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Sometimes Saying No Is Hard to Do

May 9, 2006


Sometimes one of the hardest things to do as a VC is to say "no."

I was reminded of this last week as I told an entrepreneur I had gotten to know, and really like, that Polaris was not going to invest. I did not have any really good reason other than the fact that his particular venture had not risen to the top of my stack.  While I think it remains very interesting, compared to the other opportunities we are seeing I couldn't realistically see a scenario where we prioritized this particular venture as one that we were likely to actually move forward to fund. So, although I think both myself and the entrepreneur were at one level very interesting in continuing to "work" the deal, it really didn't make sense for either of us to continue our discussions.

We all have a finite amount of time to spend and sometimes the hardest but most important aspect of being effective in venture capital is deciding how to spend our time. Lots of opportunities present themselves that we find interesting and, if we made the decision in a vacuum, we could certainly see spending lots of time getting to know, and backing, the team and venture.

But the decision is not made in a vacuum.  Realistically speaking a VC can't do more than one or two (maybe in a particular situation 3) deals a year and still have enough time to work with and be available to his portfolio companies.  In deciding to fund a particular venture, a VC, and his partnership, is making a decision to commit a substantial portion of that VC's time over the next 3-6 years to that venture.  This commitment, odd though it may seem, is in many ways a more important consideration than the fact that you'll be investing several million dollars into a company.

In light of this, it becomes pretty important to develop a pretty tight "deal filter" and to make the call pretty quickly whether a particular venture really has a decent prospect for being the one or two that you will back that year. 

One of the easiest traps to fall into as a VC is to spend a little bit of time looking at lots of interesting deals. In order to actually get deals done, you need to be a little bit ruthless prioritizing things and really focusing your time on the opportunities that stand a pretty high likelihood of getting funded. But this is much easier said than done.

In this particular instance, I had a very positive impression of the founding team and business opportunity, and was really enjoying getting to know this team, but after a few weeks I found that a couple other plans in my docket were rising higher in my priority list.

For a couple weeks I kidded myself into thinking I realistically could give adequate attention to each of these deals. But when I found myself getting really slow in returning calls, much less actualy getting making headway assessing the opportunity, I had to be honest with myself, and this entrepreneur, and call a spade a spade.  So I told him Polaris was passing.  He'll have plenty of funding options I am sure, and if nothing else I think he appreciated the candor. 

Fundraising can be real pain and distraction, and a quick no is much better for all concerned than a slow one.

So for entrepreneurs pitching VCs my advice is force the VCs you are in talks with to tell you exactly where you stand on their priority list and evaluation process, and don't waste time with those who (whether they realize it or not) are effectively in the process of giving you a slow no.


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  1. May 9, 2006

    Excellent article, and as an entrepreneur, I totally agree.

    The challenge is that few VCs have the “incentive” to provide a quick No (it’s not in their interests to do so). If with minimal effort, then can keep the entrepreneur “interested”, they can wait on the sidelines and see if the opportunity becomes more interesting (often because another investor becomes interested).

    In any case, I think your approach is both refreshing and prudent. In my opinion, VCs that have established a reputation for being fair-minded and direct will attract a better class of entrepreneurs over the long-term. And, this is a long-term business.

  2. Jeppe #
    May 10, 2006

    Brutally honest – and I totally agree. The temptation to keep the opportunities spinning in the air is great, but at the end of day disadvantageous to all parties involved. The principles you lay down here is generally applicable – take for an example the GP- LP relationship…

  3. May 10, 2006

    Wonderful advice, Mike!

    I have met many entrepreneurs who held their breath waiting to hear back from a VC instead of asking right out about their standing.

    Since, as you said, only a finite amount of time is available to all of us and the sooner entrepreneurs can seek support elsewhere, the less time everyone spends on needless anticipation.

    Thank you for bringing this to your readers’ attention!

  4. May 10, 2006

    The trap of the prioritizing in the above manner is that VC’s ends up grading/prioritizing companies & investments based on a curve rather than on a absolute scale. This method is certainly viable in time of high quality deal flow, but in times of low quality deal flow, the VC might invest in companies that does not meet the minimum bar for “quality.” Of course, easier said than done. How to decern deal qaulity is very much subjective especially during times of extreme boom & bust because quantity /= quality (2002 vs. now, for example) . . . we are all human after all . . .

  5. Lee C. #
    May 10, 2006

    I wish a VC had said “Thanks, but no thanks. And here’s why…” to me when I started my venture in 1987. Yes we made (some) money, had great Fortune 100 customers, and ran for 13 years before selling, but in the long run it was basically a waste not the best use of time.

    As an entrepreneur today when I hear “No thanks” that’s an important data point to be put in the scattergraph. I suspect experienced entrepreurs understand the “fit” part of the equation that funding sources use. Bill Hewlett’s approach to new ideas as described in The HP Way : How Bill Hewlett and I Built Our Company still holds true today.

    Good post.

  6. Lee C. #
    May 10, 2006

    Yikes…must be the theme of the day –

  7. May 11, 2006

    Just one of the reasons I couldn’t be a VC – I would find it hard to get close to someone (and you did point out you liked the guy), spend time exploring their idea and then have to cut them dead. Of course another reason I couldn’t be a VC is I’m no good with money.

    That said, your clear, professional approach is obviouslt the best way to go. I hope the “no” guy could see the positive in this.

  8. Be Like VC Mike #
    May 13, 2006

    No entrepreneur wants to hear “no” at the given moment he or she hears it. I recently had an experience very similar to the one that you wrote about it and I can honestly say that though I was disappointed in the lost opportunity, I appreciated the guts it took for the VC partner to pick up the phone (several times I might ad) to try and reach me and tell me the truth.

    It rarely happens, and when it does, you know you found a quality VC firm with a quality team. It’s a long business life and a good entrepreneur will know there’s always next time.


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