Dancing with the Sharks
How to pitch investors, learn from rejection, improve your company, and get funded.
You were invited to pitch your startup by a well-respected VC. You had their interest. Your slide deck was created with guidance from great tutorials (like this one by Darren Cooke), and polished over many repetitions. Your presentation was dynamic and you presented your material well.
The investor asked you for a follow-on pitch or even possibly offered you a term sheet. Great! Were not going to talk about those outcomes here. We’re going to talk about rejection.
The investor declines to invest and gives you a reason. Or worse, they don’t tell you why they’re passing; maybe they don’t get back to you at all.
This article will help you unpack why investors turn you down and how to learn from rejections. We’ll cover explicit and hidden cues, questions they ask, and questions you can ask them or actions you can take to do better next time. As an added benefit, addressing investor concerns will also help you de-risk and improve your company.
Learning is Imperative
Learning from each pitch you make is absolutely essential. James Currier and the team at NFX write:
Be clear on the mathematical reality. Seed VCs look at 1,000 companies per year, and they might invest in 4 or 5. For Series A investors, it might be as little as one or two investments per partner, per year.
According to those numbers, your a priori chances of getting an investment from any single pitch session are 0.1-0.4%. That’s low. Keep in mind that some investors make deals far more frequently, so qualify your investors. If you can’t get better odds, are you just wasting your time? You’re not.
There is value to pitching, even when you’re rejected. The one thing you can be certain of is the opportunity to learn from the investor. And if you can learn something at every pitch and hone it, your odds of getting funded will change dramatically in your favor.
Reasons vs. Rationalizations
You’ll use investor feedback to improve your pitch. You’ll pay attention to their cues, questions, statements, and learn to identify the real reasons they are “passing on the investment.”
There are reasons why an investor may not feel compelled to invest in your company. Note the use of the word “feel.” People’s reasons are always a combination of rational and emotional factors. Neuroscience tells us that, surprisingly, the emotional component is prevalent. That’s ironic considering that when people talk about their reasons for doing something, they always present their decisions as being primarily rational.
In Incognito: The Secret Lives of The Brain, David Eagleman describes research showing that:
When one part of the brain makes a choice, other parts can quickly invent a story to explain why.
An investor will come up with rationalizations to provide themselves a story for why they aren’t interested in your company. Just because they tell you why you failed to convince them to invest, it doesn’t necessarily follow that what they’re saying literally is completely (or even partially) true. You’ll need to look deeper to get clues, to examine their actions and behaviors, as well as what they’ve said.
Tip: Don’t Do This Alone
When you’re presenting ideas and fielding questions, your attention is mostly on yourself, monitoring your presentation, modulating your delivery, making it compelling, vibrant and coherent. It’s difficult to pay close attention to your audience’s explicit and implicit signals, their questions and expressions, at the same time you concentrate on your own performance.
It’s useful to have a colleague/co-founder at your pitch just to pay attention to the audience, to note their questions, reactions, feedback or places where the pitch isn’t compelling. This person should know your presentation well, so they can concentrate on how it is received. They can record when your audience is distracted or bored, and make note of questions and expressions of doubt.
The justifications investors frequently use to express their lack of interest can be explicit or implicit. But just because a reason is explicit, doesn’t mean it necessarily captures the investor’s real apprehensions.
The Goals of Pitching
A successful pitch needs to accomplish only 4 goals. All rejections by an investor are due to a failure to achieve them.
Finding a Qualified Investor.
This is essential prep work. A backer who isn’t able or willing to write a check at the moment, can’t invest in you.
They may not be actively investing at any given time. They may have just made a large bet elsewhere or be in an exploration-only period. They may not be knowledgeable or actively dislike the markets you are addressing.
They may specialize in earlier or later stages than your company’s (See Your valuation is too high FOR US below).
Pre-qualifying investors by studying their other investments and recent activities will help ensure you’re pitching to someone who can, if you do everything else right, actually invest. As I mentioned above, some investors invest more frequently than others, for example new funds in their first years, so pitching prolific investors raises your chances.
But even if you’re clear an investor is unlikely to put money in but they’re experienced and knowledgeable, you still learn from pitching them.
Generating Enthusiasm & Greed.
Keep in mind your most important goal: to convince the investor you will make money for them, you can execute, and that if they don’t invest now other investors will flood in to take their shares. You’re instilling greed and FOMO (Fear of Missing Out).
