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.