Originally published on Forbes in multiple parts. Part 1 here.
You’re more likely hear about the companies that venture capitalists said “yes” to — the big funding rounds, the success stories, and the unicorns. But the day-to-day reality of being a VC is that we spend ~99% of our time saying “no.” It’s a core competency of any VC. Or at least it should be.
Receiving that “no” as a startup founder is often hard. It’s not fun for us either, though. We’re empathic to how difficult it is to build a business and the effort and belief it takes. It can be painful to tell the human being you’ve just spent time with why something they’re building is not a fit for you or your firm.
Most of the time VCs have one or more discrete reasons for saying “no.” Although it would be ideal if we relayed them to founders clearly and openly, we sometimes feel pressure to take the less confrontational path and say vague things “this is too early for us” when the truth is more difficult to hear. VCs have a code around rejection language that often leaves founders scratching their heads to interpret, but candor is usually better for both parties long-term. Truthfully, the reason for the “no” often has little to do with the founder or the details of the business, but lots to do with that VC’s personal interests, portfolio, or history.
Below I’ve listed the most common “no’s” I’ve seen. I describe them through the lens of early-stage technology venture because that’s what I do. “Early stage” for this purpose means pre-seed, seed, and Series A. If you’re a founder and you’ve gotten one of these reasons, my aim is to expand on what motivations or thoughts may underlie each. And if you’ve heard one that I’ve missed, I’m curious to know.
There’s one caveat to almost all of these reasons for passing, though: VCs will make exceptions to every one of them when we think the founders are absolutely incredible. This bar is extremely high and is based on our personal experience with them, their track record, or both.
“The opportunity’s not big enough”
VCs want to invest in companies that can grow to become massive. We strive for 10x, 100x, even 1000x returns. You’re building something that might be a great, sustainable business, but we don’t see it being venture-scale. E.g., you make software for US-based entertainment lawyers who focus on celebrity endorsements, and you’re charging a SaaS subscription of $100/month. There might be a thousand of those lawyers in the US, and even if you got all of them to sign up and had zero marketing and 100% margins (which you won’t), you’re making $1.2M per year. That’s too small for venture capital.
“You’re too early to market”
The investor may like your idea but thinks it’ll take significant time for the market to come around and recognize its value. Funding the company now means that it’ll take a few checks to keep it alive until the world realizes it needs to pay for the product or wants to use it. Imagine fundraising for a mobile gaming startup in 2004 when the iPhone didn’t launch until 2007: even if the founders are visionary and know that mobile gaming will be big, how will they cover expenses for the 3+ years it’ll take for that to happen?
“No (or weak) competitive differentiator”
Someone else could come along and build this exact thing easily. Even if you’re the first to market, competition could cut down your position and your ability to command a high price whenever they choose to. We often say this about startups that don’t have a strong technical element to them. The less technical an idea is, the simpler it is to copy. Having a unique brand may feel like a competitive differentiator — and some of the most successful companies have built themselves up on brand — but a bad PR scandal or well-executed knockoffs can derail that fast.
“Unfavorable macroeconomic or regulatory trends”
It feels like the wrong time to start this business, whether because of shifts in technology, behavior, or regulation. For example, Apple announcing they were dropping the headphone jack was bad news for companies making non-Bluetooth headphones, whereas Apple switching to USB-C charging cables was great for companies who had already embraced that standard. A regulation that bans facial recognition scanning in retail stores would be tough on a company selling those systems to malls.
“An existing, more established company could do it easily”
Big companies with tons of product lines, employees, and resources can quickly release products that encompass a startup’s entire concept. Building something that falls in the realm of one of these companies’ roadmaps — think Amazon, Google, and Facebook — can instill fear in VCs. Sure, it makes you a potential acquisition target, but most investors want you to aim to create a large, sustainable, standalone business first. They’re more valuable. For example, if I meet a startup that creates animated avatars for augmented reality, I’m wondering whether Snap is going to roll out the same capability next week.