Here’s the MVP of a perfect pitch:
I have a machine that prints money. It’s proven, exclusive to me, I am trustworthy, and I have done this before and here are bulletproof testimonials from many others I have made insanely rich. You can buy a share in it from me now, and if you don’t the person next to you will. Thank you, goodnight.
Delivering a message like this is your primary goal. And, if they don’t get spooked, people want to believe in this kind of deal, which is why the stock market has so many investors. even though most have done little diligence and know little about their stocks.
Details beyond the basic message above are only needed because you also need to Overcome Skepticism:
The message above would be enough, except investors aren’t naive and won’t believe it without wanting to look under the hood. In particular, they need their misgivings and skepticism defused. This is why you are forced to expand on the basic pitch and detail the product, ip, the market, the team, the business model and all the other items that make up a standard pitch deck.
In going into these details, do so in a way that generates enthusiasm, not FUD. Ideally, the investor should remember your positive messages, and have a warm sense that all their misgivings have been defused.
N.B.: Investors are often secretly satisfied knowing someone competent has looked under the hood and loved what they found. Social proof/delegated trust is extremely important. If other savvy investors are champing at the bit to do your deal, the degree of additional due diligence you’ll need to undergo goes down sharply.
An investor who believes you can execute and you can make them money will still not invest if they don’t trust you or they believe working with you will be a source of stress and contention.
You need to be someone with whom they’d be excited to work. Don’t confuse this with being so pleasant that you come across as deferential and easily manipulated. Investors need to know you’re a fighter, as they depend on your fighting for their success, but that you won’t fight them unless it’s for their own good, and even then without being unfair or unpleasant.
A Bestiary of Rejection
I’ve dipped into my experience pitching my own startups hundreds of times and canvassed colleagues at various investment firms, accelerators, and angel groups to collect a list of the most frequent and telling negative feedback founders get. Below, I break them down into explicit and implicit, based on whether the actions needed to address them are directly contained in the feedback itself.
For each, I’ll provide an explanation or a more explicit paraphrase from the investor’s point of view and suggest questions or actions to learn and address the concern.
Rejection: Explicit Messaging
Explicit justifications point you directly to areas where the investor sees a substantial hole in your story. They are the most directly addressable form of rejection, because they lead directly to fixes. They indicate you are missing a needed piece of the story, are not telling a part of your story that you do have clearly or convincingly enough, or, most damningly, that your story is understood but isn’t exciting enough.
Some feedback indicates Skepticism on approach or tactics, for example:
I’m unsure how you build a market.
“I don’t believe customers exist for what you’re selling.”
You’ve failed to convince the investor of your TAM or SAM. This often is the result of using overly broad categories to define your customers. E.g. “Everyone wears 2 shoes, so the market for our zip-tie laces is 12B people.” You need to hone your target market and customer discovery.
Unclear how you build dominance.
“I don’t believe these customers will buy from you instead of from someone else.”
Indicates a crowded market or a strong incumbent. E.g. “Everyone loves ice cream, so I have 6B customers for my new dry-ice based dessert.” You need to improve your Go to Market, Competitive Differentiators, and Defensibility.
Unclear on your “go to market” strategy
“I don’t understand how you intend to find customers.”
You may be falling prey to founders’ frequent belief that “if I build it, they will come.” This is never true. You need to articulate an efficient way of reaching customers and the metrics (CAC) associated with it.
Your growth plans are unambitious.
“Even if you succeed in everything you say you will do, it won’t move the needle on my fund returns.”
Remember VC’s make all of their money from investments that return 10-30x on their investment. A more polite form of this is “how does this become a billion dollar company?” Harden your Market, Differentiators, Value Prop, Business Model, and Growth Plan.
Unclear on exit strategy.
“How do I get paid?”
VCs only make money when your company is acquired privately or publicly (IPO,SPAC). It’s your job to show the VCs example scenarios for who might buy you, when, why, and for how much. Work on your Exit Strategy.
Are your employees full-time?
“If your employees have another job as a safety net, and aren’t willing to risk this being their only job, how can you expect me to risk my capital?”
