While this hasn’t happened to any of our portfolio CEOs in a while, there’s one reason for a VC passing on a funding round that just sets me off: “I wanted to do the deal but couldn’t convince my partners.” This isn’t an explanation, it’s an excuse.
If you are a check-writing partner at a venture fund and you offer up this sentence to a startup CEO it means one of three things:
a) You blew the process by not enrolling your partnership
b) You didn’t want to put your neck on the line in the face of some resistance
c) You never believed in the first place, and are blaming your partners versus just passing
When I’m on the cap table I can help a founder navigate this to try and avoid going the distance with a potential investor. And if you’re a GP with tough firm dynamics, I can maybe help you navigate those. But if you put founding team through a full diligence and take them to a partner meeting, only to come back with this, RIP. [note: based on some feedback, I wanted to emphasize that I’m NOT saying all deals that go to a partner meeting should get approved. I’m saying that if it goes to a partner meeting and gets rejected, the sponsoring GP should own that rejection and give specific feedback to the CEO why they’re not going to do the deal. Not just apologize and pin it on the partnership.]
On the flip side, I do think it’s is fine for a VC to honestly say things like “we’ve got a lot of institutional scarring around your vertical so I’m going to need a little more time and help to get my partners comfortable.” Or, “I’m not going to be able to move as quickly as you need because of some firm dynamics, so unless you can stretch your timeline a bit, it might not make sense for us to take this forward.”
That’s all part of building trust and visibility for a CEO into the way you operate. And a founder working in an industry that has some hair on it, or is otherwise less understood by the generalist investor, is of course going to need to help their sponsor and her partners. Maybe I’ll write a separate post at some point about the process with investors who have a “prepared mind” for your startup versus those who are still developing their own thesis.