I always tell entrepreneurs the first rule of raising capital is people invest in people in markets they like and understand. We receive hundreds to thousands of funding request per year. Some of those are bound to be off-center for our markets of choice. For instance, we don’t get involved in food and beverage ventures. When they arrive, we generally politely reject them because we simply don’t have the market expertise in either our core team or our investor base to intelligently invest in these companies. There is nothing wrong with these market segments. Lots of folks make lots of money in them, but we know what we do best and stick to it.
When I jumped sides of the table from being an entrepreneur to deal flow management, I made a promise that I would actually tell companies why we turn them down. Other investors told me I was crazy! But, I have lived by that commitment. When I reject a company, I provide them concrete, actionable reasons we are not investing, even if the reason is there are more exciting and promising companies in the market at the time. Normally, this type of feedback receives a polite or even thankful response, which is appropriate. Commonly, a company will raise several rounds of capital and there is no point in alienating a potential funding source for your next round. And, don’t kid yourself. Word gets around fast if you do.
Occasionally, we get gushing thanks for telling the entrepreneur honest, meaningful, actionable reasons for declining. Those are greatly appreciated and point toward an entrepreneur with a healthy attitude, perspective, and capacity for growth. Despite some industry impressions, we sincerely want to help.
Sometimes, we get defensive responses and will move quickly to terminate the conversation. There is no value in responding to a defensive entrepreneur. Neither is going to change positions, and from our perspective, there are always more opportunities…ones that will take our advice and we can help! There are always more great ventures in the market looking for capital than capital looking for great deals. It is a target-rich environment. So, we move on. Please don’t misunderstand my point. We love and value entrepreneurs. Without them, we would not have a business! But, we only have time and resources to focus on the ones we can help in the markets we like and understand.
As an aside, the litmus test for investor interest once you have made your pitch is:
- Good, meaningful, insightful questions means the investor is engaged with you and likes and understands your market.
- Polite questions about the business means that there is some interest, but it is on the edge of being rejected or is off-center for the investor.
- No response (assuming you know it was received) or brusk brush-off with a canned answer means there is something wrong with your venture, market segment, or pitch and it is not worth the investor’s time to respond.
But, there is a fourth response we receive from entrepreneurs: “Can you refer me to other investors?” This can be most challenging of all requests. First, if we passed on the venture, it is difficult to recommend it to peer. There is not much credibility in saying we did not like this one, but you might. That is the equivalent of saying, “I think this milk has gone bad, taste it.” But, in the instance where we passed simply because we don’t specialize in the market, there is an opportunity to refer. The problem is we have not invested the time to gain the knowledge or connections to invest in the market segment. Said more precisely, we don’t have interest in doing so. This all means that we don’t often have a list of investors that would be interested. In the rare case that we do, we are generally happy to refer you if we like you and you have demonstrated the right human skills.
This is all to say, even though it is a small community, we still tend to spend our time with those groups and investors who share our market affinity(ies). This is analogous to being a sports fan. I generally seek out and spend time with those who like my team(s). And, I generally do not with those who don’t. So, don’t be upset or insulted if we say we can’t refer you. It is not personal, either the action would be hollow or we don’t know the right folks to assist you with your quest for resources.
Copyright Eric L. Dobson, 2016