believing." A no from an investor doesn’t have to be the final word on your dream, especially if you really believe in what you’re trying to build. My own journey as an investor-turned-entrepreneur yielded some key insights about getting funded.
It’s about timing, location and market sentiment.
When we started fundraising for BlueVine, it was disconcerting to discover one of the reasons we got rejected: me. Some investors simply didn’t think I had enough operating experience to build a company. "Eyal’s just too green," some of them said.
That may sound strange to those who associate venture-backed startups with Evan Spiegel, Mark Zuckerberg, and even Bill Gates, young (and very green) hotshots in their early 20s. They launched small companies that turned into corporate behemoths, all backed by some of the most prestigious investors in the venture world.
That’s certainly a common narrative in Silicon Valley. But that’s not necessarily the case in other places like Israel, where my team and I did our first round of fundraising. There investors look closely at your track record. So where you’re doing your fundraising is important.
Industry sector is also key with respect to the entrepreneur’s operating experience . For example, Silicon Valley-based investors have been more open to making bets on younger first-time entrepreneurs in the consumer space, on the Zuckerbergs and Spiegels of the world.
But that’s not the case in other areas such as fintech and enterprise software where experienced operators and even repeat entrepreneurs gain more attention from VC investors. That’s evident in the recent fundraising successes of serial entrepreneurs such as Mike Cagney, the founder and ex-CEO of Sofi, and Renaud Laplanche, the founder and ex-CEO of Lending Club, who easily found backing to launch new fintech startups. They’ve done it before, and investors believe they can do it again.
There are other reasons for rejection which have nothing to do with you. Timing is one of them. An investor may have just closed several deals, and may lack any appetite for a new one, no matter how great the idea. Investors also prefer to invest in hot markets. If your sector is out of favor (like lending was after the Lending Club scandal), it may be harder to sell your vision.
It’s about chemistry.
Sometimes, the reason for getting rejected may be personal. Your ability to woo an investor could be a matter of chemistry and rapport, your ability to connect on a personal level. It’s like dating in a way. Your vision may make sense and may even be strong. But if there’s no spark between you and the investor, it reduces your chance of getting funded.
There are certain traits that every investor wants to see in an entrepreneur, of course. They are drawn to entrepreneurs who are smart, confident and charismatic. These traits are important because they could also be signs of a successful entrepreneur. An entrepreneur who makes a good strong impression on an investor will likely make a good impression on employees, partners and potential customers.
It’s a numbers game.
While VC investors are constantly on the hunt for the next big idea, their basic inclination when meeting with an entrepreneur is to find reasons not to do a deal -- to say no. They will instinctively have their guard up when they meet you, and they will look for holes in your proposal to justify walking away.
There’s a reason for this. Investors are presented with and look into thousands of opportunities every year. But they can only fund a handful of them.
So remember that finding an investor for your startup is a numbers game. The cards are stacked against you even before you make your pitch. So you also need to talk to many investors. And another point to remember is this: you may get dozens of no’s, but you only need one yes to get the deal done.
It’s about showing deep expertise.
As I noted, many investors will likely put a premium on your experience in deciding whether or not you’re "investable." Now, you can’t tout experience you don’t have. But you can somewhat compensate for lack of experience by demonstrating deep expertise in your market and technology, and so on.
The best way to accomplish this is by immersing yourself in the industry or the space in which you hope to compete, learning as much as you can about it. You need to become an amateur expert. I did this by reading books and researching online as much as I could about invoice factoring, before pitching to any investors.
But you must go beyond just secondary research. It must become clear to the investor that you did not acquire your knowledge and your expertise by just surfing the web. I became much more knowledgeable in my space by also interviewing experts and potential customers, even speaking with competitors. I attended industry conferences and did a lot of networking.
Having experienced co-founders when you’re not experienced also helps. In my case, I had veteran technologist Nir Klar, my co-founder and our chief technology officer. BlueVine was his third startup as CTO. So even though I was a green CEO, I was working with people who had a lot of experience. The whole team was not green.
This is important to know: in the beginning, when your startup has yet to gain real traction, investors are essentially investing in people, that is in you and your team.
Demonstrating both a passion for the startup you plan to build and deep understanding of the space in which you hope to build it helps convince investors you’re trying to woo that you are, indeed, “investable.”