Tl;dr: You’re going to hear no continually from investors. If you expect to hear a no you can focus on how to improve rather than managing your emotions from being rejected. If you’re fundable, you just need to keep practising and hitting up investors till you get a yes.
Fundraising is a harrowing experience
Startup is hard so people keep saying “you go girl!”, “achieve your dreams”, and “anyone can make it”. I kind of get it, most people are nice, and entrepreneurs know what is involved so they don’t want to dishearten you. There’s also no benefit in being a Debby Downer. Most people want to be around positive people.
I’m not one of those people. I like to be honest because it prepares people for what is to come so they are better places emotionally and logically to face what is thrown at them. It’s like saying “Don’t buy Dark Souls (or Elden Ring) if you aren’t looking for a really challenging experience!” N00bs who didn’t know what they were getting in for with their $60 are going to rage quit.
If you choose to raise money for your startup, you have to understand that each meeting with an investor is a Boss Fight. It’s going to be hard, but rewarding after you die 27 times and finally get through! You learned how to block, parry, dodge and when to press ahead and go in for the kill.
But just as in video games, you will never actually die. You keep living to fight another day. You just need to know what you are up against so you grind your XP up to be in a fair fight and worthy of a yes. Till you are worthy of a yes, investors are going to slay you with a no. And it is going to suck.
It’s the investor’s job to say no
Most startups do not understand investors and how their business model works. VCs understand startups and it’s not their job to teach you how they work. I believe so much of the vitriol founders espouse on Twitter etc about VCs is due to their ignorance and lack of knowledge. If you can internalise just one thing about investment making processes you can make the process of engaging with them far less emotionally stressful. You just need to reframe interactions.
Reframing is looking at a situation, thought, or feeling from another angle. The emotions that you feel, your thoughts and pre-conceived notions, are rooted in old patterns of normal human interaction that don’t serve you. By reframing a situation, or taking on a new perspective, you can help adjust and break those patterns leaving you more in control of your own mind and emotions.
Let me explain VC interactions with founders simply.
Investors get between 100 and 3000 pitches a year. VCs with some visibility are in the 1-2k range. Let’s presume they will invest in 10 companies a year and they get 1k pitches.
10/1000 = 1%.
That means 990 startups are getting a no from them and only 10 founders get a yes.
Read that sentence again and internalise it.
- The odds in Macau and Vegas playing Blackjack are 42.22%
- The odds of getting into Harvard are 4.7%
Investors have limited capital to deploy. You may disagree and quote the huge Vision Fund SoftBank has etc, but they still only write a few checks, albeit for huge amounts! The reality is that very few companies get funded. It is an investor’s job to say no to 99% of startups because they don’t have the money and time.
But my bet is that founders would expect odds closer to gambling at a casino? Why do you think that?
You need to reframe. You should expect no.
Assume investors will say no to you
Do this. Go pace around your pool, room, park etc for around 20 minutes. Pretend you are an investor. Question
- What would I invest in? Why would I do that? What would I look for?
- What the heck would I do if I got 50 pitches a week? How many hours would I work?
- Would you be a nice investor- would you respond to each founder? What if you give helpful advice and they keep emailing you for more advice? You keep adding 50 more startups a week emailing for more free help…
- Pretend you only have $50m. You save half for follow on, so you have $25m for first checks. You will do ten checks over 3 years so you can do around $2.5m each. 3 years is 3000 pitches. 10/3000 which means you invest in 0.33% of the pitches you get.
You will be confused. So here is a one minute exercise. You do ten deals in 3 years so you now have a rejection rate of 2990…
What do you tell all those 2990 founders who desperately need your capital to pay their staff and achieve your dreams…
You tell them NO!
You yourself as a pretend investor can’t say yes to everyone, so how do you expect to not receive big fat NOs too!?
If you can reframe and internalise that NO is normal, then you can’t really take receiving a NO personally anymore. Get me?
Go to each meeting expecting a no, but willing to be surprised with a yes. You just need to keep improving till you can get the yes.
Each no is just one way not to build a lightbulb
Don’t beat your head against the VC wall if you are not fundable in the first place. Fundable startups are fundable. If you are not getting funded because you are not pitching well, then you can improve. Treat each interaction with investors as a learning opportunity.
