A VC Firm Investment Committee Rejected You. What Does That Actually Mean?
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One of the most common ways a venture capitalist rejects you is a variation of, "I love you, I love your company. I brought it up to the investment committee (IC) -- but they turned it down." What does that actually mean? Is this the business equivalent of telling a flame, "It's not you, it's me"?
A few years ago, I published a research paper on how private equity and venture capital firms originate investments. I found that our industry collectively invests in only one out of every 87 companies we review. To add insult to injury, most firms including HOF Capital will turn down at least half of companies without taking a meeting, because the company appears to not be a fit just based on the pitch deck and some quick internet research.
The IC usually consists of all the partners at the fund, although sometimes there are sub-ICs focused on specific sectors or stages. If a non-partner says the above line, it is likely that the committee did not take an in-depth look. An in-depth look usually means that a partner met or talked with you, and then the rejection note would come from the partner. Note that at many firms (including HOF Capital), a non-partner title like a principal can indicate a degree of responsibility and influence on specific transactions functionally identical to that of a partner.
To understand internal dynamics, a good question to ask is, "What is your investment decision-making process? How many people need to approve an investment before you write a check?" The answers range wildly. Emergence Capital requires "unanimous enthusiasm." Bloomberg Beta writes, "We have an 'anyone can say yes' policy." At HOF Capital, we require majority approval of the IC.
If a partner says something like the example above, it can mean one of several things, in ascending order of ever getting capital from the fund:
1. The partner reviewed your company and decided individually to reject. In this case the partner usually doesn't bother to bring it formally to the IC.
2. The partner likes your company and pitched to the IC, but they didn't get sufficiently excited about it. The partner didn't want to expend the internal political capital to pound the table and insist on doing the deal.
3. The partner loves your company, pitched to the IC long and hard .... but the IC didn't approve it. There are several possible reasons for this. Most likely, the rest of the IC felt that your strengths did not overcome your negatives. Inevitably, the rest of the IC is more critical of an investment than the advocate who has done the most work on a given investment. The partner also may not have enough internal political power to insist on doing the deal. Political power usually correlates positively with degree of past individually attributable investing success, ownership of the management company, and social skills.
To figure out where you are on the scale above, all of the following correlate positively with the degree of the firm's enthusiasm for you, i.e., do they really love you?
- Speed of response on emails and calls
- Number of miles traveled to meet you
- Number and seniority of fund employees sitting in meetings with you
- Length and degree of customization of emails (even if they are rejection notes)
- Depth of due diligence
- Frequency and volume of correspondence