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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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Thanks, Jules. That's worse than "mother-in-law research"!

That's a great, line, Carter. I may borrow it!

Thanks, Dan. Those are similar odds at Flybridge and across the industry. Of course, there are ways to improve those odds, and the quality and experience of the team is one large way.


I've been on the receiving end of 15 "no's" and two "yeses." One VC liked the product, market and everyone on the team but me...ouch. It was fast, direct and unequivocal, and if I ever lost my marbles and decided to raise money again I would call him first. A good friend dithered, and I would call him last.

Entrepreneurs rightly get rejected all the time, and no means no, so all that really matters is how quickly and honestly the information is delivered so that they can move on.

People with the ego to build companies can take rejections...what they can't take is their time being wasted.

If in fact the rejection is mostly or almost all team, I think the feedback is warranted and necessary. As we all know that VC's travel in packs and some people are inherently 'backable' - they can even get frogs.com (its pets.com for frogs) funded.

But understanding - what about your team is not backable is something that really can make the difference. I am someone that has gladly benefitted from $10Ms of VC money (and returned more that 10x that) but always as a member of a team. A team with others that were the anchors - the backable folks. I often wonder - when do i become backable? When do I become the anchor? Is it now? Is it after my next success?

At the end of the day --- VCs do bet on people. If you are walking into the pitch with the 62 Mets - why even show up for the game? Whereas if you are bringing in the 94 Red Sox - place your order for lilly pads.

It gets more complicated when you bring in the 67 Impossible Dream Sox or the 69 Miracle Mets --- flawed teams that somehow have a chance to win. You should feel comfortable pointing out those flaws and what they need to pick up at the trading deadline. Is it the stud pitcher or the middle reliever - knowing that - is invaluable because it not easily seen from inside the dugout.

Many entrepreneurs need that blunt wake-up call to realize what is not right. I think VCs are doing a disservice to the entrepreneurial community by not revealing all the reasons why the startup is not a fit for them. And if someone can't handle it, how will they handle the customers telling them what is wrong with their product? Preservation of egos does no one any good.

How many founders do we see who started something with an idea, but most importantly, they wanted to be the CEO. Why? Ego bigger than sense of reason needed to succeed.
Also, how many teams do we see where there will be some relative or buddy on it with no darn experience or reason to be there.

By being blunt at times, you are helping improve startup "gene pool".

Improving the start up gene pool is definitely a good thing!

As my Leading Organizations professor always said "Feedback is a Gift". It can be hard to take sometimes, but it is often very valuable.

I know that as a self-funded entrepreneur I have missed getting regular feedback and this is something that I've had to look for from mentors.

Great post as always Jeff.

Thanks, Jason! I wish all entrepreneurs had that positive an attitude!

Meeting someone for an hour and telling them they are not backable is just pretentious.

Indicating to a founder / CEO concerns about a team member is useful.

In the end you have limited upside in telling people you do not fundamentally know that you do not think the team is backable, and I am with you 100% on the quick "not a fit".

If you have dug into a company in more detail and you cannot get comfortable with the founders, it becomes a judgement call. Either they are great people and you think they should simply add to the team (good feedback) or they are people you do not want to business with (no upside in being direct: "I think you are a terrible entrepreneur, please leave" or "I would not trust you with $10, let alone $10,000,000).

Chemical compatibility matters absolutely in our business. Where there is none, it's best to be vague and amicable.

"Vague and amicable". I like that. Thanks, Fred. Interesting that many of the commenting entrepreneurs on the blog so far disagree with you!

Great conversation. The only thing that I wanted to add is the value of building a relationship between the entrepreneur and the venture capitalist. We live in a highly inter-woven world (think LinkedIn), especially in the early stage startup space, so one should always take into consideration the people side as well as the transaction aspect of any interaction between the entrepreneur and the venture capitalist. After all, we also live in a very dynamic world, where today’s sheep could become tomorrow’s wolf, and vice versa. That is true when it comes to people as well as business strategies and models.

I’ve personally spent a good chunk of my time in the past couple of years raising capital from venture capital firms and received my fair share of feedback from potential investors. Sadly, entrepreneurs have been conditioned to expect the “it’s just not a good fit at this time” feedback. Unfortunately, this (and other variations of it) is a one-way feedback and does not promote the potential for a long-term mutually beneficial relationship. The best closures that I’ve experienced have been ones that were reciprocal, where the VC not only appreciates the time that the entrepreneurs put into the pitch but also extends an invitation to help out in a different way – other potential, better suited investors, business development leads, recruiting leads, etc. There were quite a few instances where the VCs that I’ve met were genuinely interested in building a relationship while at the same time declining an investment, and that has led to a strong, long-term mutually beneficial relationship. I personally now introduce potentially attractive deals to them, help them in identifying strong leaders for their portfolio companies, make time for them to tap into my experience and knowledge, etc. A two-way relationship has been developed.

Giving timely, honest, and constructive feedback in situations where you have to say no is important. However, simply stating that “it’s not a good fit” without meaningfully and genuinely trying to invest in building a relationship is a missed opportunity for both sides.

If you can provide the feedback about the team in a constructive manner then by all means you should provide it. It would be hard to imagine a team that would not want to hear this input. They may not agree but at least they have an insight into the "no". And has been mentioned elsewhere, if they can't take (constructive) feedback and rejection then they probably won't make it as an entrepreneur.

