VCs are liars. And so am I.
They say it’s all about the team. They’re not lying about that. They’re lying because they never mention “the team" as a reason for passing…
I started in VC about a year and a half ago. When I was getting started, I was moving from an early-employee-business-generalist type to a VC. My heart was still on the entrepreneur’s side, so I was looking at VC with an entrepreneur’s lens. I read a lot of entrepreneur’s blogs and reviews on TheFunded. There was a pretty major theme I saw from a founder’s perspective:
VCs are jerks because they don’t follow up.
So, I thought I would change that. I’m not a jerk (according to at least a few people I know). I know how much time and energy went into preparing a pitch deck and trying to describe the vision for the company. I know that a startup at the early stages is the founder’s baby. I know that it sucks to try hard to get something only to receive… no response, no clear indication of what the investors were thinking and why.
I decided I would change the norm. I would reply to everyone who pitched me. I would give clear and concise reasons for passing if I decided to pass. I would offer to help out in other ways and I would actually mean it.
And then I learned the first cardinal rule of VC - it’s all about the team. Every time we receive a pitch as a group, we’ll try to convene immediately after for a very quick discussion. Most of that discussion is about the team, then some about the product and market. It’s about whether we like or dislike the founder. It’s often more subtle things than people realize, things like:
* Did you see the way he fidgeted in his chair when answering the question?
* Did you see how vaguely he described this particular issue - seemed like there was a lot of hand-waving.
* He seemed a little agitated, he must be getting frustrated in the fundraising process.
* He seemed a little desperate, he must be losing faith in the business.
Now that we’ve concluded that we’re not going to invest in the team, it becomes time to let the founders know that we’re going to pass.
And here is the dilemma: What do you tell a founder when you’re passing because of team issues?
I mean, have you ever noticed that most early-stage VCs talk about the importance of team - but it’s almost never mentioned ever as a reason for passing on a company. Notice anything wrong with that?
I decided I’d test the waters a bit. I told some founders that it was because of them. I told some founders it was because of their co-founder. And I’ve lied and said "you just don’t have enough traction yet.” Here’s what happens:
1) When the issue is with the CEO / founder. I’ve had a handful of unpleasant conversations as a result of telling people that I don’t think they have what it takes to create a successful startup. I honestly have the best intentions in sharing this feedback. I think many people see the Zucks of the world and think they can start a company at any age with no experience. And I see the flip side, people that are past the age of 50 and are trying to start a mobile, local, social startup but really have no experience creating compelling social products. This issue becomes even more difficult when the market they’re going after is huge, they have a bit of traction, and the product vision is interesting. But, there’s a belief that the person doesn’t have what it takes to move company past a beta stage or they are a poor leader and will have trouble recruiting talent. My feedback to these folks is nothing like “you’re stupid and we’re not going to invest in you.” It’s more about taking a different path.
“I think you’re going to have a hard time raising VC money because you don’t have prior success and <fill in irrelevant reason here>.” (this is just a warning)
“I think you should get some experience at a startup or incubator before going out on your own” (this is a genuine recommendation to founders that are still ultra-early stage).
“I think the executive team is missing these skill sets and you should first try to strengthen the overall founding team.” (this is my best recommendation to founders that have made genuine progress on their startup but have some weaknesses that someone else needs to cover).
Unfortunately, these conversations are not fun at all and turn tense or defensive quickly. I’ve stopped doing this. It’s just not worth it. Nobody wins.
2) When the issue is with a cofounder / executive. This is a really interesting situation. I’ve had conversations go both ways here. Some founders have thanked me for sharing that we’re passing because of their cofounder. I think they were on the fence about the cofounder in the first place. The feedback confirmed their fears and hopefully leads to a better outcome for the company. I believe my candid feedback greatly strengthened the relationship we will have going forward as I hope to see the founder again in 12 months for their next round.
Other conversations have turned real ugly and killed any potential long-term relationship with the founder. I had one founder go off on a tirade about some people that he assumed I called during due diligence (I had not). He went on to tell me how their former colleague was somewhat immature and stupid and I shouldn’t listen to his opinion (much more damning).
3) When I lie. Listen, this is what many VCs do. Perhaps it’s more like leaving out some details than outright lying. Or if they don’t want to lie, they just don’t respond. If you’re out pitching VCs and you feel like you keep getting rejection reasons that don’t really make sense to you – the harsh reality is that it’s likely a team issue. "We need to see more traction" is the ultimate easy-out, because you can’t argue with it. I’ve had people followup with “how much traction do you need to see.” And this question is an easy dodge as well – “I can’t really give you a hard number, it’s more about proving unit economics that could scale.” I feel bad about giving bogus reasons, but the alternatives aren’t great either.
So, is there a solution?
I think there is. Here’s what it requires:
* More direct soliciation of feedback. "Do you have any feedback for me personally?“
* More two-way feedback. VCs should seek feedback from entrepreneurs too. If you pitch me or know me, please give me feedback!
* Check egos. It’s easy to get defensive… just try hard not to.
PS - this post was in part inspired by Dan Ariely’s fantastic work on Dishonesty. I find the subject fascinating.
