Investment analysts at VC firms get asked the question: ‘Do you want to invest?’ several times a week x 52 weeks of the year. Their role combines deep financial analysis with an ability to truly ‘hear’ where founders are at as they talk about their business. This includes interrogating their product, go-to-market strategy, expansion plans, competitive landscape, product and pricing strategy.
Inevitably, it also involves saying “No…” more often than “Yes…” as there are only so many companies a firm can invest in.
“While we try our best to provide detailed feedback around why we won’t participate in a funding round; there is some important, more general context for Founders to be aware of which is specific to the VC world. This context might not make a ‘No’ less disappointing; but could help it sting a little less,” says Zoe Chen, Investment Analyst at GD1.
Zoe highlights three important truths below…
VCs are made up of individual investors
As much as facts and figures matter, investment is also subjective and people within the firm who lead deals have their own areas of expertise and interest. Many VC investors have done their own angel investments and may have a preference for certain verticals. This means that if the area you’re working in is something they can’t quite grasp or get excited about, sometimes a ‘No’ simply comes down to the individual preference.
This is one of the reasons why founders having a good long-term vision and being able to communicate the company mission clearly is important. Sometimes, your passion and drive is enough to convince investors (who may not know much about the problem you’re trying to tackle) to take a chance.
We’re looking for high scalability and high returns!
Venture capital carries high risk with it, so we need strong conviction in the businesses we back. In a portfolio of 20-30 companies, you may see some fail; some doing just fine; and a select few (sometimes only one!) returning the entire fund. This means that sometimes we meet founders who we think are building a good business; one that will be profitable; but just not at the scale that we think would be beneficial for our portfolio and for our underlying investors. There have been many times we’ve left a pitch thinking: “That is so awesome!” or “That’s going to be a successful, impactful business!”, but just not at the scale we need.
Sometimes, it’s simply down to portfolio and capital planning
We draw down funds from our investors in regular intervals, so we have to take into account
what funds we have available when we make investments. Sometimes this means prioritising certain deals over others.
Sometimes, companies are really interesting but don’t make sense within the portfolio we currently have. It may be that we are overweighted in a particular section of the portfolio, and for strategic reasons we have to try to adjust our focus in the short-term. Other times, it may be that a company is too similar to, or competitive with, one of our existing portfolio companies. This means that we have to decline.
This will depend largely on the investor, as some VC firms may prefer to invest in companies that are similar or synergistic, and again this comes down to investment mandate. (Specialist firms that have a more narrow, thematic approach to investing are more common overseas than in New Zealand due to scale.)
Importantly, a ‘No…’ doesn’t mean we don’t think your business is awesome. Take our feedback with a pinch of salt. While it’s good to get feedback, it’s important to keep building what you love and are passionate about. Keep doing that, and you’ll meet the right investors who are willing to back you and come along for the ride….