“This is a crowded space”
The VC thinks there are too many competitors already working on this problem. Break it down further, though, and it could suggest a few nuances. Maybe the investor is worried about your sales and marketing abilities to stand out from the crowd. Maybe they think you’re not the one to bet on in this group. In any case, competition is fierce and the thought of having to battle for visibility, users, ad space, and market share is making the investor wary. Instead of joining a competitive space, VCs would rather you start a new industry from scratch or heavily disrupt an existing one.
“Founder or team dynamics”
This reason can be uncomfortable to explain to a founder, but it’s a frequent one for VCs. These negative dynamics can take many forms, but at their core, they signal that the team either isn’t meshing well today or won’t in the future. Examples include:
- A dominant founder who belittles and speaks over the others, who appear frustrated
- Too many co-founders (usually more than three), whose job titles and expertise appear to intrude on each others’; e.g., a COO, CEO, CSO, and CFO is far too many non-technical founding members at an early stage startup
- Having both a CEO and a President, which suggests that there are two egos and neither wants to look “lesser” than the other
- A married or dating founding team (not always a red flag, but many VCs consider it to be one)
- Multiple co-founders from academia who aren’t involved in the business day-to-day
- A very seasoned founding team from big corporations or consultancies that doesn’t have any startup experience
- Any other palpable tension, awkwardness, or discomfort between the founders that seems abnormal
“Missing a key person”
This is a chicken-and-egg problem: founders raise money to hire great people for their teams, but having great people on their teams is what enables them to fundraise, especially at the very early stages when they don’t have much product or traction. Sometimes we see a founding team that’s missing a skillset that’s so key to that business that we have to pass. E.g., you have an autonomous vehicle startup with a business model that requires you to integrate your system with car manufacturers, and your team is all technical and doesn’t have any business development ability. Not having a business-focused founder, especially one who’s worked with auto OEMs, is problematic.
“Founders aren’t mission-driven”
This is another way of saying that the founders just don’t seem that into the idea. They should care deeply about the problem they’re building the company to solve, and ideally have experienced it themselves. They may reference the draw of making money, which is never the right reason to found a company; not even an absurdly high salary will keep people fighting during the inevitable dark periods that startups have to face. Or they refer to doing something else in a few years and don’t see this company as long-term. E.g., the past few months VCs have been seeing a lot of “blockchain for X” pitches where the founders don’t seem to have a great reason for including blockchain, other than other people’s hype.
“Lack of focus”
The VC thinks you’re trying to do too many things at once. This could apply to several spots in the business, including product (you’re trying to build too many things), go-to-market (you’re trying to sell to an array of customers without understanding which one’s truly best), business model (e.g., you have freemium, paid with multiple pricing tiers, and enterprise sales, but you haven’t sold anything yet), team (multiple part-time people who should be full time, including founders who haven’t quit their day jobs yet) or operations (e.g., you have a time-consuming services studio in addition to the startup business).
“Personality/behavioral red flags”
This is another one that VCs may not tell you directly unless you press them on the reason why they passed. It’s uncomfortable. But there are cases when a founder comes in and displays sexist, racist, rude, or otherwise negative behavior that makes us write off backing that person. Things I’ve seen: men only engaging with male investors and not with female investors present in the same meeting (that includes speaking, hand-shaking, and eye contact); people who are obnoxious to office support staff or waiters; narcissistic people taking 45 minutes of an hour-long meeting rambling about their bios; and spouting off sexist or racist opinions. VCs are gauging whether you’re the right person to lead a team and provide those people with a safe workplace that’ll act as a second home. We don’t want to entrust that to you — at least not with our capital — if you’re an asshole.
An investment means a relationship that spans years, even decades. Honest, open communication is critical. If VCs think that founders are lying to us, we’re out. There’s intellectual dishonesty, where founders aren’t honest with themselves or investors about how things are going; they will minimize problems and play up successes, making it difficult for investors to help them and shocking when the true status of the company becomes clear. Then there’s run-of-the-mill dishonesty where founders lie outright about facts. Examples I’ve seen include inflated metrics (“we’re growing 50% month over month” when they’re not), manufactured advisors (saying that high-profile Silicon Valley CEOs are advisors when they aren’t), and exaggeration of product readiness (claiming that a platform is fully automated artificial intelligence when it’s really just humans on the backend).
