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I discovered Josh Breinlinger’s blog this morning via a tweet from @stefanobernardi. I added it to the Ask the VC blogroll, read carefully through his post VCs are liars. And so am I, and declared it the VC post of the day.
And – Josh is right – it’s super hard to say “you suck” or “your team sucks” as a reason for passing. Most VCs aren’t willing to do this as they either don’t want to deal with it, don’t have the emotional constitution for it (it’s hard to say no constantly throughout the day, every day), or don’t recognize that’s the actual reason they are passing.
At Foundry Group, our most common reason for passing is that what you are working on doesn’t fit within our themes. We try to pass on these companies in less than 60 seconds. If you assume that you are one of the 1,000 or so companies a year we see that fit within our themes, we quickly narrow it down to about 100 companies that we spend real time on based on one of three reasons.
- We don’t like the team
- We aren’t excited about the business
- You are too late stage for us
We usually figure this out in the first meeting. You’ll rarely get past interacting with one of the four of us if one of these three is the case. I’ll come back to this, especially point #1, in a minute.
If you end up in one of the remaining 100 companies a year we look at, recognize that we’d probably like to invest in your company. So by this point we like the team – that’s the not the reason we end up passing. Nor is it the business. Our challenge is that we can only invest in a dozen companies a year. We’ve purposefully constrained the number of companies we invest in a year to 12 +/- 2 (our fund is $225m, we have four partners, and have no interest in ever growing bigger.)
100 companies a year we love? 10 – 14 potential investments a year. How do we choose? At this point it’s completely qualitative. We just spend time going deep, individually and together, on every company in this set. We dig into the people and the product. It’s usually pretty obvious when all four of us are off the charts excited about investing. If we aren’t, then we don’t.
The toughest cases are the ones where we are excited, but something qualitative is holding us back. This is always either people or product. But it’s not because we think the people (or the product) suck – we are way past that point. Rather it’s something that just doesn’t catapult it into our “we are out of our mind with enthusiasm about investing.”
So – in our case, the equivalent of “the people suck” happens early – as we narrow from 1,000 to 100. In those 900 that we pass early in the process on, often people issues are the drivers. It’s not necessarily that the people suck, but it’s often the team doesn’t inspire us, we don’t click with them, we think there are weaknesses somewhere that are significant, or we just don’t get the right vibe. We are often wrong on this, but if asked will be blunt about it. It’s hard, so it’s more “reactive” when someone asks rather than “hey – we’ve decided to pass because you suck”, but we try to never hide behind something else when someone asks for feedback.
Having now done this for 18 years (eek) and said no to people about investing somewhere between 10,000 and 100,000 times, it’s really hard to tell someone the reason is them. But, when asked, I try. And I’ll keep trying.