AGILEVC My idle thoughts on tech startups

April 16, 2009


A frequent (and often legitimate) complaint by entrepeneurs about VCs is that we rarely say “no” to a particular investment opportunity clearly and quickly.  There are a variety of reasons (both good & bad) for this which I’ll delve into momentarily.  But there are also ways for entrepreneurs to read the “body language” of VCs and understand if a particular investor is giving them a de facto “no”.

Why do VC’s rarely give a prompt and clearly articulated no?  First, I would say that many well-behaved VCs do say no when it’s a clear black & white situation.  For example, I know I try hard to say no even in a first meeting or call with entrepreneurs if it’s obvious that a particular startup falls outside the bounds of things that I personally or my firm would invest in (due to stage, sector, size of fundraise, existing investment which may be competitive, etc).  
But in a lot of cases it’s not entirely clear.  Some of the “good” reasons why we don’t say no clearly include:
  • Initial skepticism isn’t always well-founded –> it’s good for VC’s to try to keep an open mind
  • Things change very rapidly in seed and early-stage companies –> a key hire, technical or product milestone, or customer win can dramatically change the nature and trajectory of a particular startup within a matter of wks or months.  This is why VC’s sometimes give a “no, but…” response, i.e. no given the current reality, but if something changes materially the VC’s opinion may honestly be pretty different.

The somewhat more selfish or at least internal reasons why VC’s don’t always say no in an easily understandable way:

  • From a purely machiavellian standpoint, it’s in a VC’s best interests to retain “optionality” –> if one isn’t pushed to make a decision, one will likely try to reserve the right to push the decision into the future
  • Individual VCs usually can’t make unilateral commitments –> every firm is unique in terms of decision making processes and organizational dynamics.  Even if a particular partner is enthusiastic about a deal, they usually have to go through some type of process to gauge the level of interest amongst some/all of the other members of the firm.  So it may take some time for a VC to get a clear sense of yes or no from a firmwide perspective.
  • Need to prioritize –> at any given moment, a VC is likely to be looking at a handful of new investment opportunities in addition to responsibilities with existing portfolio companies, firm administration, etc.  It’s not always obvious from a 1st or 2nd meeting how a VC should triage the range of deals they’re looking at.
None of these are excuses for VC’s not being clear with entrepreneurs about the liklihood of an investment.  For those who might be less familiar with the process, this hopefully sheds a little light on why some VCs act the way they do for better or worse.  But a VC is not terribly likely to clearly and promptly say no unless he or she needs to.  
You might be surprised how many entrepreneurs don’t clearly ask where their startup stands in a particular VC’s process.  Entrepreneurs should feel comfortable in asking that question, and should do so in a continuous yet respectful fashion… without asking it the answers may be vague or not forthcoming.  I’ll work on a follow-up post on inferring a VC’s implicit “no” and why trying to change a VC’s mind immediately after they say no is rarely productive.