5 reasons you won’t get funded that aren’t your fault

Joseph Flaherty, Director of Content & Community

Entrepreneurs pitching venture capitalists have access to an endless stream of advice on tweaks that can be made to their decks, strategies they can use to manage the fundraising process, and (ugh) hacks to eke out an incremental advantage in the scramble for capital.

Founders seeking capital should try to get every edge they can, but they should also be cognizant that there will be some deals that just can’t be closed, no matter what tips or tricks are brought to bear. In my three years of working at a VC firm, and hearing stories from founders who pitch other firms, there are some virtually insurmountable impediments that entrepreneurs should learn to recognize so they can save their precious time and energy for investors with prepared minds.

They’ve funded too many companies this quarter/year

There are perfectly good startups that don’t get funded because of when they approach a particular VC. Sometimes an investor is too busy prosecuting other deals, or they’ve just finished leading a few investments and don’t want to put more capital to work right away. The timing of investments is a subtle decision-making factor that many founders don’t fully appreciate. There isn’t an algorithm determining how quickly a VC will deploy their capital, but there are rules of thumb. For example, a partnership of two VCs who want to deploy a $30M fund in three years will each invest something like $5M per year. The problem is that deal flow can be uneven. An investor may end up leading two deals with $1.5M checks in January when a genuinely compelling third deal comes along. Writing that third check would use up that VC’s annual allotment in the first month of the year, so they may demure even if they would likely lead the deal six months later. Investor psychology matters, especially at the earliest stages.

They’ve lost (a lot of) money in your category

It’s hard to objectively evaluate an investment opportunity in a market where you’ve lost $3 million dollars, or $30M, or $300M. If a startup’s pitch sounds too much like one that lost an investor a small fortune, the scar tissue/gag reflex may limit opportunities for the startup at that particular fund.

This aversion is especially pronounced when the company is outside the typical industries a VC invests in. An investor who has been burned taking a flyer in some “frontier tech” area may be hesitant to take another swing, lest their reputation and IRR take a hit, especially if they see plenty of viable SaaS and ecommerce deals. This challenge tends to be more problematic at the early stage when there aren’t metrics to back up the story. In any case, if you see some big craters on an investors CV, be prepared for a tough sell.

They’ve made (a lot of) money in your category

This seems counter-intuitive, but many investors hold cynical perspectives about the very industries that put them in the position to become venture capitalists. They know too much about the hidden challenges in a market and how important timing or other uncontrollable factors were in their success. It’s easier to get excited about a market when there is less history and more mystery.

They don’t see your category as viable—until it’s too late

Software is eating the world, but there are still markets that seem unappetizing to most investors — right up until they do. There was a time when it seemed crazy for tech VCs to invest in startups that manufactured razors, mattresses, and eyeglasses. Thanks to the runaway success of Dollar Shave Club, Casper, and Warby Parker, investors are more excited about the prospect of investing in “Digitally Native Vertical Brands.”

Similarly, Airbnb was rejected by almost every VC in the industry. The notion of a sharing economy seemed too alien and too labor intensive. Now it is one of the most valuable startups of the last decade and spawned a land grab for startups claiming to be the “Airbnb of X.” Until there’s a clear winner in a new category, expect to hear “no” a lot.

They’re taking a meeting with you as a courtesy

When an investor gets excited about your startup, they’ll often try to syndicate the deal with their peers at other funds. A warm intro is a sign of validation from the interested investor, yet the recipient may not be excited about your startup, for one of the reasons mentioned above. Still, they’ll take the meeting as a sign of respect for their colleague. This isn’t terribly common, VCs generally have a good idea of what their contemporaries are interested in, but if you’re not getting a sense of excitement even with an enthusiastic endorsement from a credible backer, this may explain why.

We advise entrepreneurs to send their pitch deck along immediately after the VC makes an introduction. This gives the recipient a chance to offer a quick no which is better than wasting time in a face-to-face meeting.

Raise money from the people who want to give it to you

A talented founder can overcome any of these stumbling blocks, but in most cases, it’s in the founder’s best interest to spend time on investors who are leaning forward. Eric Paley often shares this quote from Mike Maples with founders—“Spend time raising money from the people who want to give it to you.” Also, remember that founders don’t need to seek out capital to get started.