Part-time key personnel is a big red flag for investors. Unless the company is super early and these are to be the first investors at very favorable terms, funders are expecting the founding team to be committed full-time to a startup, and that their very survival is predicated on making the company successful at all costs. If the key personnel is drawing a paycheck elsewhere they cannot be totally dedicated to the startup, and when the going gets tough could easily jump ship.
This usually indicates that one or more of your team shows up on linkedIn or in your deck as holding down another job, or that the startup is just an exploration of viability of a concept for a company. It's rare for investors except perhaps friends and family to get involved at this stage.
If it is in fact the case that some future employees are waiting for first funding to quit their previous jobs, make this clear to potential investors, along with the plan and timeline for their joining just as soon as minimal funding is achieved.
The following reasons question the Value of what you’re building.
Unclear your solution is effective.
“Does it even work [well enough]?.” E.g. “Is your ML model going to work when applied to the real world?”
It could also imply doubt whether your solution is good enough. Your solution doesn’t just have to be better, it has to be > 9x better to overtake an incumbent (See the HBR Article “Eager Sellers and Stony Buyers: Understanding the Psychology of New-Product Adoption.”) Improve your proof points for your Solution and Customer Adoption, and your Value Proposition.
Need to see more traction/customers/revenue.
“Come back when it’s easier for me to see the value.”
This is very common. It might be a polite “no,” or it might be a way of keeping the door open. It's important to use other clues to understand which of these is the real meaning. In the latter case, the investor doesn’t know whether to be excited or not, but is willing to get excited if you show you can execute and get successful. As a polite “no” it's an implicit message like the others below.
Life cycle too long/cost of sales too high.
“I don’t think you understand how products like yours are purchased.”
This is very useful feedback when it comes from an investor who is knowledgeable in your market. That investor thinks that your product takes longer and is more difficult to sell than you do, and the economics/financials you’ve shown--your Business Model, Pricing, Cost of Sales, and perhaps your Funding Plan--are insufficient to overcome these difficulties. This is common in enterprise markets, semiconductor, materials science and others.
Your valuation is too high.
“You’re getting ahead of yourself and asking me to pay too much for my investment.”
The investor thinks your traction and market positioning is not as significant as you do. You need to show reasons for why they ought to change their mind. One of the most effective methods is to appeal to FOMO and social proof by showing other investors who are clamoring to accept your terms. Justifying a high price requires achieving and articulating real quantifiable metrics concentrated on showing successful traction and growth.
Your valuation is too high/low FOR US.
This is different from the reason above. Investors often specialize on a given stage of funding, because of the amounts of capital they have or the size of their fund, their risk/reward profile, and the optimization of their internal processes for a particular stage. Your startup at the valuation you’re talking about may not be a match. E.g. An angel investor might pass on anything over a 5M cap, as she specializes in small checks and high risk and reward. By the same token a $1B fund may not look at anything under a $100M valuation as it doesn’t move their needle and wastes their partners’ time.
If the investor specializes in a stage later than yours, ask them if you can keep them in the loop as you grow to be a more suitable match. The best relationships are built out of many touch points which don’t directly deal with raising money.
I don’t see your differentiation.
“How are you different from everyone else doing the same thing you are?”
The investor thinks you’re going after a crowded market without any significant advantages over your competition. This may be due to your failure to communicate how you’re different and better and how you’re actually doing something different than all the others. More likely, though, it’s because being so close to your own product, you have an exaggerated view of the importance of minor differences in your approach to that of your competitors. You need to work on your Competitive Advantage, Solution, and Value Proposition.
The following justifications may be about a specific concern, but more often serve as a catchall excuse, and an overall indication that the investor didn’t believe your pitch. They don’t necessarily point to which part of it was unconvincing, so you will need to use other cues and follow-on questions to try to narrow down what part of your message was unconvincing or insufficient.
You’re too early/too small
Either the investor specializes in later stage deals than yours (See “Your valuation is too high FOR US” above) or the investor doesn’t believe you can achieve your goals. Exit graciously, and ask for permission to keep them posted on significant accomplishments down the road which might change their mind.
Your company doesn't fit our thesis.
You and the investor see the future differently. This suggests follow-on questions asking the investor to elaborate on how they see markets developing and what issues they see for your approach. Listening and making them feel like they can teach you something (which is true) creates a channel for dialog over the long term.
Keep in touch.
A variant of “Too Early/Too Small.” An opportunity to take them at their word and keep in touch, but lightly. Let time pass. This is a tenuous invitation and you don't want to use it until you have substantial change from what you just presented.
