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Updated September 15, 2023You’re reading an excerpt of The Holloway Guide to Raising Venture Capital, a book by Andy Sparks and over 55 other contributors. A current and comprehensive resource for entrepreneurs, with technical detail, practical knowledge, real-world scenarios, and pitfalls to avoid. Purchase the book to support the author and the ad-free Holloway reading experience. You get instant digital access, over 770 links and references, commentary and future updates, and a high-quality PDF download.
“No” is something you’re going to hear a lot. Investors can lack imagination, operate with bias, and be flat-out wrong (just read the emails from investors who passed on Airbnb). But try to consider every rejection as an opportunity for improvement. It’s possible that your pitching style, demeanor, attitude, or research strategy needs work. It’s possible you’re pitching the wrong people and need to revisit your target list. Whatever your situation, stagnant founders who blame a series of “nos” on anyone and everyone around them are not likely getting closer to a “yes.”
Rejection is general feedback—investors rarely share the exact reason they passed. It’s commonly seen as more work than it’s worth to provide detailed feedback to every founder that walks out the door. (Enough founders made a habit of rebutting investors’ feedback point-by-point despite investors’ mind having been made up.) On the other hand, some investors don’t know why they’re passing beyond having a bad feeling about a company. Know that investors probably aren’t trying to be malicious or deceitful when withholding a firm reason, they’re just people trying to do their jobs without creating more work for themselves.
When an investor says, “I want to invest in you, but I won’t lead,” it means they do not have enough conviction in your company to take a big risk. Another way of phrasing this is, “No, except yes if you turn out to be a hot deal,” as Paul Graham describes in his post, “How to Raise Money.” A reasonable follow-up question in this case would be, “Do you generally not lead deals as a policy, or you’re choosing not to lead this deal?” Put these investors at lowest priority, and if you choose to still pursue them, wait until you already have someone leading your round.
Unless an investor has harassed or abused you, be gracious toward any investor who gives you their time. You may encounter them again or work with any number of their colleagues or friends.
Rejection can be the beginning of a relationship. Fundraising is about more than securing money, so stay in touch with investors who say no. They have learned about your business and can still offer you advice and connect you with others who may say yes. Keep your company’s name and your face in front of your investors by occasionally using rooms at their firms for your meetings. You’ll want their support in later rounds.*
Successful fundraising boils down to setting reasonable expectations. Investors tend to appear more interested in a startup than they really are. Meeting with a partner in no way guarantees your company will receive funding. Having multiple meetings with that partner, and presenting to fellow partners at that firm, are good indications that things are going well, but there is never a guarantee before signing. Investors sometimes pull out of a deal late in negotiations, even when a term sheet has already been drawn up. In short, don’t count on getting money until you actually have the money in hand.
Just because a lot of VC money is floating around doesn’t mean the market is not competitive.* There are also a lot of people looking for VC money,* and VCs will meet with a lot of those other prospective investments, making investments in only a few of them.*
Handling rejection can be highly emotional for founders who have put so much of themselves into their company. You should not let rejection stop you—again, investors make mistakes all the time. They are not magicians. But if you’re starting to feel beat down, take this as an opportunity to reflect on what it is you want. Are you upset that you didn’t get a deal from an investor you really wanted to work with, or are there other things going on right now that you need to address? Think about what’s working well—is your team in sync, are you getting good feedback from customers, are you proud to be working toward your company’s mission? These things can be large or they can be really small. The important thing is that you ask yourself why those things are going well. Work from that space.
If you are consistently not meeting your expectations with investors, you might be acting on some assumptions that aren’t true. As much as imposter syndrome and a dearth of confidence plague the founder community, arrogance and egotism are rabid as well. Fear alone can lead us to lie to ourselves, meaning the two sides of this confidence coin can both be at play. In any case, it is a common tendency to overvalue one’s own capabilities—called the Lake Wobegon effect. Bill Trenchard and Brett Berson at First Round Capital have been helping founders fundraise for more than ten years, and summarized many of the insights that have helped their companies raise more than $18B in First Round Review. Trenchard notes, “There are two approaches: one for the top 10% of startups and one for the other 90%…everyone thinks that they’re in the top 10% until they realize they’re not.”
Berson calls attention to five common ways founders mislead themselves into believing they have more leverage than they do. Though a few of these apply only to founders who have already raised capital, we believe that first-time early-stage founders should anticipate these warning signs:
The good news? Few founders get all of this right the first time. Listen to the feedback you’re getting, do your research, make sure you’re approaching fundraising in the right way, look again at your company plan and financials and make sure you should definitely be pursuing venture capital in the first place, triple check that this is exactly what you want to do, and then try, and then try again.
Peter Thiel advises founders to make sure they have “a secret”—that they know something about their product or market that no one else does. Reid Hoffman discusses the idea of “the secret” with founders a lot on his podcast, Masters of Scale. In one episode, for example, Tristan Walker talks about fundraising for his company, Walker & Co. Walker knew that razors on the market caused a lot of problems for men of color, but all the white VCs he was pitching didn’t understand this pain point. He quotes the VCs, who would say to him, “I don’t know. It’s niche. I don’t think it’s scalable.” Of course, Walker knew his customers because he was one, and he knew a lot more about the market than the investors he was pitching to did. Walker says, “So it wasn’t that it was a bad idea, or not as important—it’s just that that person was unwilling to acquire the context necessary to understand what we’re working on. That’s just laziness—and at that point, I can’t fix that. So I just move on until I find somebody who understood it.”
And he did. Walker harnessed the power of his secret to keep moving through rejection: “My experience of not having products that worked for me. My ability to potentially raise money for that thing—I don’t think there’s anyone better on the planet to do this one thing than I. And the day I came [to] that realization, it was the most freeing moment for me, and I didn’t care about hearing the ‘no’s anymore, because I knew that we had something.” Walker ultimately raised $33M, and his company was acquired by Proctor & Gamble in 2018.*
On Twitter, Twitch co-founder Justin Kan expressed the idea of the founder’s secret well: “[At] the same time we were able to get offers to acquire Twitch for ~1B, we couldn’t raise money from VCs at half the valuation. Founders: investors don’t always know everything about markets and trends.”*
Kan and the team at Twitch were repeatedly underestimated because investors and other startup operators didn’t understand video games. The key here is that, despite so many other intelligent people looking at Kan’s company, Kan wasn’t wrong. He was right—he ended up selling his company to Amazon for $1B.* Sometimes, when you have a genuine secret, you have to be willing to meet with a lot of investors until you find one who speaks the language your secret is told in.
As we discuss in Bias and Discrimination in Fundraising and as is evident in Tristan Walker’s story above, VCs who ignore great ideas often do so out of their reliance on pattern matching. Knowing your secret is the best way to keep yourself motivated throughout this process, and can be the foundation of the story you tell.