Why We Pass Quickly On Things

I passed on something referred to us by a close VC friend (who I’ll call Joe) who I’ve done a bunch of investments with over the years. A few minutes later I got the following email from the entrepreneur.

hey brad – 

if you get a moment, i’d love to hear your unvarnished reasons for the denial. thanks for the time…- i remain a huge fan of your blog…….

I get asked regularly for feedback on why we pass on something, especially when we pass after a single email interaction. As with many things, it’s useful to start with your strategy, assuming you have one.

In Foundry Group’s case, our goal is not to invest in every great company, it’s to invest in ten potentially great companies a year.

As part of our strategy, we have purposely constrained our fund size ($225m per fund, which lasts about three years and covers about 30 investments) and our partnership size (four partners, no associates.) As a result, our goal is to say no in 60 seconds. Sure, we’ll miss some great opportunities, but that is fine as long as we believe (a) there are more than 10 great potential companies for us to invest in each year and (b) our deal flow dynamics are such that we see a lot more than the 10 we end up choosing to invest in.

Based on our current deal flow dynamics, if we had unlimited time, unlimited capital, and unlimited partner resources, there are at least 100 companies each year that we would invest in. This 100 number is not “deal flow” – this is actually investments that we’d make. So given our strategy constraint, we could miss investing in 90% of the things we wanted to invest in and still have enough new, great, potential investments to execute on our strategy.

Many of our quick passes are in the “it’s us, not you” category. There are a few things driving this. Following is the response I sent to the entrepreneur above in response to his question about why I passed.

1. Stage – this is later than our usual entry point. If you’ve raised more than $3m, we generally don’t engage. We don’t have to be the first money in, and we love to work with Joe, so I squinted and made an exception since you’d only raised $4m

2. Focus – We are very selective since we only do 10 new investments a year. I wrote a post about this a while ago (http://www.feld.com/archives/2009/06/say-no-in-less-than-60-seconds.html). I took the first meeting / call because of Joe. I tested high level response internally against the other 100 things that are in front of us. It was no where near the top (we have this discussion continually and use each other for reactions).

3. Engagement – I’m in Dubai next week and then Canada the week after that. Then I’m home for a week, in Cleveland, then in Boston/NY. So the next month is one of those months where nothing much new is going to happen on my end. We hate to play the slow roll game with entrepreneurs – one of our deeply held beliefs is to either engage or not engage quickly. Given #2 and then considering #3, I know that nothing is going to happen for a while and I have no interest in being the schmuck that just hangs around waiting to see if something happens.

Fundamentally, the quick positive reaction was “neat + Joe is awesome” then weighed down by 1, 2, and 3 above, resulting in “I’ll face reality quickly on this – we aren’t going to get there on it…”

While at some level this might not be satisfying to the entrepreneur, and I’ve had many challenge me to go deeper in my exploration of their company, given 20 years of investing it’s usually pretty clear when something is not going to happen. The reasons vary greatly, but having a strategy that causes it not to matter in the long run has been something that we’ve spent many hours talking about and making sure we understand.

Ultimately, understanding what we do, how we do it, and the strategy behind it is key to us being able to run Foundry Group with just the four of us. I take inspiration from a lot of people on this front, including Warren Buffett and his approach to his headquarters team for what is now one of the largest businesses on the planet.

There are clearly more than one way to run a successful VC firm – our goal is to run it the way we think we can be successful at it.

  • Sean Wise

    Great post. In the book we talk about bounded rationality. This shows how it works in the real world.

    “Bounded rationality is the idea that when individuals make decisions, their rationality is limited by the information they have, the cognitive limitations of their minds, and the time available to make the decision.”

    • Yup – I should have linked it back to the book – it’s a great example of bounded rationality.

  • Looking from the other end of the keyhole sometimes is easy to forget how small the chances are that interests match mutually at that moment, this post just made the proposition of sending a VC firm an email about our upcoming raise 1000% harder. It’s so interesting to hear from the other side of the table and this post touched a chord with me (thanks Brad)

    • Awesome metaphor.

  • An immediate ‘no’ along with a kind but brutally honest sentence or two explaining why is the second best possible outcome of any investment pitch.