Get to X milestone, then we’ll talk
Whatever X is, it may be what they’re concerned about. But it’s more likely to just be the first thing they thought of to say. Unless they really engage you on X and their opinions on how you could achieve it, they’re probably just using it as an easy way of turning you down without thinking too deeply about it. If it isn’t obvious, ask them why they think X would be important and how they come up with a measure for X. Press them to understand how eager to invest they would be if you were to achieve X.
Why aren’t you raising more money?
At face value this question implies you’re being unambitious and have something worth approaching with more momentum. This may be what they mean, especially if they’re actually interested in talking about a more aggressive growth plan.
However, if they’re saying this and clearly disengaging after, it’s likely a way to get you off their hands while leaving you with the pleasant feeling that they believed your idea was bigger than even you did. So, it’s not sincere.
To distinguish between these, you need to follow up with questions on how they see a higher-momentum growth path, and push them on this. If they hear themselves flesh out something credible and ambitious, it could kindle real interest. At very least you will learn from discussing scaling more rapidly with a professional with that expertise.
Have you looked at [a different business application]
“I don’t believe in your market/pricing. It feels like there is something to your IP, but you’re going to have to find another vertical for it. Here’s the first one I can come up with in 5 seconds to start you on your way thinking about that.”
The investor is trying to be helpful. Do not argue them out of their idea, and do not try to build a new business on the fly at this meeting. Working out the details is your job; do it offline if at all. Echo back what they just suggested to them in an inquiring tone to see if they happen to have some real insight into a vertical you haven’t considered; and promise to give it some thought and get back to them if so.
Let us know when you find a lead.
“I’m not convinced and can’t be bothered to think about it. If, however, some really connected VC wants to invest, let me know so I can ride their coattails.”
There’s also the possibility that they are a firm which really never leads, in which case, keep them informed. If you’re willing to take on low-engagement investors (rather than value-added ones), even to round out a round, ask to keep them on the contact list for when you find your lead.
Need an experienced CEO
“I don’t believe you’re up to the job of growing the company in the next phase.”
This kind of response is rarely explicit. If you’re a startup, you need to work on being personally believable. If you’re a minority, it may reflect bias.
If you’re doing a series B or beyond and you get an intimation of this message repeatedly, you need to look for your real or apparent weaknesses in the growth challenges of a company in your next stage of maturity. At best, you’re still pitching the individual-contributor and scrappy-startup skills that got you where you are, and you need to hone your persona to your investors. At worst, you may need to re-tool and/or change your role.
Come back when you’ve achieved the milestone you just told us you were about to achieve.
You built a trap into your presentation then fell into it. You told the investor that your credibility or traction is about to increase substantially after some imminent event, like closing a deal or partnership or meeting a regulatory approval. You’ve given the investor an ideal excuse for postponing deciding until after it’s done.
One way to defuse this is to accompany the event “announcement” with FOMO, making it clear that the pricing for the deal available today will change significantly when the milestone is accomplished.
We do not have enough expertise in the space
This may be a frank admission that the investor is not qualified to make a decision on investments in your space. If the investor agreed to meet with you knowing something about your company, though, it probably indicates you have failed to show that you can compellingly communicate your own expertise in the space.
No Reply/Thank you (nothing more)
Thankfully, being ghosted by an investor is less common than it used to be as there is now more competition for good deals and more transparency into investors’ reputations.
But, ask yourself whether you exhibit the one founder trait guaranteed to cause an investor to ghost you: not listening to feedback carefully and attempting to argue it away immediately.
Founders are often so focused on making sure they are understood that they can react to not being agreed with by restating, reformulating and repeating their position repeatedly. You get one chance (at one meeting) to make your point, and hopefully get feedback. You don’t get a chance to beat the investor into submission. If you are respectful, attentive and thoughtful, you can follow on with additional points in later communication. But if you do so at the current meeting, the investor could block you forever.
Lastly, there are a few things which will guarantee rejection without eliciting feedback. You need to be on the watch for these when you’re not getting other feedback on why investors aren’t biting.
