Guide to Startups, Part 2: When the VCs say no

Key highlight

Look at risk around an investment as if it's an onion: founder, market, competition, timing, financing, marketing, distribution, technology, product, hiring, and location risk. Your job as an entrepreneur is to keep peeling layers off until the VCs say yes—until the risk is reduced to the point where investing doesn't look terrifying and merely looks risky. The whole theory of venture capital is that VCs invest in risk, but the reality is they'll only take on so much—the best thing you can do to raise money is take risk out.

Highlights (8)

If you meet with five, six, or eight VCs and they all say no, it's not a coincidence. There is something wrong with your plan—or, even if there isn't, there might as well be, because you're still not getting funded. Meeting with more VCs after a bunch have said no is probably a waste of time. Retool your plan instead.

VCs rarely actually say 'no'—more often they say 'maybe,' or 'not right now,' or 'my partners aren't sure.' They do that because they don't want to invest given the current facts, but they want to keep the door open in case the facts change. Take 'no' gracefully and ask if you can come back.

Never say you have no competitors—that signals naivete. Great markets draw competitors, so if you really have no competition, you must not be in a great market. Even if you believe it, build a competitive landscape slide with adjacent companies and be ready to talk crisply about how you differ.

Never say your projections show you'll succeed by getting just 2% of a huge market. That also signals naivete—if you're going after 2%, the larger companies taking the other 98% are going to kill you. You need a theory for how you get significantly higher share.

Founder risk is the toughest layer because nobody will be honest with you about it. If you're the technologist, VCs may think your business cofounder isn't strong enough to be CEO—or vice versa. You may have to swap out or add founders to get funded.

If your plan requires a key distribution partner to work, shelve it and do something else. Otherwise you'll need to land the distribution deal before raising money, which is almost impossible.

Location risk is the one you really won't like: if you're not in a major center of entrepreneurialism and struggling to raise, you probably need to move. There's a reason most films get made in LA and most venture-backed tech startups happen in Silicon Valley—that's where the money is.

'Yes' can turn into 'no' at any point up until the cash hits your company's bank account. Keep your options open all the way to the end.