Saying "no" can be hard to do

At the risk of opening myself up to a landslide of snide comments expressing sympathy for the "difficult" job a VC has saying no to so many potential investments, but in the interest of being open about the experience of venture capital from the inside I offer up the following thoughts:

Sometimes it’s very easy to decide to decline a company’s request for financing (and we see literally thousands of plans a year, so we’re pretty well practiced at it).  Many times the company simply isn’t a fit for our investment focus (we get a few "invest in our [pick one] manufacturing/car wash/custom painting/etc business" requests ever year).  Or the business plan is clearly off base (my personal favorite from this genre was the company that planned to colonize the moon for the purpose of reducing the cost of launching satellites – which they were going to build from materials they were to mine from the moon).  Lots of others are potentially interesting but for one reason or another just don’t make the cut.  The ones that pique our interest we start a dialogue with, which typically involves several meetings, background due diligence, etc.  Some of these businesses we will relatively quickly decide are not a good fit and they fall off the list.  Then there are the ones that we really dig into.  While we pride ourselves on moving quickly through our investment process, being quick doesn’t mean not being thorough – we do a lot of work looking into investment opportunities before we make our final decision to invest. 

As we’re moving through this process there continue to be a meaningful percentage of companies that we ultimately decide not to pursue an investment in.  I like to think our process is a pretty open one (specifically that we’re very clear with the entrepreneurs that we’re working with what our outstanding questions/areas of concern are).  But even when it’s clear that we’re just not "there" on a deal it can be difficult to turn down an investment late in the game.  I’m not talking about reaching the decision to say no – we have a well exercised process and a very open patter of communication at Foundry that I think allows us to make very good decisions throughout our deal process. I’m talking about actually making the phone call to someone you’ve been working with for months, who has been answering your questions, putting up with your requests for more data and with whom you’ve likely been engaged in pretty detailed business planning.

I had a particularly challenging example of this about a month ago when I turned down an investment in a company that I was really close to saying yes to.  In this case I particularly liked the founder (we had both a great personal and professional connection) and the business was in an area that I know extremely well.  I did a ton of work on the opportunity and as a partnership we had many conversations about the business (while I had been leading the work all of my partners had spent real time looking into the business and had met the founder several times).  Ultimately I couldn’t get over a handful of concerns about where the market (and in this case specifically competition) was moving and as a result turned down the chance to invest.  Probably the hardest "no" that I’ve ever had to give . . . .

Note: the company in question had another source of funds and is off and running on executing against their plan.

  • Gerald Joseph

    Great post. very tough subject matter. There is an art of “doing” and an art of “not doing.” Saying no is so difficult that I think VC's and Startup Founders (and pretty much every business person in the universe) have to develop a way of saying no without allowing residual negativity or bad karma so to speak to affect the relationship and future prospects of partnership. Numerous persons with no tact, no style, and no etiquette simply do not understand the tao of no.
    Maybe you can discuss in non-specific terms in a future post how you handle saying no and if you leave the door open for future considerations with companies that go through a process of sorts with you (and Foundry), however, do not become one of your portfolio companies.

    • sethlevine

      Thanks Gerald. You're absolutely right about the art of saying no. I see no reason to burn bridges – you just never know what the future brings in our business. And while I clearly don't think one should make false promises, leaving the door open for appropriate continued conversation is typically the right outcome of a turndown. I have a few thoughts on this from both the VC and company perspective which I'll turn into a post.

      • Gerald Joseph

        Looking forward to the post.

      • Jeff Widman

        I would certainly enjoy reading this post! Hitting the balance between clearly saying no w/o future promises–yet not burning bridges or closing the door… now that takes tact, clarity in your own mind, and a lot of trust!

  • “my personal favorite from this genre was the company that planned to colonize the moon for the purpose of reducing the cost of launching satellites – which they were going to build from materials they were to mine from the moon”

    – I think I went to University with this guy! By any chance did you see this plan about 3-4 years ago? And did it involve both scramjet and electric railgun technologies?

    If it did, I've seen the plan myself. It was going to be out-there even for the most aerospace-heavy VC's (if there are such things.) It's funny that you all would have gotten it! Though to be fair, the focus of his plan was more on launching technologies and space tourism; the moon colony wasn't critical. 🙂

    • sethlevine

      that's pretty funny, jed. i suspect it was a different guy (although it was probably from about that time period) – he was pretty focused on the idea of launching satellites!

  • My opinion is if you are really that close to saying “Yes”, do the deal.

    On the other hand, there's always the next round to reconsider the investment. Correct me if I am wrong, however, will it not cost you more to rejoin this investment opportunity during the next round?

    While competition will always exist, execution plans can be altered to outmatch them. It's great that the company ultimately got funded, but I am thinking it will be on your “Wish I did the deal” list.

    Other than that, yes saying “No” is hard to do. I am building a technology and having to say “No” to very talented people who are ultimately outmatched by someone who is even more brilliant is really very hard especially once we get into the top 1% level of talent.

    • sethlevine

      so following your example, if you're not quite there on a tech hire, but close, should you pull the trigger? i understand your reasoning, but don't agree – if you're not there, you're just not there. at least with an employee you can always sever them if it doesn't work out. with an investment that's a little trickier (and more complicated). saying “yes” is just the start of the relationship.

      in this case i may get another bite at the proverbial apple. but as you point out its likely to be at a higher price…

      when they sell for $500m, i'll let you know my mistake!

  • Vladislav Cherhyshov

    That's why I think that VC is the most hard profession in the world. You not only feel bad in such situations, but you also make entrepreneurs feel bad too. It's hard. Maybe, entrepreneurs who are pitching you and asking for your money are in better position than you.

    Anyway, good luck you with your investments.