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Why VCs say NO 99% of the time

And why we do too

Financial trends and news by Don Dodge
August 6, 2008 | Comments (3)
Short URL: http://vator.tv/n/36e

 (Note: Republished to highlight due to popularity)

Venture Capital investing is a very tough game...and very lucrative if you are good at it. Part of my job at Microsoft is working with VCs, so I have learned a lot about the way they think...and why they say No to 99% of the deals they see.

Fred Wilson has another great post today on Venture Fund Economics which I covered in my previous post. After posting that I remembered a blog post by Jeff Bussgang, of Flybridge Capital Partners. In it Jeff explains why VCs want to see every new startup...but say no 99% of the time.

"As one wise old VC once told me, "the trick in this business is to spend very little time on a lot of deals, and then a lot of time on very few deals."  In other words, see everything to be a better investor, but exert a very tough first filter so that you only spend time on very, very few deals.  In my experience, a typical VC has the bandwidth to actively "spend time" or actively work on only one to two deals at any given time and perhaps 10-20 in a year -- as compared to those 300-500 they get exposed to."

What are the odds? - VCs are exposed to about 500 opportunities a year. They spend time seriously looking at about 20 companies a year, and invest in two or three. So, they say no about 99% of the time.

We all say no 99% of the time - I would guess that every one of you reading this blog have a stock portfolio with 5 to 10 individual stocks or mutual funds. There are more than 5,000 publicly listed companies to choose from, and another 5,000 mutual funds. But, out of 10,000 possible companies you chose 10 to invest in. Why? Why did you reject the other 9,990 companies? Obviously there are more than 10 good companies to invest in. Other investors chose to invest their money in the other 9,990 companies...why not you?

We invest in people we know and companies we understand - We do this in our own personal investing, and VCs, with rare exceptions, do the same when they make decisions. We all say no 99% of the time, and we reject perfectly good companies, but we invest in things we feel comfortable with.

Find the right VC match - Don't be too quick to change your strategy or company pitch just because the first batch of VCs rejects it. It is all about finding the right VC that is interested in what you are doing and comfortable in the market space. Don't waste time trying to convince a reluctant VC. Move on and spend the time finding the right VC for you...that "gets it" the first time. There are at least 1,000 VCs in the USA. They all have different investment tastes...just like all of us do. Go for it!

(Note: This post was re-published to be featured on our front page of the newsroom.) 

Comments

David Saad
David Saad, on August 4, 2008

Your analogy to personal investing is an excellent one. I think that the majority of entrepreneurs, at least the experienced ones who have raised or at least attempted to raise funding before, understand the reasons why VCs reject deals most of the time. Those reasons are legitimate, reasonable, and justifiable. However, what is not acceptable, is the way the majority of VCs reject entrepreneurs - a subject that I covered in one of my postings entiled "The Art of Rejection", which you can find here: http://www.vator.tv/news/show/2008-07-19-the-art-of-rejection.


Don Dodge
Don Dodge, on August 6, 2008

Entrepreneurs need to have thick skin and not let rejection bother them. Rejection by VCs hurts sometimes. But, we should put it in context. That is why I used our own stock / mutual fund selection process as an example. We rejst lots of good opportunities too.


Comment_gbg
Jay Peek, on August 14, 2008

implementation (social utilization) of your ideas may stray from the VCs mind and they won't see the revolution your idea will have in your mind very soon. unfortunately neither do you at this point.
having a partner as close as a love interest to go over this point is quite helpful (around 'implementation'). it also can hurt. family is too often busy judging you. find a face2face person who you can befriend in a short time. such as your local SCORE chapter. this is America. business-minded people are everywhere. however so are the 'opportunists'.


Comment_gbg
Bambi Francisco Roizen, on August 14, 2008

I agree with David that the personal investing analogy is a good one. It's a bandwidth issue for VCs/investors. I started Vator because, much like VCs, for every 100 startup pitches I received, I only had the bandwidth to really write about a handful of companies. Now with Vator, I still don't have the bandwidth - but at least others can find gems that I've overlooked. For entrepreneurs who get rejected, they should, as Don wrote, not be "too quick to change" their strategy. They'll find the right match sooner or later. It's a numbers game.


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