A common phrase in the venture business is that you have to “kiss a lot of frogs to find a prince”, meaning that you have to look at a lot of companies to find the real gems.
I think folks outside of the venture industry think that it’s very obvious when a great company comes along for investment. But the truth is, it is not.
It is generally pretty easy to filter through 90% of investment opportunities and figure out quickly that it is not a fit. But the remaining 10% is very difficult to evaluate. There is usually a lot to like about these companies, but even the best are not sure things.
If you see a company at the early stage, you wonder about the viability of the product, whether end users will like it, how well it will monetize, etc.
If you see a company a little further along, you wonder about the scalability of the team, the threat of larger and smaller competitors, the durability of the early economics, and so forth.
Very early companies have tons of uncertainty. But even companies that are showing great traction are not that easy to invest in. Usually, the market is sufficiently efficient such that competition drives the valuations of investments to the point of uncertainty and discomfort. I remember when I was at Spark looking at the series B for Twitter. In retrospect, it was a brilliant move for the firm to invest, but at the time, there was a lot of head scratching – wondering if it made sense to pay what seemed like an insane price for a very speculative service that had major stability issues.
On the opposite side, the reasons why investors pass on the 10% of deals that seem like a potential fit is quite varied and somewhat random. It may simply be that the investor is preoccupied with other things at the moment (a struggling portfolio company, another deal that is closing, a major transaction, personal things at home, etc). It could also simply mean that for whatever reason, an investor just doesn’t have much intuition about a space to have great conviction to make an investment, or spend the time necessary to develop that conviction.
It also doesn’t mean that a company that has an easier time fundraising is necessarily worse than one that struggled. If both were in that top 10% of opportunities, whether they could get over the finish line may have just as much to do with luck and timing as anything else. I’ve seen some companies that I thought were not that strong raise seed or series A rounds very quickly, while others slug it out for a long time before having the round come together. If that sounds fickle, it’s because to some degree, it is. It’s just not as objective as folks on the outside would think.
A couple practical points for entrepreneurs:
1. Try to figure out quickly if you are in that top 10%. Not all “no’s” are created equal. If an investor has you meet other members of their team, clearly does some diligence in between meetings, and ultimately passes, it at least means that you cleared the “I think there is something there” bar. It doesn’t take too many meetings to figure out if you are consistently clearing that bar, and if so, I’d say don’t be discouraged by “no’s”. Take the feedback, adjust, but keep pushing forward.
But if you are not getting that kind of traction, that’s probably a signal. Although investors differ quite a bit at how they evaluate the top 10% of opportunities, I’ve found they are pretty consistent about figuring out if a company is in the top 10%.
2. You are kissing frogs too. I’ve never really liked the “kissing frogs” metaphor (does that mean that entrepreneurs are frogs and VC’s are princesses?). Entrepreneurs are evaluating investors too – you want ones who see the world the way you do, or can engage with you in a productive way about the challenges you face. I think that if you can find yourself in the position where you are in the top 10%, you should have confidence that you will get the funding you need. So the exercise is more finding the right investor at the right time, vs. just getting people to say “yes”.