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August 04, 2009

How Should VCs Say No - When It's The Team?

One of the things I continue to struggle with as a VC is the unfortunate fact that I am in the business of saying "no" all the time.

Saying "no" in the context of how you invest your time is one thing - fellow VC blogger Brad Feld did a good blog post on this topic in the context of time management a few weeks ago as did Y-Combinator's Paul Graham.  But I really struggle with saying "no" to entrepreneurs.  Entrepreneurs pour their hearts, souls and dreams into their start-up ventures and to summarily dismiss them remains the hardest thing about the job.  One of my entrepreneur buddies asks me whenever I see him:  "So - did you crush any entrepreneurs' dreams today?"  Very funny.  Ha ha.

One of the reasons for this dynamic is that VCs are in the business of trying to see everything (i.e., learn about and meet with all the best deals out there) but do nearly nothing (i.e., invest in only one or two companies a year).  My blog post on this topic a year ago was a bit tongue in cheek (VCs and Deal Flow), but only a bit.

My dilemma becomes more acute when I try to explain why I am saying "no".  In particular, how do you say no when the reason for turning down the investment opportunity is the team?  It's easier to say no when you have concerns about the market, the business model or the price.  The entrepreneurial team is great, you would enjoy working with them, you think they are money-makers, but there's something in the general model that prevents you from pulling the trigger.  Those are the easy ones.

The hard ones are when you are saying no because of the team.  Successful start-ups typically follow Thomas Edison's genius formula:  10% inspiration (in start-up land, the vision or idea), 90% perspiration (in start-up land, the execution).  Whether you like the idea or not is irrelevant if you don't believe the team has the wherewithal to execute it successfully.  Sure, a team can evolve over time and new leaders can be brought in, but very few VCs invest behind teams they don't believe in.

One curmudgeonly VC I know used to say to entrepreneurs:  "I don't think is an opportunity that suits you." At Flybridge Capital, we try our best to be direct and honest in providing feedback to entrepreneurs to help them with their ventures and perhaps we should have the courage to give it to people between the eyes.  I'm just not sure this blunt feedback would pass the decency and respectfulness test.  After all, who am I to project such an unfair judgment based on a 45-60 minute meeting?  VCs need to "Blink" and make snap judgements after those 45-60 minutes in order to filter and prioritize how they spend their time, but why be mean about it?  So in the end, I often settle for a polite "it's just not a fit for us".  Is that the right approach?  Let me know what you think.  What's the meanest turn down you've ever received from a VC?



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Great post, Jeff. This is always tough. Advice to the entrepreneur who is turned down - how you respond to the "no" says a lot about you and can serve you well if you ever come back to that VC. I always remember how a team responded to my decline to invest...

I think there are some similarities here to hiring managers that pass on enthusiastic candidates and how those managers deliver that feedback. When handled correctly it can be a great value to the employee (entrepreneur).

Also, I would imagine if you're passing, other investors are as well. It seems a smart entrepreneur would in fact think the most of the VC who finally gave some honest feedback that helped explain why everyone passed on the deal.

For what its worth, I've never forgotten the day you surmised that as an entrepreneur I seemed like more of an implementor than an "idea guy". That was criticism that I took to heart, and as you may have noticed I've worked hard to hone my "idea-crafting" skills ever since.

Jeff, good thoughts. As an entrepreneur I don't think you can go wrong with your "no's" as long as they are three things (in this priority):

1. Efficient and Timely
2. Honest
3. Include constructive feedback

If it is about the team, I think it is partially similar to turning down an interview candidate where the no is usually always about the person, and not other conditions. You still should say exactly why. The "art" is figuring out how to package and message it in a nice and constructive way...something I admit have not perfected myself, but our dear friend Sean Lindsay has.

Even if its not packaged perfectly, a smart entrepreneur is going to take the feedback and use it to his advantage on his next pitch. If they can't take rejection in a constructive way, then they probably won't make it as an entrepreneur.

