Here's what you should do when investors say no

If you are or have been an entrepreneur trying to raise funds from Venture Capital (VC) investors, you have, in all likelihood, had to deal with a LOT of rejection (Or, no response to your mails/follow-up).

Fund-raising can seem like a hellacious gauntlet for every entrepreneur.

After all, less than 1% of startups end up raising money from a VC.

(…and I know what it feels like to be part of the 99%.)

You may even be forgiven for thinking that VCs have no interest in actually financing a company.

If you have received yet another rejection from a VC, do take a few minutes out to read this post before you judge yourself unfairly or let your (uncensored) opinions go wild.

1. It is a Numbers Game

Raising funds from a VC isn’t an ordeal just for the 99%.

A study showed that even for the 1% of the firms that are successful in raising a seed round, they end up contacting an average of 58 investors, which result in 40 meetings (Most of which, undoubtedly, do not end with a positive investment decision)

The monopsonistic nature of the VC-Entrepreneur market puts entrepreneurs at an unambiguous disadvantage.

No wonder the odds are so overwhelmingly against them.

2. A ‘No’ can become a ‘Yes’…

Here is a rather interesting and unusual observation :

Nearly two-thirds of all fresh investments we have done at Kae Capital since the beginning of 2016 (Most of which haven’t been announced at the time of this writing) were companies we had rejected in the past.

While it might be a sampling abberation, the power of this empirical evidence suggests that a ‘No’ from a ‘VC’ can indeed become a ‘Yes’.

There might be several plausible explanations for this. Here are just a couple:

The overwhelming effect of the Numbers Game can lead to (as much as we VCs hate to admit it) a hasty decision (Studies show that the average time VCs spend on each slide is 12 seconds). A second, or even a third look, when backed by greater rigor, or a stronger gut-feel, can lead to a reversal in the decision

Time offers several luxuries, including those which allow entrepreneurs room for a well-suited pivot, a more refined business model or approach, or simply, traction that becomes hard to ignore — All of which are very desirable from a VC’s standpoint.

There is a catch though.

3. …But only if you are worthy (Otherwise it can become “Hell No!”)

To give credit where it is due, the vast majority of entrepreneurs I meet are very polite and gracious when it comes to accepting rejection.

Ever so often though, I receive a response such as

“What makes you think you know how to pick a good investment ?” (The answer to which is, “Nothing at all. I am just another dude with an opinion”)

or

“You will regret this. We are going to be a Billion/Trillion dollar company !” (Wouldn’t be the first time we have missed a company that went on to be valued at over a Billion dollars. As for the Trillion dollars, leaving Saudi Aramco aside, the world is still waiting for its first Trillion Dollar company, so I wish you the best.)

If as an entrepreneur, you see a clear disconnect with a VC, or are that sure of building a Billion dollar company, surely starting petty squabbles isn’t the most productive use of your time ?

But such an outburst is likely to prevent the VC from ever revisiting an investment, and negative word-of-mouth is likely to poison future fund-raising prospects further.

Speaking of which…

4. Don’t underestimate the power of goodwill and referrals

Of all the sources that result in a flow of deals to a VC, the most precious are undoubtedly those that come through high-quality referrals from close-knit networks.

At Kae Capital, our recent history shows that referrals have accounted for a majority of our investments (Including those we had rejected in the past).

What, perhaps, is underappreciated though, is that when the referral is from a fellow VC, it implies that the company was rejected during their own evaluation and yet, was deemed good enough to be referred to other VCs.

We have also referred a few deals to other VCs. Over time, some of them have gone on to do rather well and raised significant external funding.

As bittersweet the competitive nature of the VC industry might be, it always feels good to see a company that you had referred do well, even if it means you missed out on the deal.