    • Elizabeth Kraus

      I can’t speak for Brad, but I can speak from another investor’s perspective on this one. “Explaining the why” is often much more time consuming than you think. While it might only take 5 minutes for an investor to do this for each entrepreneur, these 5 minutes add up. Today for instance, I had 15 emails from entrepreneurs looking for investment, five of which came from referrals. Unfortunately, I have a finite amount of money and time, and if I want to really help 10 companies per year (which is a lot to manage by the way), I have to stay focused. More color on my most recent comment.

      • Thank you @elizabeth_kraus:disqus. I’m assuming the investor already has the reason(s) in mind when making the decision, so the additional time is in expressing them.

        If ‘no’ reasons generally fall into a half-dozen categories (conflicts with a prior investment, doesn’t fit our investment theme, etc) then a Gmail “canned response” or link to an article or blog post for each of these makes for a quick explanation.

        The benefit of not explaining is a bit of an investor’s (finite and extremely valuable) time not “wasted,” but what’s the cost, in terms of reputation, goodwill and missed future opportunities?

        • Elizabeth Kraus

          Yep. It’s a constant balance. Canned responses are a good solution and I try my best with that. And re: cost, this is a great point. Some things I do that may be helpful to other investors include: monthly office hours, a monthly hike for entrepreneurs and a monthly CEO lunch. It helps me help more people, but still isn’t as helpful as I would like to be. Thanks for the suggestions – Elizabeth

  • Dan

    Love your blog but this isn’t so helpful.
    From the eyes of an entrepreneur the interesting observation would be:
    if this is 1 of the 100 potential investments that you would take, how to get through to be 1of the 10 that you actually commit to investing in and not be 1 of the 90 that are missed (and surely could have been better in the process).

    • Elizabeth Kraus

      Hi Dan.

      This is a great question. I coincidentally wrote a post about this yesterday: http://blog.mergelane.com/2015/04/09/how-to-get-an-angel-investor-to-answer-a-meeting-request/

      Hope this is helpful.

    • Good point – I’ve written about that a LOT on this blog. We also talk about it on http://www.foundrygroup.com.

      We start with our themes – if you don’t fit in a theme, we pass immediately. Then, if you are not in the US or have raised > $3m, we pass. If you get through this first filter, then we go extremely deep on the people and the product. We are looking for products we have an affinity for, founders who are obsessed about their products, and founders who want to partner with us for the long term and who we want to also partner with for the long term.

      We have a qualitative approach internally. Once one of us decided he is interested, we open it up to all four of us to explore. We each explore separately as everyone has different things that are important to them. If any of us start to trend negative on an investment qualitatively at any point in the process, we pass.

      We don’t chase deals. If the entrepreneurs just look at us as undifferentiated capital, we usually lose interest. We try to move very quickly, but deliberately, and open up our whole world to the founders when we are in the process. We want them to choose us as much or more as we choose them.

  • I relate really well to you. Maybe it’s because we both come from technical backgrounds. Your approaches to everything from venture capital and relationships seem very grounded in logic and cause and effect and you are able to explain it so it makes total sense.

    You value your time and if a deal comes to you and you are able to pass on it in 60 seconds then you just potentially saved yourself a ton of time evaluating something that wasn’t a fit. (Not to mention saving the entrepreneurs time) And because you have the criteria on the Foundry website it should be clear to entrepreneurs whether they might be a fit even before they reach out to you.

    You are more efficient. Founders can be more efficient. Everyone wins!

    A couple of questions:

    1 – How does the criteria with a VC raise differ with your syndicate? Is it basically the same criteria but more focused on a seed round versus a series A which seems to be your sweet spot with Foundry? Is it a funnel where companies raise with the syndicate and then raise with the venture fund like Mattermark did?

    (Maybe you have a blog post on the syndicate but I haven’t seen it)

    2 – Why 225m? It makes total sense that each fund would be the same size – I love that approach to keeping each one as much of an apples to apples comparison as possible – but 4 funds equaling 1 billion would’ve made such a nice round number.

    Thanks – great post!

