Founders often say: “Raising funds is like dating, taking a venture capital investment is like getting married." As for love, the process requires honest communication from the very start, to make it a long-term success.
If you are in discussion with VC investors, there are a few off-the-shelf sentences that you are likely to hear sooner or later (as in, “it’s not you, it’s me”). We have collected some of the most iconic ones, translated them and added some practical tips on how to tackle them.
In this issue, considering the unclear market developments expected ahead, we take a look at some of the most controversial clichés in Venture Capital: investment rejection rationale.
1. "We would love to see more traction."
While this is regarded as one of the most common answers when a VC passes on an investment, it typically refers to two very distinct situations. Before that, what is “traction”? Traction means momentum. Every investor decides what is sufficient proof of momentum, typically it boils down to MVP, product-market fit or a target KPI such as revenue or ARR. You cannot know beforehand, so this is an excellent first question to ask.
That said, here those two cases:
Case 1: Your company simply did not reach these milestones, but the investor likes the concept and wants to build a first contact. Tip: Actually use the opportunity to create a relationship as a stepping stone for future rounds – it might be a win then.
Case 2: The investor has reconsidered the investment, but has no factual ground to explain it to you. Tip: You can ask for more explanation, but reality is that you should consider this as a polite goodbye.
Which case are you in? Just ask for a factual explanation – the quality of the answer will tell.
2. "We are not certain your business is scalable."
When a VC refers to lack of scalability, it typically refers to not targeting a large enough market, or that business is not designed to grow faster than costs. Truth is, both are important for VCs’ business, because they are typically critical to achieving a high valuation increase – in turn required to deliver return to the LPs (Limited Partners, i.e., the VC’s customers).
If you received this answer, chances are:
Case 1: The messaging in your pitch deck did not come through. Tip: Try to defend your argument once more. Slim chances, but perseverance is a good attribute for founders of early ventures.
Case 2: Your strategy or business model are not geared towards the VC investment model. Tip: Consider if/how you can pivot your business in business model or operations. If that is “impossible”, the brutally honest answer is that maybe VC financing is not optimal for you.
Can this be another polite decline? Absolutely so, the only way to tell is to ask for concrete explanations.
3. "We are happy to follow, if you find a lead investor."
This is possibly one of the most frustrating for founders (“we are convinced, but not all that much”). Despite that, sometimes it is simply how that investor actually works, sometimes it is (yet another) polite way to step back. Again, two cases:
Case 1: The investor, by choice, does not lead investment rounds. Being a Lead Investor literally means leading: Performing Due Diligence, creating the investment case, negotiate, draft legal contracts and/or coordinate other investors. That is a lot of hard work, and some investors simply decide not to take it on and leave it to others. Tip: Keep them in your list, and contact them again. They will seriously consider the investment.
Case 2: Another trusted formula to gently walk away. Tip: You can contact them again, but probably nothing to do here.
Trick to spot in which case you are: (1) Among your first questions, ask whether the investor typically leads the round or not, and note that down. (2) If you get rejected with this formula, check back your notes and you will instantly know.
