Thursday
Apr162009
Why VC's Rarely Say "No" Clearly...
Thursday, April 16, 2009 at 12:18PM 
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.
- 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.
Reader Comments (6)
Nice post. Clearly articulated, and certainly makes sense.
I also think entrepreneurs bear some of the blame as well, we never WANT to hear no, despite the common complaints that a quick no is desired. We're optimistic by nature, so we always feel that we can convince a VC to change their mind.
Lee,
You are usually pithier. The entire issue is ... "What possible incentive does a VC have to cut off a useful source of market information regardless of whether the deal or team is interesting?"
In each and every case, it's the startup's job to say, "Unless we have a concrete process forward, please be aware that you just passed on the deal."
I must be off today Rafer :)
I think for a lot of VC's it is genuinely "want to maintain option" at least for semi-interesting stuff, in addition to "pump these guys for info as long as I can" sentiment you suggest. The latter is generally true only for the sleaziest of VCs, esp. if they use that info to feed to an existing investment that's competitive or to go fund/start a competitor.
But ultimately yes, entrepreneurs should press for clear "what's our process from here". If the answer to that is unclear, the VC has given an answer loud and clear.
Lee,
A couple of other reasons getting the "no" is so hard:
1) No one likes to deliver bad news. It's just not fun. Sometimes it's easier just to let things slide than crap on someone's dream with a no.
2) Sometimes entrepreneurs can be very argumentative when they hear the no. While this may seem annoying from the VC's perspective it is also somewhat understandable. But, again, it's just not easy to deliver the no.
Healy - definitely agree on both 1 & 2. As a former entrepreneur who's been involved in raising money from VCs, I personally find "dinging" deals one of the most difficult parts of my day to day job.
Lee
Its really simple to figure out "no". If you do not get a call the monday afternoon after you have presented to the VC, you can safely assume no. Every round I have ever done across 3 companies comes via that phone call. Any later in the week is a no.