Most VCs view a distributed founding team where people don’t work out of the same physical location as a negative. It can work, but typically only after the company started in one place and then expanded to multiple offices as it grew. Exceptions include crypto investments where a decentralized platform and business model lend themselves to a decentralized team, and very early companies who outsource their development teams to countries with cheaper workers.
Someone the VC trusts had something bad to say about one or more of the founders or a key person on the team. VCs don’t stick to the list of references you provide; we’ll also look through LinkedIn and talk to people you’ve worked with but didn’t mention to us. There isn’t much you can do in this situation because the VC most likely won’t divulge the person who made the comment. Be thoughtful about the LinkedIn connections you have and delete or don’t accept those with people who you don’t truly know well.
“CEO or founder isn’t compelling”
The founder who will assume the most public-facing role should strike an investor as exceptional and special. There has to be something about them that is moving, a je ne sais quoi that compels people to listen and to care. This same presence will be what allows them to raise money, convince employees to work for them when they have lots of other options, sell customers, build partnerships, give great press interviews, and more. There is not one right way to come off as special; the extroverted salesperson CEO often comes to mind, but the introverted technical genius who breaks down complicated architecture into simple quips fills that role too. “I’m just not that into you” is perhaps the most difficult-to-articulate reason to pass on a startup, but one of the most common.
Individual investor or firm-related
“Not in our geographic area”
Most VCs have geographies in which they do and don’t invest. Pay attention to the VC’s current portfolio: where are those companies located? Where are they relative to the investor’s offices? Most firms will put their preferred geographies on their websites or social media accounts. Don’t waste your time pitching your UK-based company to a US firm that only invests in the US and Canada.
“It’s just not something I can get excited about”
VCs are people with individual tastes and interests. Not every startup idea thrills every VC. And that’s okay — as a founder, your best investor match is with someone who really loves and understands what you’re trying to do. Sometimes VCs do take pitch meetings with companies that don’t interest us on paper, but we’re hoping the founder’s enthusiasm will be contagious. That can happen, but it’s more likely that a VC who’s already excited about a certain industry will get it, as opposed to converting one into a believer who isn’t.
“Too capital-intensive for us”
In non-VC jargon, this means that we think it’s going to take a ton of money to get this business to work. Different firms have different comfort thresholds with capital-intensive startups; bigger funds are often better suited for them. If you’re starting a virtual reality headset company — a complicated hardware play — don’t expect a $50M pre-seed fund to be a great match. Certain industries, like cybersecurity and hardware, tend to need more funding to reach product-market fit than others, like consumer mobile apps or SaaS platforms. They’ll need a VC who understands that it’ll take a few checks (and years) to get it off the ground.
“Too early for us” / “too late”
All VCs have a stage or range in which they invest. That stage considers how far along the product is, who and how many people are on the team, how much funding they’ve raised, what amount they’re seeking to raise and at what valuation, their industry, and more. If a firm mainly invests in Seed and Series A companies, one that’s just at the idea stage with nothing built and that’s seeking $50k in funding is too early. One that has 200 people and is seeking a $50M Series C round is too late. Not aligning within a VC’s investment stage(s) is one of the most common reasons for a pass. Some VCs make personal angel investments in companies that are too early for their firm but that they love and want to stay close to as they grow.
“Too small a round” / “too big a round”
Like with company stage, VCs have round sizes in which they prefer to participate. Many VCs are conscious of ownership and seek to buy a certain percentage of a company when they invest. For example, Accomplice looks to put in $1M-$2.5M first checks for between 10 and 20% of a company. If a founder is raising a $15M round, our investment won’t make up a significant enough piece of it to hit our desired ownership. But as with stage (too early or too late), VCs will sometimes make exceptions to their model to have a small ownership percentage of a company that they think has huge potential.
“I couldn’t convince my partnership”
The individual investor you’ve been working with loves you and the idea, but either one of their influential partners or the partnership as a whole vetoed it. If you’ve been talking to an associate who can’t write a check without a senior partner’s approval, it’s probably the senior partner that they work most closely with who’s saying “no.” If you’ve been talking to a senior partner, it’s probably that person’s equal at the firm (like one general partner talking to another). Another possibility is that the VCs are knowingly using each other as scapegoats to avoid giving a real reason for passing and preserve standing with you (“it’s not me; it’s that other person”). One of the benefits of a partnership is absorbing the fall for each other in situations like these.