    • Pure guessing games – Brad – I guess it is structured as a filter/funnel

      2 Why 225M – Hmm Lets see – perhaps:

      Seed 30 * 500k = 15M leaving 210M (nicely divisible by 3)
      Series A 1:5 = 6 * maybe 5M = 30M leaving 180M
      Series B 1:2 = 3 * maybe 10M = 30M leaving 150M

      150M (two thirds of fund) provision to pro-rata series C – IPO at 50M per year after a 1:10 survival rate

      Suppose one unicorn and holding maybe 40% for > $400m – the metrics look good so long as the Seed Investments are all potentially big

      Would love to know if this is anything close (just because I am taking a tea break and I saw it as a speculation quiz !)

      • Nope – not the way we ended up at $225m. The answer is above – linked to @disqus_ozB62adDW7:disqus comment.

    • 1. The FG Angels syndicate is a different approach. We’ve written about it some – here’s the data on our first year of it. http://www.foundrygroup.com/blog/2015/01/our-first-year-on-angellist-fg-angels-update/

      We are NOT using it as a funnel for Foundry Group investments but rather a seed-only program to fund lots of entrepreneurs / companies at the seed level that we are qualitatively interested in. I probably should do a longer post on where the deals are coming from and what causes us to decide to invest – I’ll do that eventually.

      2. Re: $225m. When we raised our first fund, we decided that would be the size of all of our funds. We went out to raise $175m in 2007. It took us nine months to raise the fund – things really accelerated over the summer as we had commitments start to flow in, and we ended up in a position where we probably could have raised > $250m. Our largest LP – Lindel Eakman at UTIMCO – coached us a lot on where he thought we should end up, and after a lot of back and forth we ended up at $225m.

      When we closed the fund, we said that all future funds would be the same size. We were not going to add anyone to the team and as a result each fund would be the same size.

      When we went out to raise our second fund in 2010, we probably had – with no new LPs – over $400m of interest. Since we capped it at $225m, it was a much easier fundraise. In 2013 when we raised our third fund at $225m, we didn’t even talk to LPs outside of our existing LP base.

      We are fortunate that we have 20 strong, long term LPs who support us. Our goal has been to make the fundraising side of our equation straightforward – as long as we are doing what we said we’d do and performing well financially I expect our existing investors will be supportive of us.

      Mathematically, we allocate between $5m and $15m / investment. We’d like to have 30 companies per fund. Some fail early, some take less money, and we use $15m as the upper bound of what we’ll invest from the early stage fund (we raised a late stage fund in 2013 that invests ONLY in our successful companies, but let’s us put more capital to work in later rounds.)

      We also have invested our own money on top of the $225m and recycle up to 110% of the capital, which gets us to an effective fund size of around $255m. It turns out that we end up with about $8m – $9m on average per company per fund, so we are right around $255m.

      We did have a conversation about raising one of the funds to make the math work out to $1b, but decided that was a numerically cute but silly reason to change the fund size.

      • I’ve heard you refer to it as the LPs give you a box full of money and that they trust you to do your job and return a bigger box of money.

        It’s really interesting to hear about an LP coaching you. Is it mostly a one way conversation where you give quarterly updates on each fund or do they give feedback at all? Do they ever question specific investments or exit decisions?

        Maybe you’ve blogged on what the relationship is like between Foundry and the LPs – it’s really interesting to think about that side of venture capital.

        Thanks for the additional details!

  • Brad – have you ever met this entrepreneur?

    I’ve come to learn that there is an emotional aspect to investing that no amount of “rules” will ever fully capture. It’s a bit like dating – sometimes the other person just isn’t interested – they can’t put their finger on it, but they know it’s just not a fit.

    With that said, we hear all the time that “it’s not the idea, it’s the people” – and yet so many folks (like this entrepreneur) are rejected over an email or maybe a slide deck. That’s why I asked my question above. If you haven’t met this person, and they came highly recommended from somebody you trust, why wouldn’t you (at a minimum) get to know them better?

    • I spent time on the phone with him in this case but did not meet in person. I have no ability to meet with even a tiny fraction of people who reach out to me so the approach you suggest is an impossibility.

      I try to get on the phone (preferably video conference) with people who are referred to me where I want to at least spend a little time going deeper. This was one of those cases. The call was positive, but when I reflected on it more and bounced around a discussion internally with my Seth, Jason, and Ryan (via email) it quickly became clear that this wasn’t something I wanted to pursue.