Team/Personal weakness: don’t succumb to Dunning-Kruger
If you’re convinced of your solution, but have honestly not done a ton of homework to deeply understand your tech, your market, and other factors of building your business, you may be succumbing to the Dunning-Kruger effect, a psychological characteristic in which the less someone knows about something the more they think they know. Basically, if you don’t know what you don’t know, there’s a tendency to believe it’s not that much. If your ignorance is obvious to an investor, they’ll write you off with the most minimum of messaging to that effect. They won’t see it as their role to educate you.
I mentioned this above under “Goals of Pitching: Establishing Rapport.” Investors will not be interested in a founder who is arrogant, insulting, dismissive, argumentative or unpleasant. If you are confident by nature or training, stay attentive for when that may edge into one of these behaviors. Conversely, by showing respect and attentiveness to an investor, a confident founder uses her own standing to recognize that of the investor.
If the value you are placing on your company is much higher than what your investor believes it is, they will likely walk away silently. There’s little they stand to gain from trying to talk you down or explain why you should lower your valuation or deal terms.
See “No Reply/Thank You” above.
How to Get Better Feedback
Investors have little incentive to tell you why they don’t agree with you which sets them up either for “confrontation,” where you try to re-argue your points, or for being shown to be wrong later. Your job is to get them to want to share their critiques. There are a few ways that you can elicit better feedback from investors you are pitching.
Don’t Just Talk. Listen.
Of course, you need to talk to get the messages of your pitch across. But, while you’re talking you’re not learning. Strive to make the presentation a dialog wherever the investor wants to engage you. If this interrupts your flow, either cope with it, or come back to their points soon and draw them out.
Respect Their Point of View
You can only be truly heard by someone who feels like they’ve been heard. Whether or not you agree with your investor on something, make sure they know you’ve heard and understood them, otherwise they can’t move on. See The Clearing Method of Conflict Resolution.
Your investor sees something differently from how you do. You cannot re-educate them in the course of one pitch by repeating your points or arguing them out. This will only make them close down. You need to make them feel understood and heard, note their objections, and come back to them on them later in a considered way.
Questions Their Questions/Explore their Questions
When an investor states they see something differently from how you see it, when they question something about your pitch, ask them follow-on questions on how they’re thinking. You’ll increase their sense of participation, and perhaps you’ll learn something valuable you haven’t considered, or lead them to reconsider their disagreement. Leave room for both.
Fundraising is one of a CEO’s most challenging tasks. It takes time, organization, diplomacy, and the willingness to be critical of shortcomings in one’s own vision and aspirations. It can feel like a distraction from running and building a company. But fundraising forces one to be clear to investors and to oneself about precisely the issues that will determine success and failure in a company. The beneficiaries of this are not primarily the investors, who have only a financial stake in the company, but the team itself. Your stake is your dreams and several years of your life, and that’s worth much more than a check.
It’s crucial for you as a CEO to learn from every presentation you give to potential investors. Few of these may result in a direct investment, but they can all be learning experiences.
Make your clearest case, understand investor’s concerns using the list above, promise to think about their feedback and get back to them when you have. Keep the relationship alive and it will have much more potential to be fruitful in the future, as Mark Suster of Both Sides of the Table explains in Invest in Lines Not Dots.
Even once you’ve understood an investor’s sense of what your pitch or your startup may be lacking, it doesn’t make it necessarily true. It’s a data point, and needs to be considered carefully. The investor could well be wrong. Take it into account, and if you’re getting frequent similar messages, they’re more likely to be applicable to you.
For more lessons on this phase of fundraising, check out my colleague Chon Tang’s Behind the curtains of startup fundraising during the COVID pandemic, and NFX’s enlightening and encyclopedic 16 Non-Obvious Fundraising Lessons On Pitching.
What interesting feedback have you had in your pitches, and what have you learned to help improve your process? How’d it work out? Let us know in the comments.
Thanks to friends and colleagues who were kind enough to read early drafts and make suggestions: Darron Cooke, Roger Spitz, Etienne Deffarges, Sibyl Chen, Jean Sini, and my amazing sister, Karin Meyer.
Marc Meyer is a long-time Silicon Valley technologist, founder (6 startups, 3 exits, 1 IPO), executive, investor, advisor and teacher. He has invested in and advised over 100 companies, chairs the Advisor Council at Berkeley SkyDeck, is on the Selection Committee of HBS Alumni Angels, advises at multiple accelerators, and has an Executive Coaching practice helping leaders achieve their greatest potential.