“I’ve seen a similar company try this and fail”
VCs have scar tissue from the companies we’ve backed that haven’t worked out. Even indirect knowledge of a startup’s failure can dissuade a VC from investing in a similar company. This pass reason is more about the VC’s personal baggage than the founder to whom they’re saying it.
“Unreasonable expectations around the VC’s role”
Some founders (wrongly) expect VCs to help the company where it’s weak, but far beyond what’s normal or useful for an investor. I’ve seen founders who have a company with a very minor tech component built to date ask tech VCs to join “so you can help us build the software.” That is not our job. If you want a tech VC to back you, the tech should exist or come from you in the future. We’ll help where we can, but you shouldn’t want us involved in the minutiae of the business because it’s not the best use of our time for either of us. Of course, good VCs help with a wide range of things across a company’s lifecycle: recruiting, product testing, conflict resolution, marketing launches, strategic vision, equity and compensation, etc. But we aren’t employees, and we aren’t your crutch for essential parts of the company that need to come from you.
“Competitive with a portfolio company”
If you’re a founder in a certain industry, it’s smart to pitch VCs who have already made investments in that industry as long as it’s broadly defined. If you get too specific with the similarities, though, you risk the VC telling you that your company is competitive with one of their existing investments. E.g., if I’m on the board of Niantic, which made Pokemon Go, I would pass if you pitched me a new company’s idea for “Pokemon Go but for kittens” (even though someone should make that). But a mobile gaming company in general may be a good fit.
“Problematic cap table”
VCs will ask to see your cap table, especially as they get more serious about the investment. Short for “capitalization table,” it’s a spreadsheet showing which people and firms have ownership in the company and its financing rounds. Problematic cap tables may have format issues (like being out of date, not reflecting recent funding rounds or equity grants, broken models, or mispriced option grants), ownership issues (like angels who got way too much of the company for a small amount of money, not having employees on a vesting schedule, advisors who think they have equity but aren’t on the cap table, or confusing agreements like warrants or verbal promises that don’t show up in the document), or both.
“Bad presentation materials”
This is another pass reason that is awkward for VCs to say, so just because you don’t hear it doesn’t mean it doesn’t apply to you. Ask someone you trust to be straightforward with you about your pitch deck. It doesn’t have to be a design marvel, but egregiously ugly decks are distracting and make VCs worry that you don’t prioritize aesthetics now and won’t in your product later. The same goes for spelling, grammar, and legibility: be precise and clear. Communication matters. If you make these kinds of mistakes in your pitch deck where you’re aiming to put your best foot forward, it suggests you’ll be even more negligent about the rest of your business.
Usually this means that the VCs think your valuation is too high. A high valuation means that the VC will get a smaller ownership piece for the same amount of funding, plus you’ll have to raise your next round on an even higher valuation. That’s tough: you’ll have to hit lots of milestones and execute flawlessly, and that’s never guaranteed. Depending on how much higher your desired valuation is than what the VC thinks is reasonable, you may also risk appearing overconfident and out of touch with reality. Too low a valuation is also a negative signal: it suggests a lack of sophistication around fundraising, the market, and the value of what you’ve built.
There’s a long list of possible issues that could go wrong in negotiating a term sheet — it’s outside the scope of this article — so you should push a VC to give you specifics. Some of the most contentious areas include classes of stock, pro rata rights, liquidation preferences, founder vesting, the board makeup, employee stock options, drag along rights, information rights, and voting rights.