      There was a point early in my investing career – as an angel investor between 1994 and 1996 – where I tried to meet with everyone. Once I had a bunch of investments, and had learned what I liked and didn’t like, I was able to come up with some rules / filters so that I spent more time with less people.

      Sure – I run the risk of missing something absolutely amazing because I didn’t spent time meeting someone. But I’ve accepted that is ok in the context of my investing strategy.

      • I understand the volume issue of meeting everybody that reaches out to you – in this case it was somebody introduced by a trusted source. Are you saying that even that filter is too large a number?

        In any case, you did speak with him – that was my main ask. The way I interpreted your blog was that it was a no simply from the email, which I would have found disappointing.

        I’ve also re-interpreted what I hear a lot of VC’s say, since I don’t believe (due to the volume issues you highlight) that the team is most important. I think it’s:

        (1) Initial (emotional) reaction to the idea and their general state of mind when the opportunity is presented to them

        (2) Team
        (3) Deeper dive on the idea

        That’s why asking for a reason on a “no” to #1 doesn’t really help the entrepreneur – because it’s not based on any fact or reality, it’s almost all emotion.

        • scampcat

          You should read Malcolm Gladwell’s book ‘Blink’. It’s a fairly deep study on the subconscious ability to have a brief interaction and get a “gut feeling” – a feeling that very frequently pans out to be the right reaction. Great book. Anyway, most seasoned investors see enough people and ideas that they start to recognize almost on “auto pilot” which ones have the almost indescribable elements that culminate into a good opportunity.

          If you don’t think team is most important, there are many examples I can give you where that’s very much not the case. Bluetooth, for example, almost never happened in mainstream. Bad team. They replace them. Now it’s everywhere. DOMO is a software that’s getting absurd investments. Investors hope that a person that created Omniture is good for another big idea (which lately is arguable a potentially over-hyped disaster-in-the-making – just my opinion).

          You have to prove to them that you can weather the storm. That your team can weather it with you. That you stick together in hard times rather than fighting. That you go the distance and pick right back up after falling on your face. That you hustle day and night UNTIL THE JOB IS DONE. That you never give up, never surrender. Because if you can’t do those things, their money will vanish quickly, and so will your company. That’s not how they like to invest. You have to clearly prove that your drive is unstoppable, and that the only thing keeping your small successes from becoming massive successes is just a little money to put you into a bigger playing field.

          • Thanks. I simply had an emotional reaction to the quick rejection since I thought it was based on just an email. That’s it. I do agree team is *very* important. That is why I don’t understand when an entrepreneur is rejected based off an email or a pitch deck if the VC has never met or spoken with them.

  • mananaashra

    Thanks for the great artical – Jobs EYE

  • Elizabeth Kraus

    THANK YOU for writing this.

    For me, the hardest thing about being an investor is that I have to say “no” 99% of the time. I would love to say yes to more companies, but unfortunately, there only so many dollars and minutes I can invest. When I first started investing, I thought I would be most helpful by taking as many meetings and answering as many emails as I could. Luckily, I quickly figured out that the more I focused and said “no”, the more helpful I was. Like Brad said, after meeting with hundreds (or thousands in Brad’s case) of companies, you start to recognize patterns and better understand when you can be helpful. While constantly saying “no” is emotionally taxing, I try to remember that a quick “no” is in fact a “yes” to another company that I can be more helpful to, and “no” is far better than stringing an entrepreneur along.

  • Jeremy Riley

    Brad, thank you for posting this. This is my first response to this blog and I look forward to joining this and future discussions. I know that from my perspective as an aspiring entrepreneur (Beware: my pitch will be in your I nbox soon!) it would seem like a cruel waste of time for you to have prolonged the process when you knew from experience that it was going to turn out as a decline in the end. Of course any feedback to the entrepreneur is both kind and potentially helpful, but that’s not something that should be expected on the entrepreneur’s end. A polite request for additional information doesn’t sound unreasonable but understanding that whatever time the (non) investor spends with you is effectively pro bono. Seeing as how there won’t be any return from this specific deal and most likely any help provided will actually benefit the NEXT investor that the entrepreneur talks to. Thank you for allowing me a venue to voice my opinion on the matter.

    • Thanks for taking the time to share your thoughts – it’s always fun to see new folks show up in the comments and I’m looking forward to getting to know you better.

