VCs are arrogant. VCs are cowards. They speak about how they love to help entrepreneurs build successful companies, yet, when I ask them to give me feedback on my business plan or idea, they usually don’t even bother writing me back. And if they do, they complain about lack of global potential or misunderstand my product completely. Do they really expect that the next Facebook will come knocking at their ivory towers with a polished product, proven business model and the only thing missing on the way to an IPO being their Series A investment?
Having a chance to review hundreds of investment opportunities and sharing similar experiences with other VCs, I know many entrepreneurs who feel this way. Since I can’t really blame them for it, I would like to share our take at Credo on why it is sometimes hard to get feedback from a VC and why negative or no feedback at all doesn’t have to be bad news for an entrepreneur.
Venture capitalists and their feedback
Credo Ventures receives about one business plan a day, and the Silicon Valley VCs at least 10x more, so I am pretty sure we face a similar issue: too many business plans, too little time to respond. Yes, it is true that some entrepreneurs either don’t receive a response or get a premade template. But if our website says that Credo invests in IT, internet, mobile or healthcare startups predominantly in Central Europe, I just don’t feel obliged to respond to a gold mine in Mongolia or Australian TV production studio. Therefore, the reason no.1 why we at Credo would not respond back to your investment opportunity is that you have clearly not even bothered to read our website to discover what we invest in.
But there is a second reason, and this is where VCs are to blame. We also reject a lot of projects that do fit in our initial investment criteria, and such projects deserve feedback. The feedback dilemma of the VC in such cases is the following: on the one hand I want to provide as much feedback as possible to help the entrepreneur, but on the other I don’t want to include too much detail to encourage him to challenge my feedback on issues that will not change my mind about the investment, as this leads to a pointless email exchange which fails to persuade either side about the merits of the other and wastes each other precious time. Therefore when giving feedback in such cases, a VC has to get the amount of provided information just right to help the entrepreneur yet avoid a conflicting email conversation. Sometimes it takes me up to an hour to feel I have at least somewhat succeeded. And let’s not forget the fact that a VC receives at least one investment opportunity a day that he should respond to. Calendar day.
So yes, the second reason for not giving feedback is that VCs sometimes try to avoid writing tough and unpleasant emails, even though they know they should. What can you as an entrepreneur do in such cases?
- Without stating the obvious, send a friendly reminder. In particular, try asking if they need more information about the project – I have yet to see a company that provided us with all the information we would like to see
- Find an indirect route to the VC: I can assure you that we pay a lot of attention to an investment opportunity that one of our investors brings us and is excited about. Some large VCs in Silicon Valley or even superangels like Ron Conway only look at investment opportunities that were introduced by their network: colleagues from other funds, angel investors, industry experts, advisors etc.
- Get another validator: if someone else reputable is willing to commit money, then the VC will think twice if he hasn’t missed anything. Co-investments are an industry standard, and entrepreneurs should strive to get as much know-how on board as possible
Why a ‘no’ can be a good thing
Not all entrepreneurs are aware of the responsibilities associated with receiving venture capital. Sometimes I get the feeling that certain entrepreneurs are raising money without really knowing what they could use the money for just because they think it is prestigious in the eyes of fellow entrepreneurs. Successful closing of a fundraising round is celebrated by these entrepreneurs as if it was the ultimate reason why they built their startup in the first place, not realizing or ignoring the fact that they are just at the very beginning of the journey to build a great company.
In one sense, securing venture capital puts an entrepreneur’s company on a collision course: he is either going to experience tremendous success or a spectacular death, but both will happen much faster than they would if the company remained self-funded. For every success like our recent exit of Cognitive Security to Cisco Systems (you can find a CoSe case study presented at the PE Deal Forum in Warsaw here), we also have a failure such as the case of Beepl – both happened less than two years after our investment.
The truth is that venture capital is not for every entrepreneur. Before applying for an institutional investment, all cofounders need to decide whether they want to hop on the wild rollercoaster of a VC-backed company, or if their goal is to own a bootstrapped lifestyle startup, which can still experience exciting growth and avid all the hassle of outside investors. Just look at the GitHub story prior to the investment from Andreessen Horowitz. I am pretty sure there are quite a few other entrepreneurs (check out the rest of the Bootstrapped, Profitable, & Proud series) out there who were considering VC funding, and at the end are very happy that they didn’t receive it.
But for those who would like to know what it is like to experience tremendous success as a VC-backed company, I recommend speaking to people like Martin Rehak, the CEO of Cognitive Security.
More on getting inspired by global leaders from Central Europe in the next post…