The Real Reason Founders Get Rejected

The other day, I had a difficult conversation with a founder who clearly felt like VCs were the problem in her fundraising process.

The fundraising process sucks for about a million reasons — not the least of which is that investors often lack clarity and transparency in their communication. Still, there is somewhat of a method to their madness. Because feedback is usually given quickly and somewhat dismissively due to the sheer size of the average VC's funnel, founders walk away from the process feeling like VCs didn't quite understand what they were doing, or they don't understand the market.

This is some of the worst thinking anyone trying to make a persuasive argument can make — that if you only fully understood me, you would agree with me.

Founders need to shift their thinking to an assumption of understanding — that investors who see thousands of pitches per year probably do understand what a founder is doing the vast majority of the time, and have simply decided that the risk/reward for investing in their company simply isn't as good of a deal as others they're currently looking at.

That's a hard pill to swallow — that perhaps you're objectively not measuring up compared to other companies. This can be the case at the very same time you're experiencing bias, microaggressions, and discrimination. Both things can be true.

A Framework to Score Your Fundability

What I'd rather do is provide a useful framework to understand the objective ways VCs are scoring the opportunity — even if it doesn't represent a complete picture. Below, I've listed a bunch of attributes a startup might have and how they push the decision-making needle one way or the other.

You'll notice that many of the attributes have asymmetrical effects on the outcome. For example, being familiar with fundraising lingo and the finer points of SAFEs vs equity doesn't really buy you many points with an investor — but coming off like a startup n00b really tanks your chances. On the other hand, if you sold your last company for hundreds of millions of dollars, that earns a ton of points in the win column, but not having that isn't so bad — because most founders haven't done that yet.

What Actually Moves the Needle

Revenue from hard-to-get sources wins big. Having some revenue or no revenue isn't a big sway either way — but having notoriously difficult-to-get revenue, such as a school district, government agency, or hospital, will score you a lot of points. Having a prototype doesn't win you much in the fundraising process, but not having anything to show is clearly going to count against you.

Some sectors are only downside. If you're in travel, fashion, or DTC — good luck. The prior failures in those areas are going to require a lot of all the other positive attributes for an investor to overcome the perception that the whole sector is to be avoided.

A technical co-founder is table stakes. If you have a technical co-founder or at least someone who can build on the founding team — that's more table stakes. Not having that person will likely cost you a lot of points when VCs get concerned about how someone with low amounts of equity in the company will be able to run the build of a very hard thing to build on startup resources.

Your exit matters — but only if you announced the number. You sold your last company? Cool. Did you announce the number? No? Well, then that's the kind of outcome that isn't going to move the needle. Tell me how you exited your last company for $300mm and now we're talking.

Being known to the investor is perhaps the most unfair advantage of all. Regardless of the outcome of their last go around, known people are de-risked. An investor is going to perceive that there's little chance this founder just goes off the rails entirely because they have no idea what they're doing. What's also known is their startup network — the idea that whatever this founder needs to learn, they'll be able to learn it quickly from people who have been there before. They'll be one step away from everyone they need to connect with — and that's a huge advantage that some random person off the street isn't going to have, fairly or not.

Sector vs. Thesis: The Hardest Part to Get Right

One of the hardest aspects of this to get right is sector vs. thesis. If an investor is known to invest in mobility startups, they review a ton of different business models. Being out of their sector area is going to hurt you, but being in it won't get you a lot either — because they're not going to invest in most of those ideas.

What you may not know unless they've specifically written about it, is that a given investor might believe we've reached "peak car" and that the use of city streets is going to radically transform in the next 10 years, having all sorts of effects on how we move people and things around urban environments. If you fit into that specific thesis within micromobility, that will give you a lot of points in your column — whereas being an autonomous vehicle play wouldn't do that just because it's in mobility.

There's more behind each one of these areas and this list isn't comprehensive. The goal isn't to find a magic formula — it's to shift from "they didn't understand me" to "here's how I can give myself a better shot."