The moment finally arrives: you’ve founded your company with a killer team. You’ve got a disruptive, innovative idea that’s ready to meet the market. Now you need funds. No founder likes to hear “no” when pitching investors for startup funds, but it’s an inevitable part of the process. However, is every no created equal? We spoke with three venture capital experts to help you understand the complex nuances of why investors say no, so you can get to yes.
THE TIMING OF THE NO
“When someone’s saying no, it’s important to note how they said it and at what point in the process,” says Anna Redmond, Founder and CEO of Hippo Reads, a California-based research network of academics that helps companies research and write their own content. She knows it can be frustrating when investors express interest but still say no, though this is not necessarily a sign that you’ve done something wrong. “There are investors who don’t have a lot of capital to commit at the moment but they’re willing to take a meeting because they want to build relationships and may have capital to commit in six months to a year.” Another likely reason is that you’ve reached out to a junior person in a firm who just doesn’t have the social capital in their company to push your project through to those at a higher level.
The most important thing you can do upon hearing no, Redmond recommends asking, “What could I have shown you that would have made you excited to invest?” Not only will you get useful feedback, you may learn helpful details about the investor, as well.
"NOT NOW" ISN'T REALLY A NO
Even more confounding than a no is when investors say “not now.”
“I like to meet companies early, to build a relationship and decide if I’m the right investor for them. Raising money is a bit of a dating process,” says Michelle McBane, an Investment Director in Toronto with MaRS Investment Accelerator Fund for Medical and Scientific Innovation. She suggests that if you hear “not now” try to assess if it’s really a timing issue, or if the founder is having a hard time telling you they don’t want to back your project because they don’t have confidence in your ability to pull it off. “When you get a lot of hand waving no’s that don’t seem to have a lot of substance to it, that could be it,” she says.
However, if they’ve given you clear parameters such as changes they’d like to see, or a future timeline, “you should follow up on that,” McBane urges.
Redmond agrees, “There’s always space for you to go back with new data.”
SEEK COMMON THEMES
If you’re pitching more than just a few investors, McBane suggests every no is an opportunity to rethink some part of your business model. “A good founder won’t sit around trying to fix every issue investors suggest, but they’ll notice themes in what people would like to see to open up their checkbook. That feedback is invaluable.”
Moreover, she urges you to consider the way in which you’re approaching investors. Randomly hitting up investors rather than seeking ones based on references and connections may lead to more no’s. “Remember that people are always measuring you,” she says. Thus, how you ask for money may look like a reflection of how you’ll run your business.
If you’re discouraged by no’s, don’t be, says Mark Britton, Founder and CEO of AVVO, the world’s largest legal marketplace, based in Seattle. “I actually think you want to get potential investors to say no,” he says. If you do that, “then you can really understand where your product is failing in their eyes.”
He says that investors are looking at three main things:
- The size of the market opportunity
- The “wow factor” of your idea
- The strength of your team
In order to find out how well your business achieves these, he encourages founders to engage in “pitch hygiene,” where you practice pitching to investors not in your industry. For example, if your business is telecom, pitch investors in biotech or the cloud and walk them through your pitch. “You’ll get a ton of feedback from non-competitive investors on whether you have your pitch appropriately dialed in,” he says.
In the long run, founders have to get used to hearing no, he says. “That’s the essence of selling anything. If you’re truly visionary, you’re going to hear a lot of no’s.”