Bill Burnham has a great series (1, 2 & 3) on the Art of the VC No. Saying No is their business (from thousands of business plans to a handful of investments), and Bill explains how it's hard to say No, common ways of doing it and his reasonable approach. As an entrepreneur who has heard the word as much as anyone over the years, I thought I would chime in from the other side of the table.
When a VC doesn't say No, they keep a free option to invest. Even better, they get to see your business as a moving picture instead of a snapshot presented at the first pitch. They have time and deal flow on their side.
Entrepreneurs are in the Yes business. The more you hear that word while cultivating relationships, the greater the valuation of your company. Same thing holds for hiring and selling your product. More critically, the enemy of the entrepreneur is time; and an increase in your Yes volume, provided you can make efficient decisions, the more time saved.
When you first start your business, all you hear is No. Accordingly you become conditioned to never accept it as an answer. As your business grows, Yes volume increases and eventually you start dealing with the sell-side in a delightful turn of the table.
For entrepreneurs, there are a couple of approaches to avoid hearing No, none of which I am particularly good at:
- Never engage in active pitching -- not everyone can pull this off, but indeed you want other people pitching you
- Only take meetings where you know its a fit -- have relationships in place, know the timing of their fund, understand the portfolio fit, know who is the guy and their decision making process.
- Create a sense of urgency -- when there is competition for the deal or a milestone where the business will not need venture capital (the best time to raise), you generally increase Yes volume.
I've come across all of the VC Nos in Bill's list, so how do I not want people to say No to me?
- The California No -- part of the Valley culture makes it excusable to be indirect when it is personal (invariably is with entrepreneurs). While you won't piss me off immeadiately by avoiding saying no, going radio silent or do not return my calls while previously setting other expectations -- is a sure fire way of not getting my business in the future.
- The New York No -- conversely, being an asshole doesn't help
So generally, how do I want people to say No to me?
- Before you take the meeting -- for competitive, portfolio, structural, thesis, geography and other good reasons let's save each other time. Don't bring me in to educate you.
- The "It's Not Me" No -- communicate if there is a barrier. VCs work in partnerships, and it's reasonable for a VC to say that he wants to do the deal (even when he is not entirely convinced), but needs to persuade his partnership -- when the VC works with you to do it. One tangental approach is when a VC brings in an "industry expert," usually an under-employed consultant or executive they are trying to find a home for, and makes their opinion part of their criteria. Good things can come from working with this person, especiallly if it is a recruiting fit, but it is often less constructive.
- The Constructive No -- I appreciate when VCs believe it is worth their time to learn what they don't know while making me a better entrepreneur. Private equity is an asynchronous market, meaning entrepreneurs have more information about the state of their business (a justification for lower valuations given inherent risks). But VCs have a keen eye for risk factors and can help you refine your pitch. To work through risk factors, the best VCs will introduce you to potential customers and partners. Not only can this help your business, but you get an understanding of what it is like to work with the VC.
Which is really all I ask from a VC while negotiating -- treat me as though we are already partners. Show me how you really work, grow our networks together and help me think through strategic issues. When the deal is done, it's not like the hazing stops and you become part of the brotherhood. How we work together to form the deal sets the tone for how we execute it.
But with all that said, the most important thing is how iterative the Valley is, so do not forsake trust and relationship. We live in a world of Maybes, time-sliced with decisions. Odds are you will be back at the same table in a few years, even on either side.