What to do with investor that rejected you?

What to do with investor that rejected you?

How to understand why an investor rejected you , and be able to refer back him agayn

When I was fundraising, there were a ton of investors who rejected me. Worse yet, there were many more investors who gave me no-response / went MIA / or was non-committal. So what do you do with all of these people? Is it worth re-approaching these people later?

The short answer is yes. A “no” or non-response today isn’t forever.

But the natural response that most entrepreneurs have is, “Oh, this investor doesn’t like me,” and he/she just shrinks away from talking w/ that investor ever again. At least, that’s how I felt, so now there are a whole flock of VCs I’m connected to on LinkedIn whom I’ve only met once and have never spoken with again. This is definitely the WRONG way to approach things.

When an investor rejects you – and most investors will – you should figure out why you’re being rejected. There are a few basic categories for why you’re being rejected.

1) The investor doesn’t / no longer invests in your vertical / space.

If an investor doesn’t invest in your space, it won’t be helpful to re-approach him/her later about investing in your business.

For example, say you approach a pharma investor about your new mobile app. This obviously isn’t going to be a good fit, because he/she knows nothing about your business.

Similarly, within software, there are lots of nuances between say mobile apps and B2B software. Or even within B2B, say adtech and HR SaaS.

Now, the confusing / annoying part of this, is that very often you’ll see a company in an investor’s portfolio that is in your space, but then he/she will say that he/she doesn’t invest in your area. For example, at 500 Startups, we don’t invest in game studios (because we know nothing about building hit games), but we have at least one game studio in our portfolio. This type of situation happens when

  1. A) A portfolio company starts out doing something and then pivots into something completely different. E.g. Glitch was a game that pivoted into a B2B communication software platform called Slack. The products could not be more night and day, but they are the same company.
  2. B) The investor knows a founding team really well, and the founding team has a great past track record. That’s a great reason to invest in itself regardless of what the team is building.
  3. C) The investor invested a TON in particular space but now feels over-indexed in that space and wants to diversify its portfolio and has now paused investments in that space. Worse yet, maybe those investments haven’t gone well, and the investor has decided he/she does not know how to pick companies in that space OR is bearish on the space. 3D printing and bitcoin companies are examples of two such spaces where a lot of investors have pulled back dramatically (but may later want to invest in as they see how the market unfolds).

2) The investor thinks you’re too early.

This is the number one reason an investor will pass on your business. I used to think that you can waltz into an investor meeting with just an idea, and you’ll get funded.

The reality is that unless you have a track record OR unless you are pitching friends/family, no one will fund you at the idea stage. They just simply don’t know you.

Traction = a way to prove your abilities – that you know how to execute.

If an investor is passing for this reason, then you should definitely keep him/her abreast of your progress. This allows him/her to get to know you as a person and your abilities.

3) The investor doesn’t think you’re impressive.

It’s going to be near impossible to figure out if an investor thinks you’re not impressive.

It’s much easier to figure out if the investor is impressed with you. For example, if you get a rejection email that goes something like this, “We thought your team was impressive, but…” then you know team this is not the problem.

In most cases, you can still change a person’s mind about you / your team later on.

Traction = impressive. I was once at an Ex-Googler meeting, which consisted of ex-Google entrepreneurs and ex-Googler investors. And one entrepreneur-CEO got up and did a presentation, and he basically pointed to the crowd. “All of you passed on me, because I wasn’t an engineer. Look at where we are now.” Then he wowed the crowd with a slide of their impressive growth. That company is now one of the hottest consumer companies today (and you can probably guess which one that is.)

4) The investor thinks your market is small or crowded.

Usually, investors are pretty upfront about what they think about your market. The weird thing is that although seemingly unrelated, you can also change someone’s mind about your market through your traction.

Traction = you can rise above the crowd. It also suggests that you may be able to capture more of the market than an investor would ordinarily think you can.

So if an investor rejects you for this reason, you have the chance to change his/her mind about the market.

Interestingly enough, you don’t have to necessarily wait that long to change someone’s mind. One of our portfolio companies at 500 Startups last year approached an angel investor who passed for this reason. About a month later, the entrepreneur-CEO re-approached him, showed him their new numbers at continued strong growth along with a list of other investors who had come onboard. That angel investor joined the round.

Bucketing rejections

Those are the basic reasons for why you’re being rejected. I.e. the problem is with you/your team, your progress, your market, and/or investment-fit. However, the biggest challenge for entrepreneurs is just trying to figure out which bucket an investor-rejection falls into, because often you’ll get no response OR an investor will be very vague about why he/she is rejecting you.

So, you should try to ask for feedback. Something like, “Thanks for your response - can you give me some quick feedback on why you’re passing? It would be super helpful for me.” is a good way to ask.

I realize this isn’t easy. No one likes to be rejected and then further discuss why he/she is being rejected. (As an aside, you should check out my side project Hustleathon, which helps with this.) But, you absolutely need to do this in order to figure out when you should next get back in touch w/ that investor. You may have heard the expression, “Investors invest in lines not dots.” It is actually much easier to get an investment from someone who has tracked you over time (which may include several rejections along the way) than from someone new who has just met you. So, you will need those rejections in order to get to a “Yes”.

As difficult as it is, embrace the rejection and get comfortable with talking about it.

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