      Send your pitch anytime!

      • Jeremy Riley

        Thank you for the kind words and though my elevator pitch has been ready for awhile my partner and I are in the process of hammering out the backup data to support our position. Venture Deals has proven to be the single most valuable source of information to both guide my investment seeking direction and inspire me to not get overwhelmed by the process. I have sat on my idea for almost 7 years now and have only been digging into it more deeply over the last year. I just finished Startup CEO by Matt Blumberg as well and am starting to now develop my vision for what I want my company to look like through its development.

    • scampcat

      When pitching, I ask as I walk in if we can sit next to each other and have a conversation rather than a “presenter/audience” scenario so that it’s a collaborative exploration of the opportunity (yes, I still have a pitch deck for quick visuals, but only for that purpose). I don’t get rejections to that. And because of that, I’m free to ask toward the tail end what they look for and how we match up to that – specifically because the nature of the conversation allows me to do that casually in context. That way I get immediate feedback on a few things I really want to know – are they interested, do I fit their portfolio, is our presentation of information effective, and are we where we need to be for them to engage (and if not, what’s missing). The tough part of asking these questions is that you have to be ready to take a tough bullet. You may or may not like what they have to say, but risk of awkwardness is worth the information. Graciously accept their feedback, note it so that they see that you incorporate new information, and don’t argue with what they say.

      • Jeremy Riley

        Very interesting approach. I believe that I will incorporate much of this when I take my funding journey to the next level. I appreciate any knowledge given to me. Especially when it comes from experience and thoughtfulness. Thank you.

        I think shows like Shark Tank tend to give amateurs like myself an unrealistic view of what pitching an idea is actually like. It’s better to learn from experienced entrepreneurs.

        • scampcat

          The Shark Tank approach does have its use, although in my opinion, the order in which the information is presented – is backwards. You want them to know what the venture is right away, not the terms. They need to appreciate the idea and team before they beg for deal terms. You have to excite them right away. Deal terms don’t do that. Get the exciting things out first, and end with the obviously required details of any venture. If they’re curious about deal terms before you get to that part of the pitch, that’s usually a good sign. Numbers will be negotiated on terms regardless of what you propose, so you don’t want a potentially errant valuation in the beginning of the pitch to give them a mental block that covers their ears for the rest of the pitch. If they love the pitch and you end with errant valuation, you can always say that your valuation is just a guesstimate (pie in the sky) and that you’re open to working with them on that. Then it’s only a temporary sour taste, and they were fired up for the rest of it without that getting in the way up front. Their excitement will overpower the momentary sour note of bad terms.

          Anyway, the format of presenter/attendee is useful for a couple of reasons. First, it will require you to know your content extremely well, which will make any topic in the conversation very concise and powerful. It’s important to have the information of each topic well rehearsed so that if you’re asked something, you don’t stumble and stare at them. Your words need to be carefully chosen, and pauses can be interpreted as not ready, or something even worse. So practicing over and over in this format will keep complete answers ready in your quiver of arrows. Another reason this format can be useful is that, for example in the case of Techstars on Demo Day, you have large room full of investors interested in hearing the deal, but there are way too many of them to sit down and have an organic conversation. It’s a longer “elevator pitch” aimed to help them check off all the checkboxes on their list before interrupting you to secure the deal ahead of anyone else, or at least wanting to talk with you afterwards to set up the “conversation pitch”.

  • Interesting article, Brad! It’s too easy to feel the rejection and spin ourselves in circles wondering how we can fix things. It also plays into the validation card. “Rejected (again)… sh… something is very wrong! Maybe if we could just get 2 minutes of an investor’s time we could fix it! Or maybe our idea just sucks…” It certainly pays, as entrepreneurs, to understand things from an investors point of view. So many funds focusing on specific things. So many risk management strategies. So many other dynamics.

    If anything I might favor an equally quick pass e-mail. 2-3 quick points should suffice. For those who have just an insane amount of passes on a daily basis just keep a template available. I can imagine the rejection reasons are pretty similar (esp. the ‘it’s us not you’).

    Keep on moving!

    • I’ve found that giving specific feedback, even a few simply bullet points, generates a flurry of emails trying to justify or overcome the resistance. I used to do this but have stopped because I literally couldn’t respond to things in depth, especially when I said it was “me not you” and I still got pushback on why I didn’t understand why I was wrong in my assessment.

