50 Questions: How can I tell when a VC won’t invest when they aren’t saying ‘no’?

By January 18, 201250 Questions

Fourtieth in a series of (almost) weekly posts by myself and Nicholas Lovell of Gamesbrief which answer the fifty questions you should ask before raising venture capital.  We expect the series to run for a year after which we will collate the posts into a book.  You can find the rationale behind the series here, and the list of questions here.  We welcome your comments on any and every aspect of what we are doing.

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Venture capitalists are notorious for not telling companies when they won’t invest, and worse, being enthusiastic about the company and the prospects of a deal for an extended period and then simply going quiet. It is unfair on startups when VCs behave like this as it wastes time (an entrepreneur’s most precious resource) and makes it harder to know when a fundraising process is failing and the company should change tack. Giving up on a fundraising process too late can be fatal for a business if it then doesn’t have enough cash left to pursue a different strategy.

I work really hard to get a quick ‘no’ to startups if we aren’t going to get into a conversation, and once we are in a conversation I try to tell them immediately if our interest cools. It isn’t always possible though. In the next part of this post I’m going to explain the dynamics that can lead to the undesirable behaviour of not getting to ‘no’ quickly enough and then I will describe some of signs so that you can tell if it might be happening to you.

The biggest single reason why VCs are slow to say ‘no’ is that for any half decent company it is impossible to be sure that ‘no’ is the right answer. Most VCs are inundated with investment opportunities and the most important day to day decision is which one to dedicate time to and if there is more than one good opportunity then one gets de-prioritised without a significant amount of work or thought. If the entrepreneur of that company then calls up the VC to ask if they want to keep looking at the deal most VCs will not want to rule themselves out of that opportunity, and will look to keep the deal alive, although realistically at this point the chances of an investment being made are (usually) already slim.

Decision dynamics within partnerships can also lead to slow decisions. If a decision is finely balanced then despite the sponsoring partner being heavily pro the deal investment committee can sometimes turn it down very late in the day (note also that many of the best investments are those where the original decision was finely balanced). Equally, in the situation where an Associate likes a deal it can sometimes take them a week or two to get a partner to focus enough on the opportunity to either run with it or kill it.

Finally on the dynamics of slow ‘no’s, it is important to note that most entrepreneurs want investment from people who believe in them and their company, and if it comes to a situation where two firms are competing then the one who has shown the most belief generally has an advantage. VCs who express equivocation at any point can face an uphill battle getting back into the deal and therefore the incentive is to be fully enthusiastic right up to the point of saying no. If a sponsoring partner is currently prioritising another deal but thinks they might come back to your company(i.e. are too unsure to say ‘no’) they are likely to simply apologise for being busy rather than explain that you haven’t made the top of their list. Equally, if a partner loves your company but faces a split investment committee they will fear that if they are open about that fact you might go with a competitor who is simply being less transparent.

By now you have probably already thought of some of the signs that suggest a VC is heading towards a ‘no’ even if they aren’t saying it.

The first, and most obvious, is that they are slow to return calls and emails and to arrange meetings. A top priority deal gets close attention. I wouldn’t give up on a VC who is slow to respond though, whilst it tells you that they weren’t immediately excited and the chances of getting to ‘yes’ are receding, it may be they simply haven’t thought about your company enough yet, and when they do they will get excited.

Secondly, look to the body language rather than the words. If there is genuine excitement about your company you should be able to see it or feel it.

Thirdly, repeated requests for more information that don’t seem headed towards a conclusion can be a sign that there is too much unease about your deal within the partnership. If during partnership discussions there is concern about the sales forecast and a request for a pipeline analysis follows, and then the following week there is concern about the competition and a request for a breakdown on the competition follows it is very possible that the following week will see a new concern, and so on.

Finally, you should look to be building a trusting relationship with your sponsoring partner and ask them these questions directly. If the trusting relationship is not forthcoming, or the answers to your questions are evasive that will tell you a lot.

Reading back through this list of signs there is nothing terribly surprising here, and, on reflection, I think that when entrepreneurs go wrong it is because they don’t want to believe the signs rather than because they don’t see them. Giving up on the chance of a transformative event is something most people find hard, even when that chance is slim, or even very slim. When the alternative is unpalatable (e.g. slower growth, headcount reductions, or even going out of business) then giving up on a slim chance is even harder. The trick, of course, is to be ruthlessly honest about the chances of success and not hold on too long.

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  • Céd

    As a rule I think it is absolutly key for  an entrepreneur to understand the VC’s investment process. 

    Another (not flattering) reason might be that the VC in question is just out fishing for deals but with no money to invest therefore keeping a deal alive might be a way to show “deals in the pipe” to his/her potential LPs as well as -genuinelly- thinking that they will have soon a first closing and want to be able to close quickly a few deals….Here the easy way to find out for an entrepreneur is to look if the VC in question has closed a NEW deal within 12-18 months max (and the vintage of his/her fund, 5 YO or older usually is an indication they have no money for new deals). If the company is VC backed (or proper advisors) his investors shall be able to help here too.On your 3rd point. There might be an element of this but also it might mean too that the VC (his firm) likes the deal but the space is complicated/he’s less comfortable with so after this initial period of excitment, it is followed by doubts (when the VC realises how many companies are doing something similar etc. for example) to try to get comfortable while having XXX things to do in the meantime.
    To be also fair to VCs very often we are put in front of aggressive business plan with big contracts coming in the next 2-3 months so delaying a bit the investment process is also a way to see if the company really is on the trajectory it is selling…

     

  • http://www.theequitykicker.com brisbourne

    Hi Ced – VCs keeping busy for the sake of it is a great point. tks

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  • http://www.theequitykicker.com brisbourne

    Hi Derek – requests for more information are only a bad sign if they don’t seem to be headed towards a conclusion – e.g. asking about sales one week, tech the next, cash forecast the week after, and then back to another point on sales. If a VC is simply trying to fill in the gaps not covered from the initial info provided that isn’t a bad sign. Could be a good one in fact.

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  • http://www.facebook.com/people/Sharky-Rechinas/100003609817993 Sharky Rechinas

    Do usually best deals find their way to the best VC’s ?

    When things go bad with the VC is it mainly because of missing milestones or because there was not a good match with the VC in the first place ?

    What makes a “good VC” anyway? Entrepreneurial exposure, keeping his head cool under pressure from his investors – hence a constructive aproach ?