I am reflecting today on something I have to do a lot as a venture capitalist: Say ‘no’ to investment opportunities.
At GC, just in the clean energy group alone we see >100 investment opportunities a month. You do your math, and it comes down to me looking through several ideas a day. It is great to see the best deals out there and to learn, but we try to be respectful to the entrepreneurs and if it is not an investment opportunity for us, we politely (and in as timely fashion as we can), say no.
Needless to say, since we only provide funding to a handful each year, we have the job of saying ‘no’ to a lot of companies. Often this job falls to me. This is probably among the toughest parts of my job. Sometimes it feels like I crush people’s dreams. Not a good feeling at all, and no matter how hard I try to deliver my message with constructive feedback and compassion etc, I am admittedly still an amateur at it.
Having been an entrepreneur in the not so distant past myself, I feel like I must make an extra effort to empathize with the entrepreneurs who try to deliver their months, some times years worth of work to a VC in a 45-60 min conversation (if you get to it, that is), and then hear a no. VCs take some time to provide constructive feedback (and nurture relationships with entrepreneurs), but lets face it…the reality is that once they have decided on declining an opportunity, they have to quickly move on to the next big idea. It would really help if entrepreneurs recognized their probability of finding a match when they walked through a VCs door. Obviously there are many things involved in approximating such a probability aside from the deal flow at any VC (such as past successes of the entrepreneurs, prior relationship with firm, VC interest in sector, etc). We try to give early indications as well, but entrepreneurs’ expectations are obviously to convince us this is the best idea since slice bread.
Regardless, a decision of ‘no, thank you’ has to be delivered and I keep searching for good, positive ways of doing this part of my job.
I list below some of the reasons why I have had to say no in the past:
- The team is just not that good –> this is a tough one to deliver since it gets personal. Obviously you are making snap judgments on people who often know much more about their business than you do…but making gut calls is a part of my job, and if I am not impressed with the team and the lead founders, I just don’t see a way for us to move forward.
- The idea is just not big enough –> we are looking for transformative, breakthrough ideas and while the technological innovation may be exhilarating, if it does not have a big enough impact on society and markets, we just don’t see us getting excited about it. Incremental improvements don’t capture the imagination and generally don’t create significant value.
- Markets are not large enough –> We are trying to invest in technology companies that are attacking large markets to make a huge difference, and to bcome very large companies. Sometimes we feel entrepreneurs, esp technologists, get excited about extremely niche markets and don’t try to look beyond that box.
- Technology carries too much risk –> this is also a tough one for VCs, esp those of us who like to say we invest in early stage ideas. When and how a technology is de-risked enough to get seed or series-A funding from a VC is still a mystery to many entrepreneurs, and frankly to many VCs as well. There really isn’t a science to this…except that if there is a lot of scientific risk remaining, VCs will follow progress but not invest…esp if there is a long lead time to market.
- Too capital intensive –> In some ways much of cleantech is capital intensive, but I guess when VCs are expected to bear the burden of building out large plants even before technology is validated, the capital intensity question rears its ugly head pretty fast. We have invested in and do invest in companies that develop large scale projects requiring millions of dollars….but there are alternate ways of financing such projects for the infrastructure components. VCs typically don’t foot those bills.
- Business model is broken –> this is where I find myself spending more time with the entrepreneurs, seeing if the innovation, applied differently or in different markets, would create bigger better outcomes. It is great fun if the entrepreneur team is first class, and can sometimes result in stimulating problem solving sessions.Having said that, VCs can guide but can’t create business models/plans for entrepreneurs. Sometimes, we just don’t see eye to eye on go to market strategy and frankly prefer to agree to disagree.
- Position in the value chain –> this becomes moe important in certain industries than others. For example, is the innovation going to disrupt the existing value chain, or work within it. For example, automotive industry has an established Tier1, Tier2 …. supplier system. It is sometimes hard to see a small component level technology developer becoming a Tier 1 supplier in short period of time. In that case, finding channel partners while preserving margins is key. We have also had to say no sometimes because we just do not believe the value lies in the part of the value chain where a particular startup is playing.
- IP issues –> In cleantech industry IP is extremely important and valuable – a bit like the biotech industry. Creating, maintaining and managing a strong IP portfolio is an expensive exercise and we often see companies that either have not paid enough attention to it in the past and gave valuable IP away, or have not spent enough time understanding the value of IP in the valuechain.
- Exit Scenarios –> While sometimes VCs do invest in companies that don’t really know how to make money or find an exit, I don’t see that very often in the cleantech world. We do simple math to understand the comparables and see what a company could be worth a few years out if they hit their milestones. Companies with low EBITDA margins, in commodity industries, and with few potential buyers tend to not get high multiples on exit. And if MOI (multiples on investment) are not great, VCs shy away. I am still surprised by how many companies think they will get very high multiples even when there are no such comparables available. I guess entrepreneurs have to by nature be optimists.
All in all, we try to be honest and up front, while at the same time being polite and respectful. We try to provide constructive feedback where we can and in some cases we have developed closer relationships with entrepreneurs that we have said no to at least once. I am sure we have passed on some great opportunities, but I guess if we don’t then our bar is probably not set high enough. And yes, the bar is very high for investment…esp these days.
While I have had to say no to a lot of investment opportunities, I must say I am absolutely in awe of the entrepreneurs that I have met along the way. I am blown away by their commitment and excitement about the revolution that they know they are a part of. In many cases, they know they will make a difference, and are only searching for a way & a partner to get to where they know they will eventually get to. I am humbled by their knowledge, enthusiasm, creativity, and hard work. My hats off to them…esp to all those who have continued to keep at it despite the economic downturn of the past year. I wish I was a part of their journey, but (a) it is my loss, and (b) maybe there will be opportunities to work together in the future. I really mean it when I sometimes tell entrepreneurs “this is not a good fit right now but we would love to follow your progress and perhaps it will become a better fit later”.
just saw another post on similar topic by Jeff Bussgang.