The VC doesn’t like the investors you already have, those you want in the current round, or both. Strategic investors, those associated with corporations, can be especially problematic because they have more complicated incentives beyond just making a return on their investment. They might invest to get a view into a product that they want to build themselves, or to get more information about your company to see if they want to buy it later. They often move slowly, ask for unusual terms stemming from their unique interests, and can create conflicts of interest with their competitors (like if your robotics company takes money from Panasonic, and then Samsung won’t partner with you because they’re worried you’re too close to their competitor). Taking funding from a strategic investors can also signal that you didn’t have interest from “regular” institutional investors. But “regular” VCs can be the problem, too: you never know which individual VCs have feuds with others, or which firms dislike working together. VC firms and individual investors can have long, dramatic histories that founders won’t be aware of. Although co-investor dynamics are largely out of your hands as a founder, you can sometimes get the inside scoop by asking other founders who the VCs you’re meeting with have backed before.
The way that founders run their fundraising process reflects a lot about them. There’s a fine line between invoking psychological and sales tactics that keep VCs interested and being unethical. Saying you have multiple term sheets in hand will inflame VCs’ competitive natures, but don’t say it if you don’t. Trying to force scarcity or create a rush to get an offer when there isn’t one is usually obvious and can backfire.
“You need to find a lead”
Some firms do not lead investment rounds or only do in rare cases. If they tell you they want you to find a lead, that lead will not only put in the largest check in that round, but they’ll set the terms that the rest of the syndicate will follow. However, some VCs who don’t have enough conviction around your company will ask you to find a lead as a pretext because they want to hang back and see if you can convince a quality firm or person to join. That removes some of the risk that they’re struggling with.
“Unpersonalized cold pitch”
Sending a cold pitch over email is a bad way to get investors’ attention. I only know of one founder out of hundreds we’ve backed at Accomplice that came in through a cold email (nice work, Mikael from Unsplash). You want the VC to invest in you, so you should invest the time in personalizing your email to them. Taking the extra few minutes to get a warm intro from someone the VC knows well, ideally a founder they’ve backed, is well worth it. If you must do a cold pitch over email, at least make it rise above the crowd. Cold email pitches should:
- be personalized, explaining why this firm and these partners are a good fit for you and your idea; don’t just copy and paste the same thing to every VC
- be very brief, with just a high-level idea, who you are, and maybe a link to a slide deck for more info
- have a reasonable ask for a first meeting (like “do you have 15 minutes for a call?” not “we would like to pitch your entire partnership this Friday”)
Product or tech-related
“Not enough tech”
This “no” is specific to technology investors. What defines “technology” is super broad these days — almost every business has a website or an app — but most tech VC firms have a baseline amount that they need to see. What isn’t technology? Life sciences, medical devices and biotechnologies, simple e-commerce, capital-intensive businesses, pure gaming companies (because success is too dependent on how individual titles perform), editorial content/media, consumer packaged goods, or heavily offline businesses. E.g., “we sell this physical widget online” is not enough if the widget itself doesn’t involve any tech.
“Not enough product”
Some VCs, usually pre-seed or micro VCs, will back startups that are nothing more than an idea. Others require a finished product that’s been researched, tested, and launched.
“Feature, not a product”
The VC may like the idea, but it doesn’t feel significant enough to be a standalone business. This “no” is related to market size: the VC doesn’t think the concept can hook a lot of people, or inspire them to pay or use it frequently. One way to counter this assumption, if you believe it isn’t correct, is that the feature may be the focus today but it’s the first step in a larger product plan.
Not having any product built is bad if you’re fundraising at a point where an investor expects to see it. But having bad product to show is also, well…bad. If you have a tech demo, make sure it works. Prepare for demoing on different devices and in different settings, from coffee shops to conference rooms. If you’re claiming the product does X, make sure it really does X. It’s better to under-promise and over-deliver than to hype up an investor on everything your product can do and have it flake out. Exaggerating your product capabilities can come off as disingenuous or naive.
“Licensing or IP issues”
Many founders, especially those who are highly technical or academic, seem to think that securing patents is important to VCs. Actually, VCs don’t care much about patent portfolios; they’re expensive, time-consuming, and can distract you from all the other things you need to do to build the business. Instead, intellectual property issues in fundraising usually have more to do with a startup’s questionable use of existing IP. A few examples:
- The founders spun the technology out of a university but haven’t negotiated rights to use it yet or got a bad deal
- The founders used a development studio to build an app and now owe the studio a high percentage in royalties forever
- The founders came from a previous company that has patents protecting a certain thing, and whatever the new startup is building looks dangerously similar to the previous company’s tech; there may be an infringement lawsuit ahead
Business model or progress-related
“Not enough traction”
VCs have a bar for the amount of traction that they’re comfortable with. Depending on the type of company, that could mean users, downloads, paying customers, revenue, partnerships, etc.