However, you mention some of these decisions be "Blink"-like decisions where you are reaching "intuitive decisions very quickly, often without consciously thinking or knowing why analytically."
So the question becomes is it worth the time to go through the post-meeting analysis to come up with the constructive feedback? The answer, I believe, is "it depends." If the feeling about the presentation was that the idea was solid, market was viable and the team was professional and passionate about what they are doing then I can only see goodness coming from taking the time to put together the constructive feedback about the team.

Hi Jeff,

Good post. I believe it is important to keep in mind that there is no finality in this decision. It is not about team's objective chances to succeed. It is about you not being willing to bet your firm's money on this team. No more, and no less. They could go and raise money somewhere else, or bootstrap or what not. This is why your statement about this not being a fit, is not only polite, but also correct. It would be interesting to see success rates among the rejected companies.


-- Greg

A great follow-up blog post would be to run a test. For the next, say, 30 pitches where you feel the largest reason for passing is the "team" respond as follows:

(A) "It's just not a fit for us." [your control group]

(B) "We think the team is not up to the task."

(C) "We think the team is lacking X, Y or Z and recommend A, B and C."

Randomly decide prior to the meeting which of the three groups a company is in and then after giving the rejection rate the response of the entrepreneur and the amount of time/effort required by you (in minutes). In fact, you might even give the entrepreneur a short SurveyMonkey survey to measure their satisfaction with your firm.

At the end of the year, post the results. I'd be willing to bet that:

(A) Takes the least amount of time and leaves the entrepreneur moderately dissatisfied.

(B) Takes a moderate amount of time and leaves the entrepreneur very upset

(C) Takes the most amount of time but leaves the entrepreneurs feeling the best.

If the above hypothesis is true, that's why most VCs take option (A) since it's the best "global" outcome. Of course, what entrepreneurs really want is (C) and the few that experience (B) rant about unholy VCs.

That's my $0.02.

Agreed, this is tough. I have been on the receiving end from some VCs. I also suspect that some VCs turned me down but didn't have the guts to tell me that it's me.

Here's how I would handle this: tell the entrepreneur that you don't think they can pull off a certain aspect of the job. As in "I don't think you can recruit the A-Team needed to launch this".

Be specific. Because it also gives a chance for the entrepreneur to come back 6 months later and prove you wrong. If they pull it off, then you can give them another challenge. As long as you are honest and you give them challenges that are meaningful to you, there is progress.

I just saw a team be told by a PE firm that they needed a stronger CEO. Went right over their head. Being more direct is a good thing, but it does not always produce the desired result because most people will not accept that the team needs to replace them.

I kinda like the "I don't think is an opportunity that suits you."

Maybe something like "we (Flybridge) are not convinced you can execute on your vision" lets the CEO know there are concerns from Flybridge's subjective perspective, but is not absolutely pronouncing them doomed.

I agree with the previous commenter s that it doesn't have to necessarily be painless when delivered with constructive feedback.

The worst turn downs are when they give you no answer.

Jeff, have you ever been wrong about judging a teams capability? And if you have been, have you decided to invest later on?

Maybe people who give pitches should bring comment cards. Please check one of the following.

My opinion - be blunt, direct and honest. If its the team, let them know it. There are lots of opportunities out there that clearly don't have the right team in place, but what if everything else is great? I feel that the VC community would be doing a service to entrepreneurs, especially over the long term, if more entrepreneurs realize that maybe they aren't the right person/team to create a buisness out of a great idea. Hopefully that leads them to get the right team and reapproach, and for subsequent entrepreneurs to get the right team in the first place. Wouldn't that make everyone's life easier?? VCs see more good deals, more entrepreneurs get funded, and less people get hit with disappointing feedback. Its a long term view, but would be nice if the system evolved that way.

Jeff, it seems you put a lot of thought into this article... maybe we're overthinking it.

Backing a team should be like ordering from the menu at a restaurant, you don't need to order the best meal, you just don't want it to be bad. You'll want to avoid spices that don't agree with your palate and ingredients that make you sick. After these assessments have been made, you should explore the rest of the menu because you don't know what you'll like until you try it. Unless you are a food critic or a foodie who dines alone, the food is not the end-game anyway. It is a catalyst for conversation and a lubricant for social connections. That is the point of going out to dinner. In other words, "it's not what you eat, it's who you're with" that matters.

A similar approach should apply to backing an entrepreneurial team. There are red-flags that should not be set off and you should know what they are. Immaturity, inflexibility, lack of domain experience, drive or passion. After these assessments have been made, you should explore what entrepreneurs have to offer. Innovation is about exploration into an unknown.

It's self-defeating for a VC to think s/he knows the human formula for success in an untested arena. By converging to criteria that have worked in the past, you end up backing more Goliaths and not enough Davids. That is the culinary equivalent of always ordering chicken.

= = =
Hermann Mazard is an adjunct professor of innovation at NYU-Poly, an entrepreneur in the field of digital grocery lists and the founder of http://feastup.com.

Thanks for the thoughtful analogy. I'm usually quick with the Moneyball analogies and not as facile with foodie analogies! Glad I just had a big lunch...

I think feedback about the time would be particularly helpful. The more direct, the better.

Some entrepreneurs will respond to the fact that you want to see a CEO brought in to build the company; and strong CEOs will appreciate the feedback that there's something missing on their team. I imagine that entrepreneurs who use the feedback and act upon it in a constructive manner could make for better investments.

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