Be honest - any entrepreneur who can't handle someone's opinion (yours has alot of value given the experience) - just won't have the thick skin absolutely needed to see a business from birth to high growth. The truth allows us to get better. We get the option of listening, ignoring or moving on. Some of us are motivated to "prove you wrong" anyway!

just saw Sean's comment above me...apparently we think alike :)

Jeff, interesting subject! Thanks for asking for opinions. In my humble opinion, you SHOULD definitely tell the entrepreneurs that the reason you are not investing is because of the team. True, you’ve only spent an hour with them, so your judgment of the team may be wrong. But the team knows this fact (and they may therefore dismiss your view.)

Entrepreneurs need to know that the problem is the team, rather than attempting to guess what about their idea “didn’t fit” at Flybridge. It’s possible some members of the team have doubts and your being honest could cause them to make a difficult decision (to change out a team member) sooner rather than later.

I also would not characterize your being “direct and honest” in providing feedback as “giving it to people between the eyes.” Nor is it being “mean.” Yes, the feedback is blunt but, delivered politely, I think it would pass the “decency and respectfulness test”, albeit just barely!

My opinion; tell it like it is!


I agree with this 100%, Greg. I've invested in "no's" that came back months or years later with great progress under their belt.

Thanks, Sean. Clearly one should be careful with one's feedback and the implications! :-)

Brian - you are very right about entrepreneurs and persistence/tenacity. Timliness is a hard one to follow-up through on, but so important to be respectful. It takes extra effort to not let the "no's" naturally drift to the bottom of the call back list when dealing with other "fires". Talking internally about the entrepreneur as the customer has helped our culture with that one, I think.

I tend to agree with the group here that an honest assessment, delivered constructively, is best. Also agree with the analogy to the job candidates.

With job candidates, I usually try to couple the negative feedback with specific, credible positive feedback. Sean alluded to this earlier -- it's not fun to hear that you're not enough of an "idea guy" right now for us to invest with you, but when it's paired with sincere compliments about your obvious ability to execute it's a bit easier to hear.

And Jeff, to answer your last question, the worst turndown is indifference. Come to think of it, that was true at the bar too -- the girl who shot you down in spectacular fashion was much more fun than the girl who gave you the once over, then went back to talking to her friends without a word. :)

Amen, Annette. Nothing makes me happier than eating crow on a turndown (as I did recently via Twitter when logmein when public). Well, ok, one thing makes me happier - when one of our portfolio companies makes it big!

You should consider working together. :-)

Good feedback, Des. I once told an entrepreneur that I thought the idea had merit under a different leadership and it went over like a lead balloon. 6 months later, he hired a new CEO, so maybe your "need to know" comment is right. Being a good VC is not a popularity contest, that's for sure!

As a novelist, with plenty of rejections to my credit for work that took my heart and soul to complete, I've always apprecited vague but understanable rejection letters. "Not a fit", "not what we're looking for at this time", "story didn't hold my interest", were turn downs that worked better for me than a detailed critique. If a character or two (liken that to a team memeber) isn't working, then I could change it, I would argue. For that reason, vague is best, but if you like aspects of their work, suggest changes that could be made and consider, same as in the book world, a new pitch.

I was considering inserting a dating analogy, Troy, but wasn't sure my wife would appreciate it! Then again, my wife doesn't read my blog...

Definitely good analogies between book pitches and company pitches, Dan. Maybe there's a book idea there??

Agree that if a turn down is simply that, it's been a waste of everyone's efforts.

If, instead, there's something constructive and the entrepreneur is smart, aggregates the information and makes positive change, then the chances for a 'yes' are so much better, next time.

One of the first things I learned from my business partner is that "every conversation is worth having". That's never more true than the 'ugly frog' conversations that no one wants to have, and everyone should.

That being said, as an entrepreneur, we have to keep in mind that feedback is simply someone's opinion; an educated and experienced one no doubt, but an opinion none-the-less Not to be ignored, but to be incorporated as it fits.