“Dislike the business model”
Something about the business model is a red flag. Maybe the VC thinks you’re targeting the wrong customer, or that you don’t understand which customer is the most valuable. Maybe your pricing seems off. Maybe that VC doesn’t have confidence or enthusiasm about that type of business model. Some investors just don’t like e-commerce; others love it and do only that. Maybe the model requires working with many different stakeholders and seems confusing and time-consuming. Ideally the VC tells you exactly what put her off about your model. If not, it’s okay to ask.
“Dislike the go-to-market”
Usually this pass reason means that the VC thinks your go-to-market (GTM) plan is non-existent, not well thought-out (e.g., “we’ll do a launch, and then users will just…find us”), or they don’t think tactics mentioned will work. I’ve seen really high-tech products with ill-fitting, old-school GTMs, like trade shows and direct mailings for a big data company. Or simply saying “we’ll do Facebook ads” for a consumer product doesn’t cut it because they’re competitive and expensive; plus you should have an organic strategy for users to find you without paying for them.
“Supply chain concerns”
Many VCs have horror stories about hardware startups: they tend to be a lot more expensive and take much more time to get to market than anyone expects. Many of these issues relate back to problems with the supply chain. If you’re pitching a hardware business, you or an expert on your team should know exactly how and where you’ll manufacture every component and what it’ll cost.
“Not a scalable model”
Venture-backed companies should be scalable, meaning that they can multiply revenue with minimal incremental cost as they grow. Studio or high-touch service models that need more people to do their work aren’t scalable. Software scales; people do not. Many models start out with heavy reliance on people or slow processes, but they should move to scalability as they evolve.
“Unclear value proposition”
In the investor’s opinion, you’re solving a problem that the world doesn’t have. The solution that the company provides should be essential, not nice-to-have; it’s a painkiller, not a vitamin. Maybe the value proposition is strong, but it’s not coming across because of complicated or confusing messaging.
“Weak metrics/unit economics”
One or more aspects of your unit economics were concerning. Maybe you calculated something wrong (like you report your burn rate as much lower than it really is, or you’re claiming 50% month-over-month user growth but your user numbers don’t support that), you’re presenting something that seems low (e.g., the ratio of your customer acquisition cost to your customer lifetime value is one or below, or your margins only 15% in a software business), or the investor is calculating something additional using the metrics you provided and doesn’t like the result (like using acquisition cost and lifetime to determine that payback period is extremely lengthy). Weak metrics hurt your viability; false metrics hurt your credibility.
I’ve talked about the stated reasons VCs give for passing: those that have to do with the market, founders, individual VC or firm, fundraising process, product or technology, and business model or go-to-market. But sometimes actions (or inactions) speak louder than words. If a VC goes silent on you at any point in the fundraising process, they’re not that interested. It’s poor form and you deserve a reason, but overflowing inboxes, portfolio company emergencies, and unwieldy and unpredictable schedules are the norm in our jobs. VCs will lose interest. Speed kills in venture, so as a founder you should work to create and maintain momentum.
In the spirit of transparency, the two most common reasons why I pass are first, not feeling strongly about the founders, and second, a lack of personal interest in or conviction about in the space. I’ve seen how hard it is to build a successful venture-scale company. It’s riddled with adversity. Pivots and crises are the norm. If I don’t have a real connection with the founders in a space that they are mission-driven to care about immensely, it’s a pass. Success takes a rare combination of exceptional people, timing, and technology. It’s a long, drawn-out battle, and VCs will crawl over broken glass for the founders we’ve chosen to back.
Having conviction in either of these two components (or ideally both) will overcome almost any other reason for passing. VCs make exceptions for people and ideas that we think are truly exceptional.
Have you heard a pass reason that should be on this list? Or did you get one that you didn’t understand? I’m curious to hear. I’m sarah(at)accomplice(dot)co and @SarahADowney on twitter.