Comment by Aurornis
2 years ago
Top tier VCs will definitely tell you “no” and they’ll often get there quickly.
It’s more often the small funds, the inexperienced family offices, and the junior associates that don’t have authority who string companies along forever. They don’t have as much authority or funds to actually work with, so they have a lot of time to string you along.
Lumping all VCs together really doesn’t lead to accurate descriptions of how the industry works.
This is the most accurate comment I've seen here. Sequoia, Benchmark, Kleiner, etc. will all tell you "no" and why with minimal turnaround time. The same is true for second-tier players like Craft, smaller shops started by breakaways from the big firms, and scouts. Good VCs are professionals and have no interest in wasting your time or theirs. A "no" now never precludes future participation anyway; they don't need to string you along for that.
Hmm, my experience with one of the largest investors in NL was a full verbal 'yes'. The investor was actively involved in the hiring process (that is how I got in). A founder put in his cash (think a small apartment) for a lower single digit percentage of agreed valuation. I signed for something smaller / similar but without bringing in cash.
In reality the money never arrived, they forked in few times 250k. The other investors who bartered a deal all brought in their share. My takeaway is that even the most reputable investor has absolutely no limit in saying yes and doing no.
The motivation for everybody was greed, and that was buzzing around due to the fact a large investor was involved. They know that and they used it. But in the end in this world signed contracts and wire transfers are the only credible thing.
What is NL, the Netherlands?
One of the largest investors in a given location might not be "top-tier" in the overall VC market.
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A signed contract is certainly part of the process. I can't speak to outside the US but here the high-level steps are:
1. Engage the firm and reach a decision that they'd like to invest.
2. Negotiate and sign a term sheet. (The only part of this that's legally binding is that you won't continue shopping around while negotiating the full deal with them. That said, it's extraordinarily uncommon for things to fall apart after signing a term sheet.)
3. Negotiate and sign the full deal. (This goes beyond just a contract, e.g. you'll be amending your articles of incorporation to reflect changes in board composition and a million other things.)
Virtually all breakdowns are in steps 1-2. Maybe the firm doesn't want to invest, or they aren't offering a compelling valuation, or they aren't flexible on dilution, or they only lead and you want another firm to lead, etc.
Keep in mind these are VCs, not PE. VCs make their money from outlier companies, so the competent ones don't optimize for worst-case outcomes. You'll never see a dirty term sheet (e.g. liquidation preference > 1x) from Sequoia, for example, because they don't return 8x on a fund by squeezing pennies out of failed startups.
> But in the end in this world signed contracts and wire transfers are the only credible thing.
I don't have any experience in this business, but why would anyone think otherwise? Did you spend your own money on a verbal promise of investment without any signed document??
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Which actually reinforces the grandparent's point. Sequoia, Benchmark, Kleiner, etc. can say an actual "no" and you'll still go back to them because they're...Sequioa, Benchmark, etc. You'll go back to them, because its a huge signal to prospective buyers, potential acquirers, partners, etc. that you're being funded by a top tier VC.
> Good VCs are professionals and have no interest in wasting your time or theirs.
"Good" VCs has less to do about professionalism and more to do about pedigree. Professionalism and "good"/"bad" VCs are not mutually exclusive things.
The grandparent said "VC's never actually say no". I did the opposite of reinforce that. Every good VC will give you a version of the following if it's a "no":
1. It's a "no". (Clear, unambiguous.)
2. Here's why. (E.g. not believing in the space, issues with customer background or another part of due diligence.)
3. We make mistakes all the time and hope you prove us wrong. (I've pitched the partner at Sequoia who invested in FTX. His name's Alfred, super nice guy and fully aware that screwing up is part of his job. "No" isn't a value judgment.)
4. Happy to talk again for the next round. (If they're a multistage fund, e.g. you won't hear this from First Round.)
It's all very predictable. The one real "why" you won't typically hear back on is strength of the founding team. They won't tell you when they think you're the problem. But product, space, GTM, basically anything else they're happy to dissect.
This is true for all of the firms that people have heard of. Of course there's a long tail of bad VCs, too, generally podunk firms few people ever encounter anyway. Avoid TechOperators out of Atlanta, for example.
People get pissed at entities that act irrationally, but the really good entities rarely act irrationally, and have a feedback loop to attempt to act as rational as possible.
But the people who are in the bottom 80% tend to match with others in the bottom 80% as well. And so this kind of story resonates well, to the tune of 200+ upvotes.
Not criticizing anyone, but it's a trap that people fall into, both founders and VCs, employees and employers. Where the perception of these entities is biased by inexperience.
Redpoint will also give you a straight no and share a lot of their rationale.
You can't be mad at the no because you learn so much from their response that you feel thankful.