Six Reasons Why VCs Reject Good Startups

In one sense, successful entrepreneurs seem to say “no”
more than the average person. Greg McKeown, author of
Essentialism: The Disciplined Pursuit of Less , gave this
advice to entrepreneurs on HuffPost Live : “The temptation
all over the place... is to do more. The brutal reality of
trade-offs is you cannot.” He urged entrepreneurs to
“narrow their focus.” Entrepreneurs tend to have a vision
and must avoid all distractions in order to achieve it.
Someone who says “yes” to many things is probably
saying “no” to more important things. In another sense,
entrepreneurs often hear many “no’s” along the path to
success. Young Walt Disney was fired by a newspaper
editor because he “lacked imagination and had no good
ideas.” He went on to build a creative media empire.
Steve Jobs was fired from his own organization and
returned to build Apple- turning it into one of the world’s
most valuable companies. Oprah Winfrey lost her job as
a reporter because she was “unfit for TV.” These three
visionaries have all probably looked back on their “no’s”
and said something to the effect of “Suckas!” Despite
your own familiarity with the word “no”, rejection still
hurts. As a venture capitalist, I have to say “no” to a lot
of good startups and founders. It’s just the nature of the
game- a firm can only invest in so many companies. In
order to prime your expectations, and hopefully lessen
the blow, here are the six main reasons why venture
capitalists often decline to work with good startups.
Image credit: Shutterstock.com
You Need More Traction
Venture capital funds usually invest according to a fund
strategy, which pretty much always indicates the stage
of companies they invest in. If you are an idea stage
company trying to raise capital from an early stage fund,
you will probably get told to come back later with more
traction. You will hear the same rejection if you are an
early stage company trying to raise capital from a
growth equity fund . Traction is good regardless of
wherever you’re pitching your startup, but it will
definitely matter to some funds more than others.
We Have A Competing Portfolio Company
Venture capital is a game of picking winners, and
investors often don’t have much to work with. Once they
choose to invest in a startup in a particular space, it’s
very difficult for investors to bring in any other similar
startups. For example, once there is an ephemeral
messaging app in the portfolio -there are too many to
choose from right now- it doesn’t make sense to add
one more. This is because the success of one
investment might destroy the success of another. So if a
VC rejects you on the grounds of a “competing portfolio
company”, don’t waste your time feeling bad. Just go
find another VC.
You're Too Late
Trends come and go, and so do investment
opportunities. As social media investments continue to
wind down, something else will crop up as the next hot
thing. Tech has a short shelf life, as you may notice
when you open your desk drawer and see your dead first
edition iPhone (which only launched seven years ago). If
you’re too late to the game, you won’t likely find an
investor.
You're Too Early
An early idea can look just as bad as a late one.
Although tech prides itself in being ahead of its time,
investors usually look for obvious wins (obvious to them,
but not yet obvious to the masses). They like to leave
the crazy ideas to the research labs.
You're Too Expensive
Valuation is a difficult subject to discuss because it’s
highly subjective. The bottom line is that if your
valuation seems too high in comparison to your past
achievements and future roadmap, you likely won’t get
an investment. Your options are to (a) negotiate down to
a lower valuation, (b) find another investor, or (c)
finance your startup in some other way.
We're Unsure
The VCs you are talking to may keep you hanging on for
a long time. This is probably because they’re unsure
whether they want to invest or not. As one entrepreneur
put it, “time kills deals.” If you’re dealing with slow
investors, move on. Study these six reasons and use
them to your advantage. Self-awareness is key
to negotiation with VCs. Understand your company,
competitors, and the venture firm from which you are
seeking investment. You must understand what the
different stakeholders want in order to get what you
want. Even then, you may still get a no, but remember
that Oprah, Steve, and Walt are right there with you.