Founders can fail at pitching a fundable business for a lot of reasons:
- You don’t explain that the market is indeed suitably large and growing fast
- You don’t illustrate suitable differentiation in a crowded market
- You are terrible at answering questions because you don’t understand financial stuff
- You don’t understand all these questions about being defensible etc
- You are an introvert and can’t switch into passion sharing mode… confidence matters
All these things can be improved and someone like me teaches you how to improve in just one call.
There are a lot of things that can be improved:
- Your pitch deck can help you get more first meetings
- Your dataroom etc can build the confidence you are on top of things
- How you answer questions can be more logical and engaging
- You can tell a better story
- You can preempt questions you keep getting asked so you own the narrative
- You can illustrate more social proof and urgency
- Your financial model is logical and in line with expected metrics
- The list goes on and on…
Everything can be tweaked and improved. There are some levers that create more benefit than others, but raising really is a lot of little improvements.
Investors have this mental model of a fundable startup. Think of it like a cup that needs to be filled up to 80% and the 20% is topped off with optimism that “these guys will just figure things out” so that gap is only covered through the confidence they construe in you based on your perceived competence.
When you interact with investors and elicit a very close yes, or a very far no, you are learning something if you are paying attention. Why did you do better with one investor and poorly with another?
Edison was famous for never giving up in his search for the construction of the electric light bulb. He said “I have not failed. I’ve just found 10,000 ways that won’t work.” What isn’t talked about is the fact he told investors he made the lightbulb work before he actually had in order to get more funding. Something Elizabeth Holmes took a little too much to heart, whilst dealing with peoples’ health.
Each pitch that you make is learning on how not to fail, on the path to having a fundable pitch.
You need to pay attention to verbal and social cues
When you first start pitching investors you’re going to be a 13 year old having to make a presentation in class. Your palms are clammy, you stammer, etc. You also haven’t practised adequately so you don’t really know your pitch. You are more concerned with saying the right words than being present and having a discussion.
Proper pitching is a discussion.
When I raise I know my pitch so well that I can do it on Zoom whilst responding to my emails. I only stop if I am asked a new question I have to think about. Who do you think is more confident in a pitch than, me or you? Me, because I do the work to allow myself to do a pitch and be fully confident.
Once you have prepared adequately you have ticked the basic box. You are ready to be present in a pitch, until then you are on the back foot.
TIP. Don’t be impressed by people. Treat everyone as a friend when you meet them – social but respectful. Imagine investors in their underwear if you need to. It’s important you approach investors at the same social level as you. If you put them on a pedestal you won’t be able to relax and be yourself.
There are two stages in pitching to be aware of:
- Downside management: Every pitch starts with investors on the defensive- is this worth my time? Questions are about the problem, how you are different, the market size, go to market, acquisition metrics etc.
- Upside maximisation: If they think you are fundable they start asking about expansion. How large could this get? Where else can you expand?
Investors are telling you how your pitch is going based on the questions that they ask and their body language.
- If they keep asking about market sizing, it means they are concerned your market size is too small
- If they are on the phone they are either not interested or their kid is ill (This is a bit rude, but something to be relaxed about)
- Do they start leaning in when you answer a question?
- Do they start asking questions about how large things can get?
You need to pay attention to where investors are engaged and where you lose them.
Do more of the good, and be better at the bad.
Keep refining your pitch
When I do pitch decks, I make it clear that this is your starting pitch deck and that it needs to improve as you get feedback from investors as you spend time with them. Your deck should not remain the same unless you are killing it. There will always be things that are too obvious or are not explained well for the first call that you have to set the right scene.
How you pitch investors need to change too. Your initial monologue when you explain why you started this company and how it is going can change a lot.
How you answer questions can constantly improve by leaps and bounds.
Sure, you can do a lot in preparation work to be positioned to start getting a decent grade from investors, but you will almost never get an A off the bat. You only figure out how to do a great pitch through implementation with real investors. This is why you start pitching investors you don’t want money from.
Depending on your capability, I recommend writing down each and every question that investors ask you immediately after the meeting (writing them in front of investors is a little awkward and makes you less present to spend your time on processing the question). Then literally write a structured answer to each and every question. Then read and learn from your responses. Make some note cards and ask yourself random questions and see how you answer them.
Treat each meeting with an investor as an opportunity to do better in your next investor pitch. Don’t let hearing no get you down.
You’re just learning one of the 10k ways to not to get funded.
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