      • After I submitted the comment I immediately wondered if the boomeranging would be a problem (assumed so). Hat tip to you for trying though!

  • “While at some level this might not be satisfying to the entrepreneur”: This shows awareness of self/entrepreneur.

    Kind of echoed in Dan’s post “Love your blog but this isn’t so helpful.”

    It is why it is and that is why I like this post.

    It show several things as the entrepreneur:

    You really need to make a strategy, put together a list and pursue many VC’s. They my not be all your favorite, but you have to figure out if you can work with them, many times being an entrepreneur means making the least worst decision.

    You have to understand that things are binary, with many external factors.

    Its shows why you need many options, and one is bootstrapping.

    • Yup. The classic mistake is to either target one or a few firms as “they will want to invest in me” and recognize that VCs make decisions in very different ways from firm to firm. Exogenous factors (like the fact that I’m on the road a lot right now) play into the dynamic in a significant way. And, most importantly, each firm has a strategy – sometimes explicit, often not, and this plays a big part in what is interested to them at any particular point in time.

  • As every great actor knows, rejection is nothing – unless you make it into something. Yes, we all wish it could be a learning experience, but sometimes there’s nothing to learn. It’s just not the right fit. But each ‘no’ is one step closer to ‘yes’. Just keep going!

    • Well said – good philosophy.

    • Adam Quinton

      I smiled when I read this. I was talking with the Founder/CEO of a pretty interesting company a while back but was a no based on Brad’s point #3 above – I simply did not have the bandwidth at that point. Speaking as an individual angel #3 is primary – there is no “other you” to run with it! The founder looked me straight in the eye and said: “Adam, I don’t mind you saying no. Because that is just one step closer to saying yes.” Sensing that I was interested enough she pinged me again some months later, we re-engaged and I invested. Since then, and an additional note and now Series A later, I am glad the founder was persistent!

      • Love that! I always think ‘no’ just means ‘not now’. If I come back and say I now have 40 million users, I’m pretty sure whoever said ‘no’ might take the call!

  • StevenHB

    I’m surprised that your investment themes didn’t get a mention above. I don’t know if this particular investment fit in one of your themes (I’d be inclined to assume it did since “Joe” recommended it to you) but I can imagine that thematic relevance is one of the things that you and your partners use to filter incoming deals.

    • Yup – that’s at the top of the filter. In this case, the company fit in a theme and even though they’d already raised $4m (a little above our $3m cut-off point), we decided to look anyway.

  • Kevin McLaughlin

    Brad – I’d be interested to know how much #1 and #2 drive #3. If the Stage and Focus were perfect and the entire team loved it, would you pass just because you’d be out of town and not have a lot of time to engage? I am sure it’s very hard to balance it all…..

    • Someone else would grab it. #3 is secondary.

  • This was a perfect response.
    I know you, and I’ve seen you operate a bit, so I agree with that you said 100%.

    At the end of the day, it’s a matching game. If it doesn’t match, you move on. If it matches, you know it right away. There’s rarely a second chance to try to change your mind.

  • gaurav3rdjune

    Great post, thank you for sharing this. – MP3 Free Songs

  • A quick ‘no’ is better than a slow ‘maybe.’

  • Jason Coombs

    Frustrating, however, that VCs consciously avoid any attempt to scale their business model. If everyone in this business were to make one additional investment each year that fits in the category of “this could disrupt everything about venture finance and enable us to scale if it works” then nobody would have to waste their valuable time reading blog posts written by people who only make ten investments per year.

    • I think you are wrong on the generalization. Many VC firms actually do try to scale up. We could raise a lot more money if we wanted to, but we’ve explicitly chosen not to.
      At the same time, we have helped create and funded organizations that do scale on the capital side. Techstars is the most visible example (we are co-founders) but there are others like FG Angels.

  • Victor Muthoka

    Very illumining. thank you. And the quick yes than a slow no is HIGHLY appreciated as an entrepreneur who’s received enough slow nos.

  • Timing is funny. There was an art director that I might have hired if the timing was different . It was mostly bad luck, timing wise because I had back-to-back travel weeks. I didn’t like it, but it was true.