So, what is it about the potential investment's team that you look for?

- Domain experience?
- Maturity?
- Responsiveness?
- Ability to think quickly?
- Team cohesion?
- Grey hair (any hair?)

Or, is there a magic bee-bee that speaks more loudly than all of those?

Could be! I'll definitely mull that over.

An unfair advantage and the ability to execute. I have to be able to answer the question: if the idea is such a good one, what happens if ten other teams around the world pursue it? If the team has some angle or unfair advantage, it'll have a better chance of clearing the bar. One of my business school professors used to say in any market, there are wolves and sheep. If you don't know that you are a wolf, then you are a sheep and someone is going to eat you. VCs like to back wolves.

Reminds me a bit of my post "you are the problem - the real reason you can't get venture funding." I think your take was a bit more polite, though... http://www.startable.com/2009/05/27/its-not-me-its-you-the-untold-reason-startups-dont-get-venture-capital/

Thanks for the pointer, Healy. I missed this one but enjoyed your perspective!

Jeff - respectful and timely "no"s are the next best thing to "yes" for an entrepreneur. I think you do a great service to aspiring company-builders (especially 1st timers) to let them know if the team isn't going to take them where they want to go, in a respectful way. Of course you might be wrong, but most of us are from time to time. I'd rather hear that, than hear a polite version of "we're just not that into you" - the latter doesn't help me.

Jeff, I don't need to reiterate points above but as CEO if you had doubts about me I probably would not listen very well and plow ahead (human nature and also being so immune to being punched in the face, as an entrepreneur).

But I would be all ears about perceptions of my team. If you hit substantive issues I would probably appreciate the confirmation in my gut. But if you misread the people and their abilities I would figure out how to present them better--that would be "our" fault.

On your last question...I've never had a mean turn down. I haven't even had a rude one, or a super slow one. But I've had a stupid one, common to all businesses which are geared towards selling to women. Male VC's say, "I asked my wife about your business..." Arrgggh. As soon as an entrepreneur hears that we know you are not going to listen to us (the people who theoretically know our market, not your wife) or add any value. (This is like vetting a sophisticated data storage technology with someone just because they own an external hard drive.)

I think this issue could be greatly ameliorated if people were to adopt a more eastern perspective. Specifically, shifting the emphasis from "the team is the problem" to "right now, leadership lacks quality X etc..."

This makes the feedback more helpful, and also emphasizes that the entrepreneur is simply at a certain stage on their path - not fundamentally flawed. Thus egos don't have to get involved and the learning process is more natural.

I look forward to going through this myself soon!


The BBJ interviewed a high profile local VC a couple of years ago who said that his firm saw ~5,000 deals and invested in 14.

I decided to do the math to put it into perspective. I have about a .28% of getting a deal done with these guys. To put this into further perspective the average American has a .32% chance of dying from a gunshot wound. Since my chances are better of dying from gunshot wound than raising a VC round I meet with VCs knowing in advance that the deck is stacked against me.

I can only imagine that serious entrepreneurs think similarly. In order to maintain the thick skin necessary in the start up business you plan for the worst and hope for the best.

My advice to you is to be honest with the team. I have talked to many VCs who say that they never really say no so that if the deal comes back as a hot one, or if the team's next deal is a great idea the VC will not get snubbed.

I have been told no by more VCs than I care to admit but the people that I respect the most told me no quickly and they told me why they were saying no.

Any good entrepreneur is going to be able to see through the "not a fit for us" excuse. We know that VCs are in the business to make a lot of money and if the deal is "not a fit" it simply means that the VC doesn't think that they can make a lot of money in it, which usually comes down to the idea or the team. Honest feedback (even if it is the team) is good feedback.

Perhaps the feedback will motivate the entrepreneur to work harder and smarter to prove the VC wrong or maybe it will get them to bring in professional management. These are both positive things that can come from honest feedback.

Taking a "pass" is lame.

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