Vaporizing VC Interest

November 12, 2013

Nearly every week, I receive an email from one of our portfolio founders that reads something like: “Hey, Eric, great news! We just got out of a meeting with Dave from AwesomeVC and he loves what we’re doing. I have a good feeling he’s going to lead our Series A round.”

Not long after, a few more superenthusiastic emails follow about the high probability that other VCs are also very interested and how the founder expects to wrap up the round quickly and painlessly.

Then the balloon deflates. One by one, the VCs pass on the round, and the founder has to break the news to the co-founders, employees, and existing investors. He’s completely dejected, his team is now concerned about running out of money, and his initial investors fear they may have funded a dud. How could he have been so wrong about the interest level of the VCs? They seemed genuinely excited; what went wrong?


The problem is that venture capitalists often give off signals that are inconsistent with the real probabilities of their actually making an investment. Venture capitalists are not just buyers of companies; they’re also sellers of capital–meaning that because the best deals are competitive, investors use enthusiasm to increase their chances of winning (should they ultimately decide to invest). That’s not to say their enthusiasm isn’t genuine; it just doesn’t necessarily reflect their likelihood of investing.

Every VC is different, but here’s a breakdown of a few steps in the investment process to illustrate how a founder’s expectation of closing a deal differs from that of a VC’s. This is far from a scientific analysis, just a general sense of the numbers from my experience.

The VC Invites You to Pitch
Likelihood You’ll Get Funded:
In your mind-10% In reality-<1%
Most VCs take a few hundred meetings a year and fund one to three investments a year. Founders typically get in the door with a strong personal introduction from a mutual contact, which can lead to the assumption of real interest from the VC. Don’t get excited about getting a meeting; VCs are paid to listen to you pitch.

The VC Invites You to a Second Meeting
Likelihood You’ll Get Funded:
In your mind-50% In reality-10%
Being invited back happens right away, and
it can make you feel that momentum is building. Unfortunately, I’d estimate that the
typical VC quickly invites back 20 to 40 companies a year after a great first meeting.

The VC Invites You to a Partner Meeting
Likelihood You’ll Get Funded:
In your mind-90% In reality-50%
After multiple meetings and due diligence, a VC will often invite you to pitch the partnership. Although some firms really do rubber stamp investments at partner meetings, I’d estimate that about half of these investment discussions vaporize at this point. Frequently, the partner leading the deal loses enthusiasm after facing the crucible of his colleagues.

The VC Offers You a Term Sheet
Likelihood You’ll Get Funded:
In your mind-100% In reality-90%
This is often the most painful disconnect between founders and investors. Most founders consider a term sheet to be a 100 percent guarantee of financing. Unfortunately, my experience is that 1 in 10 term sheets self-destructs. When the term sheet comes, you shouldn’t take closing for granted.

Why does any of this matter? Raising money is like any other sales process, only the
consequences of failure are usually much more significant. Qualify your prospects accurately, make contingency plans, and don’t appear naive by overestimating the odds of a close. Once the deal is done, then you can celebrate.

A version of this post was originally published on

It’s All So Obvious

November 5, 2013

Most of the business advice you’ll receive as a start-up CEO seems obvious. In fact, it’s rare that an investor or adviser makes a suggestion that you have never considered. More often than not, the suggestion is, in fact, probably already being implemented at some level.

Your company isn’t scaling as quickly as planned, and a board member says you need to boost sales. “No kidding? Thanks for letting us know,” you sarcastically think to yourself. Even the more concrete suggestions from experienced advisers or team members often seem either painfully obvious or just a regurgitation of things the company is already doing or has tried before. From your viewpoint, it can feel demeaning, because it suggests that your job is so easy that people think they can do it by giving generic advice while sitting in the cheap seats.

At times, real life can resemble that TV commercial in which a bunch of businessmen in suits sit around a conference room making insanely obvious statements and the tag line is something like, “If business were this easy, you wouldn’t need us.”

Duh (1)

No matter how obvious these suggestions may seem, take a minute to really consider the magnitude of your efforts. When it comes to operational issues, your start-up often succeeds or fails in accordance with the degree to which your company embraces these seemingly obvious ideas or suggestions. The advice may not seem earth shattering, but very often it is the successful companies that embrace that advice and put forward a serious effort in following it.

Take, for example, an exchange between you, the founder, and an investor. The investor is concerned about the quality of your customer development and advises you to get your hands dirty spending time with customers. That’s completely obvious to you, and you respond that you’ve done so and will continue to do so.

Box checked and issue resolved, right? Not at all.

Yes, technically you are talking to customers, but are you doing enough of it? Because you are already talking to customers, it’s very easy to shrug off the advice and move on. However, that advice typically reflects the investor’s concern about the scale of your efforts. In this instance, the investor is trying to tell you that whatever amount of customer development you’re doing, you need to do much more.

When I read Delivering Happiness, by Zappos CEO Tony Hsieh, I found the book both incredibly insightful and incredibly obvious. The book explains Zappos’s formula for success–putting the customer first and offering delightful customer service. Most of what Hsieh writes about probably seems familiar to any founder. What business doesn’t want to put the customer first and offer delightful service? The difference between Zappos and most other companies is one of magnitude. Zappos manages to do so at a completely different level than almost everyone else.

As a CEO, you should never blindly follow the advice of anyone–be it a team member, a board member, or an adviser. After all, whatever the outcome, it ultimately belongs to you. But you do need to seek out the best advice to figure out the right answer. Sometimes, the right answer comes from someone in a way that initially seems painfully obvious.

A version of this blog was originally published in the November issue of Inc. Magazine