When I first started in the VC business in 2004, I usually shared some reactions with entrepreneurs whenever we passed on pursuing an investment, but I admittedly erred towards communicating generic thoughts that were fairly non-specific but perhaps mildly helpful. After a few years into this role, however, I developed a style and approach where I always try to share some type of real meaningful constructive thoughts as to why an opportunity wouldn’t be a fit for my firm.
Jerry Neuman had a great blog post a couple weeks ago on giving feedback to entrepreneurs who pitch him for investment in which he categorizes his reactions about why he’s not going to pursue it. His eventual conclusion is “I am not looking for a reason to say no; I am looking for a reason to say yes.” That statement is certainly the case for all venture investors. We enter meetings with entrepreneurs not looking for reasons to say no, but rather with the hope of hearing a story which is truly exciting. When that spark doesn’t happen for whatever reason, it can become a challenge to clearly articulate in words why that is the case. In many situations, a startup pitch just lacks that one additional compelling factor that empowers an investor to take that leap of faith… and it’s challenging to crystallize what’s exactly missing.
But lack of concise rationale for not pursuing an investment isn’t the reason most VCs don’t share real feedback with entrepreneurs, or in many cases, follow-up after a meeting at all. Instead, it’s typically because one or a combination of the following reasons:
- It takes time and effort to circle back with deliberate thoughts in a profession where both of those resources are scarce.
- It’s challenging from an inter-personal skillset to deliver difficult news constructively rather than not. And possessing that skillset is not a necessary one to become a good investor.
- VCs occasionally encounter extremely hostile and unpleasant reactions to negative feedback from entrepreneurs. Ask any VC and they’ll share a horror story.
- Some entrepreneurs view a conversation about feedback as another opportunity to pitch rather than listen. A decision has clearly been made, but they view the dialog as an opportunity to try to re-open process at that very moment and sell against specific objections.
- VCs have a bias towards preserving (the perception of) “optionality” with any potential investment. The more negative the feedback (even if genuinely constructive), the less likely an entrepreneur will return to a venture investor whenever his business and/or financing details have markedly progressed. A VC doesn’t like to even entertain the thought of “missing out” on a good opportunity if it isn’t required.
The first and second reasons, while I can understand, I think are largely inexcusable. In a business where the entrepreneur is the customer of a venture capital firm, good customer-service (so to speak) is paramount. Respecting an entrepreneur’s time with the courtesy to share thoughts after they’ve taken the time to open the kimono on their business is a reasonable exchange in the unspoken informal contract of the fundraising process. The third reason, while certainly a hazard, happens infrequently enough that it shouldn’t be a factor.
On points four and five, I’ve come to learn with experience that these are not bugs in the process but rather features. Good entrepreneurs may either try to re-convince a VC who has passed given another conversation, or view the “no” as a transactional and move on. But great entrepreneurs use the opportunity to hear critiques as a learning opportunity to refining their business or how they effectively communicate about it. Great entrepreneurs also value people who are honest and direct about their concerns, and use those points as a foundation for addressing them to build a relationship over time. At NextView, we’re looking to invest in the truly great entrepreneurs.
So I always try to share at a detail-level of feedback with a founder who pitches us to invest in their seed round commensurate with the amount of time we spent together. My aim is to do so as constructively as possible, always with the caveat that it is only my personal perspective and merely one datapoint. Sometimes the feedback is overly blunt and not easy to hear, but the intent is for it to be valuable in some fashion. And if that feedback opens the door for a long-term dialog, then that’s just an additional benefit.
It’s fairly telling to note, that of the fifteen portfolio companies we’ve invested in here at NextView, between the three of us partners we had said “no” to the founders at some point on eight of them. Whether it was with their current venture or a previous one, whether at our previous firms or at NextView… more than half of our investments we passed on an opportunity to work with the founder initially, but used that dialog as a basis for further developing a relationship. (Along those lines, my partner Lee has an entire separate post about the difference between “no” and “not yet.”)
So I strive to offer direct and honest feedback with every entrepreneur I meet with (and am humble to say that while I often do, I don’t always succeed.) And I am encouraged when that exchange is a one which is valued; that can be the beginning of a relationship, not the end of one.