So you get a 'no' from a VC. Now what?

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We’re lifting the hood on Folklore’s investment process to give founders, particularly early founders, insight into how to approach VC engagement from your first conversation through to what to expect from your VC after receiving your first cheque, or even rejection. In part one of this series, Folklore’s Britt Boxall shared how to approach your first interaction with a VC, drawing upon the insights gleaned from her experience reviewing countless pitch decks and screening calls. In part two, Folklore’s Sachin Samarawickrama offers tactical guidance to founders looking to keep investors warm after an initial ‘no’. 

When an athlete wins a championship, do we think about how many losses they had when they started? Better question, do we care? 

Losing is inevitable, but how you bounce back is what people remember. 

I’m well aware that I sound like a bootleg Rocky Balboa, but losses don’t just exist within the confines of a sporting arena: Melanie Perkins pitched over 100 times before receiving investment. The experience of hearing ‘no’ 100 times can’t be easy, but what's even harder is persevering through this to build a business whose name I don’t even need to mention for you to know which company I’m talking about. 

As an investor, saying ‘no’ is one of the worst parts of the job. Day in and day out, you meet incredible founders building awesome companies across sectors at all stages, and sometimes their startups just aren’t the right fit for your firm’s mandate or expertise. 

For founders who dedicate heaps of time building a business and putting together a pitch, it’s no doubt one of the most frustrating experiences, and it’d be understandable why a founder’s initial instinct might be to get defensive or discouraged. 

Rejections are, unfortunately, part of the capital-raising process (and one of the biggest parts of a VC’s job). As much as they suck, they can also be a gift in that they force you to go back to the drawing board and dive deeper into why that investor didn’t recognise the opportunity that you believe is there. After all, why else would athletes watch playback footage after a loss?

Understanding the rationale behind a VC firm’s investment decisions (Britt recently shed some light on what we look for, in case you missed it) as well as what to take away from investor feedback can help you effectively navigate the rejection process and see you land investment down the road. 

Understanding the ‘no’

‘No’ doesn’t exist in a vacuum, it’s important to peel back the layers and understand what’s really driving this reasoning –– in most instances, a ‘no’ isn’t personal and shouldn’t be received as such. Easier said than done, but keep in mind that VCs look at thousands of companies every year and will ultimately only say ‘yes’ a handful of times.

At Folklore, for instance, we are deliberately concentrated in our approach – we see an investment as a 10-year journey with our founders (which might start with just a pitch deck and idea). That’s a long time to work together, so we want to make sure we have high conviction in every investment we make. And when we don’t feel we’re the right fit for one another, we try to leave you with more than a ‘no’; we want to provide constructive feedback you can implement. 

There are various reasons why a potential investor might say ‘no’, and I’d break them down broadly into two categories. The first relates to the fund’s strategy, which may not align with the startup seeking capital. This could be because the startup sits outside the fund's mandate, the fund has reached its investment limit, you’re not in a target sector or perhaps there is now too much exposure to your sector. Whilst these lie largely outside of everyone’s control, founders shouldn’t fully write these investors off, these firms are continuously seeking to raise new funds (potentially with different investment criteria). Use the discussion to open up the door to future conversations. 

The second reason relates to the profile of the startup itself. Maybe the VC has voiced their concerns about competing in a saturated market or your product lacking defensibility. You can flip that feedback around to figure out what the investor is really looking for:

• “Company is in a saturated market”
  Do you know your competitors inside and out? Did you articulate the real opportunity? 

• “Your product isn’t differentiated”
  Did you effectively communicate what makes your product different? How are you 10x better than your closest competitor?

• “The product is not defensible”
  What is special about your team and your insight that will make your product resilient and one-of-a-kind for a customer? 

• “You’re not able to lock in your customers”
  Does your product actually deliver functionality and usability that a customer can’t do without?

• “Unclear value proposition”
  Do you have insights on the pain points of your target customer and whether your product is a need-to-have vs. nice-to-have?

Ultimately, this works both ways. You have to be clear about what you’re doing and what your product aims to achieve, but investors also need to ask the right questions when they meet you so that they can make an informed decision. If they’re not – and you feel like they’re not grasping your business – you’re probably not the right fit for each other. 

A blessing in disguise 

While receiving a ‘no’ can be discouraging, finding the right partner is crucial for a long-term, successful partnership that could last over a decade. In most cases, a ‘no’ will be the best outcome because you’ll avoid a mismatch.

As a founder, make a call on which investors are worth investing your time and energy into. Think about your experience with that investor to date: Has it been valuable? Have they demonstrated a real interest? Are they thoughtful in their approach? Again, investing is a two-way street and investors have just as much to gain from you as you do from them – take the time to figure out which ones you’d want on your cap table, and therefore, which ones to be proactive about. 

Keeping investors warm

There’s a fine line between keeping someone in the loop and spamming them, but I think the key thing to call out is demonstrating follow-through. A regular email update for those who opt-in could be a great way to stay top-of-mind with investors while sharing progress, discussing challenges and celebrating wins. To the extent that it’s welcomed, you might even schedule a no-agenda catch-up meeting to provide an update on where things are at. 

However you choose to communicate, it’s important to show that you took feedback on board. Before we keep going, I’d like to highlight the importance of figuring out which feedback is worth taking on board – not all of it is helpful. Each investor will be looking for something different, so making your business more attractive for one can run the risk of making it less appealing for another. With each piece of feedback, ask yourself, ‘Is this productive, does it make sense, and will it help me build my business?’ 

After pinpointing the core areas you want to focus on, now is a great opportunity to show that investor how you are both mitigating their concerns and doing what’s right for the company – not everything is solvable overnight, but demonstrating your tenacity can go a long way to building investor confidence. Sending updates every time you hit a milestone, such as product improvements or signing a pilot customer, might not result in a 180 change right away, but over time, you’re painting an incremental picture to the investor that you’re succeeding.

Has this ever worked? Absolutely. In 2020, Folklore first met Aiden Roberts and Will Pamment when they pitched their vision to build a healthcare data integration layer called Dymaxion Technologies. Dymaxion was too premature as an idea and despite having the pleasure of meeting the team, neither Folklore nor the founders were high-conviction on building the product. But Aiden and Will kept in touch and they reapproached us with a new company, SimConverse, a simulation platform to recreate healthcare education with AI – and we invested in 2022.

You never know what can come from maintaining a good relationship with an investor: objective feedback, an introduction to another VC that might be a better fit (never underestimate the power of referrals) or an investment down the line. Keep these investors warm, even if they passed on you at the start.

Dealing with a ‘no’ can be challenging, but I’m hoping you’ll be well-placed to not only understand why they happen but also how to dedicate your attention to potentially changing someone’s mind (when it makes sense to). Each ‘no’ gets you that much closer to a ‘yes’ – remember, it only takes one.

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