Every single day, my partners and I have to tell passionate entrepreneurs that we’re passing on an investment in their company. For me, saying “No” to someone who has poured his or her heart and soul into a start-up is hands down the hardest thing I have to do as a professional investor. Actually, it flat-out sucks. Imagine working in a maternity ward and telling every new mother that their baby is ugly. Unfortunately, it’s part of our job and something we have to do every single day.
Early in my career, I wasn’t very good at this. Actually, I was awful. There were many ways I would say “No”. There was the “Excalibur No” – like the legendary sword of King Arthur, I would tell someone that I would invest if they brought me a “Google” size customer. What I finally realized is that if they somehow actually went out and accomplished this, they wouldn’t really need our investment, would they?
Another easy way to say “No” was to hang the black hat on my one of my partners. “I really like your idea but I can’t get one of my partners to agree.” This “No” would allow me to maintain a good relationship with the entrepreneur by not passing personal judgment on their company. There were others too. There was the open-ended “maybe No” and the “maybe if I don’t answer their emails for a while they’ll go away No”.
The problem with saying “No” as a venture capitalist is that there really isn’t anything to gain. You’re going to alienate someone who just might have the next great idea and shut you out of a future round of financing. Worse yet, risk that they won’t refer you to a friend running the next hot start-up in town. Finally, people generally don’t like others who criticize their work and it’s a quick way to make a long list of antagonists.
What I’ve learned over time is that entrepreneurs deserve (and appreciate) two things from professional investors in how we communicate our decision: promptness and honesty. The worst thing we can possibly do is string someone along or make up a reason why we’re not investing. Glenn, Phil, George & I regularly talk about this and we strive to be respectful and saying “No” as quickly as possible and to articulate our reasons as best we can. This doesn’t mean that these aren’t great companies or worthy investments, just that they aren’t right for us right now.
To help entrepreneurs understand, we evaluate hundreds of businesses every year and on average, invest in only three or four. The “No” that we deliver could be based on our concerns about the size of the company’s addressable market, the intellectual property, product (or lack of one), business model, strength of management team (the most delicate to articulate) or a host of other reasons. Venture capital investing requires a keen sense of pattern recognition and perhaps we see a sign of something from one of our previous failures. Sometimes “No” could even be that we’re currently working on four or five other opportunities at that particular time (along with managing a portfolio of twenty previous investments) and simply don’t have the bandwidth to devote resources to another significant due diligence process at that particular time.
We do however try and help every entrepreneur who approaches us. Whether it’s connecting them with savvy angel investors, introducing them to potential customers or or helping with their recruitment efforts, we try and leverage our network as best we can to be of assistance. We’re rooting hard for all of the regional companies we meet with and often reach out to them months after we’ve said no when something comes across our radar screen that might help them.
Finally and perhaps most importantly, we don’t claim to possess the Wisdom of Solomon. Investing in start-ups is more art than science. Bluntly, we’re often wrong. If we’re not passing on good opportunities, our diligence process probably isn’t rigorous enough. So if you wind up hearing “No” from us, please don’t despair, you’re in good company. I always smile when I read about the success of another company that we’ve said “No” to.