RTC #40: The secret reasons why VCs say "no"

Hi everyone, here is today’s issue at a glance:

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📢 My favorite links of the week

👉 Struggling with legal wording in term sheets? Check out this guide. Plain language to make things clearer. (Link) - My favorite this week

👉 The hidden metric that's getting more important (Link)

👉 Some of the most successful angel investments ever…🤑🤑🤑 (Link)

👉 Don't pick a cofounder that… (Link)

👉 Less than 1 in 100 seed startups makes it to exit (Link)

👉 How different types of VCs react to the very same bad news (Link)

👉 The venture capital due diligence questionnaire (Link)

📖 Report of the week

Global Private Market Fundraising Report (Pitchbook)

• European fundraising up ⬆️

• North America down 😲

Venture capital investors only invest in a tiny portion of the startups they see - like maybe 1-2 out of 100. 😲

What does this mean?

In the first place: There are many reasons and occasions when they decide not to invest and say "no".

More traditional and standard reasons usually include:

• Misfit with the investment thesis of the fund

• "Not getting comfortable enough with the (return) potential and the likelihood of being an outlier" (remember: VC Power Law)

And then there are the LESS standard and more covert (secret) reasons.

But first, let’s take a quick look at the more obvious ones…

No fit with VC investment thesis and focus

This often happens when founders have not thoroughly reviewed the investment criteria of a VC firm - or thought they might still want to try it. Honestly, I'm not sure how many exceptions there have been. My guess: not many…

In such cases, a "no" is often due to a misfit in:

• Geography

• Industry (Healthcare, FinTech, etc)

• Vertical (B2B, SaaS, etc)

• Stage (Pre-Seed, Seed, Series A, etc)

• Check Size: Up to EUR 2m, EUR 0.5-5.0m, etc

Not enough return potential ("no outlier")

If a VC says "no" for this reason, they usually feel that the startup signals or characteristics of the markets it operates in are not robust enough👇

• Crowded market with high competition

• Limited growth potential of markets

• Markets where established players are already experiencing massive growth

• Signals of early adoption not strong enough

Now let’s look at the less obvious reasons.

Let us assume:

✅ Investment thesis aligned.

✅ Return potential solid.

So, you had a first chat or meeting with the VC and thought:

“Damn, this went well…they like us” 😊

Days and weeks pass by...the momentum fades, and after a few follow-ups, you receive a message:

What went wrong?

Here are three things I’ve frequently observed.

Founders, do avoid them!

❌ Poor execution of follow-up and fundraising process

The way you manage your fundraising process reflects how you'll execute future operations (at least in the eyes of VCs).

Early-stage investors are looking for truly exceptional founders.

To be exceptional you need to be able to execute in all situations.

If you fail to perform here - you are out.

What does this mean in practice (a few examples)?

• If you agree via email to a meeting, send an invite right away

• Send the follow-up materials within 24 hours after the meeting

• No follow-up materials? Do not go on radio silence and drop a random email four weeks later

• Make sure you understand the internal process at the VC (committee, decision-making processes, etc) and follow up accordingly

Most importantly: let me feel the momentum of your process, talk about other meetings, how you are “on it”…make it feel like your process is on fire! 🔥

❌ You asked for an NDA before sharing your deck

This might seem obvious to many but let me tell you…it is not.

Every month, at least one founder asks if we can sign an NDA before proceeding.

I will only stop telling people about this when this has stopped.

But for once, let’s have a (serious) look at the reasons why asking for an NDA will directly kick you out as a potential investment:

• Power Dynamics: Investors just don’t have to sign anything as founders don't have enough power at this stage - they will look at the other 5 pitches they received.

• An NDA adds unnecessary friction

• An NDA is for due diligence, not for first contact

• A NDA would add extra complexity to the investor's job

• You are signaling that you are an amateur: For all the reasons listed above, asking for an NDA is not the industry standard. By asking for an NDA, you tell the investors that you don't know any better.

What should you do instead?

Simple: for the first contact and meeting you need to be able to create some information/document that you can share without any NDA but conveys the core information of your case and can raise maximum interest.

Thank you, for the good summary on this topic, Stéphane!

❌ The competitor slide is a “make it or break it”

The “Competitor Slide” is one of the most important slides for me.

Especially when it comes to very disruptive opportunities I do not care that much about the content on it - what is important for me though: how the founders approached it.

And I see too many cases where it is just obvious that they just tried to put something on and show their startup as the “winner” across many (often absurd) categories.

Don’t do this! Step back and thoughtfully assess the market and your competition. It should not resemble the typical formats seen in 80% of pitch decks.

Which ones are these? See below 😂

Need help with your competition slide?

Have a look at the following article published by Sifted last year - recommended!

📅 Calendar of main VC events in the upcoming weeks

“Networking is a lot like nutrition and fitness: we know what to do, the hard part is making it a top priority”

September
• Carbon Unbound Europe | London, UK | Sep 11-23
• France Digitale Day | Paris, France | Sep 18
• B2B Rocks | Paris, France | Sep 25-26
• TechChill Milano | Milan, Italy | Sep 25-27
• Italian Tech Week | Turin, Italy | Sep 25-27
• The Drop | Malmo, Sweden | Sep
• Bits & Pretzels | Munich, Germany | Sep 29 - Oct 1

October
• Sifted Summit | London, UK | Oct 2-3
• World Summit AI | Amsterdam, The Netherlands | Oct 9-10
• SaaStock | Dublin, Irland | Oct 14-16
• The Business Booster | Barcelona, Spain | Oct 16-17
• TechCrunch Disrupt | San Francisco, US | Oct 28-30
• 0100 Conference Mediterranean | Milan, Italy | Oct 28-30

Thank you for reading today’s issue. If you enjoyed it, leave a like or comment, and share it with your friends. Follow me on LinkedIn to never miss updates again.

Have a great week,
Stephan 👋

Issue #40 | 17 September