This is The Founders' List - audio versions of essays from technology’s most important leaders, selected by the founder community. This essay was written and published by Elizabeth Yin, Co-Founder & General Partner at Hustle Fund. Read the full article here: https://elizabethyin.com/2019/05/17/15-annoying-things-that-vcs-say-or-ask-and-how-to-think-about-them/
Today’s blog post is all about the annoying things that VCs commonly say or ask. I did a call out on Twitter this week and these are the VCisms that the crowds have bubbled up as the most annoying things out of a VC’s mouth.
1) What if Google Builds It? (@pravesh)
This one was cited a LOT by many people on Twitter in various forms! There were variations — e.g. substitute Google with Amazon or Facebook or any other big company.
Admittedly it’s a valid question — what if the 800 lb gorilla in your space does copy you? What is your edge? How will you win?
Here are a couple of answers that may help:
A. Large companies are so large, they aren’t able to prioritize or even care about your “small” opportunity relative to their huge company. In the case of Google specifically, it has actually been shown that building a Google product competitor can actually be a great opportunity. Many people would much prefer to pay for products so that they can get customer support when something goes wrong — a free Google product will never a customer’s calls or emails.
Companies like Mixpanel, Optimizely, Superhuman, and many more have built big businesses by going head-to-head with a free Google product by charging customers and providing a better experience.
So it’s actually validation of your market if Google is interested in your space.
B. Big companies, by definition, are no longer nimble. You, in contrast, are able to run circles around them. Can you prove that you’re nimble by shipping quickly? Can you show that customers love you more than Google? These are concrete things that you can point to in your conversations with VCs.
2) We don’t invest in hardware (only to find out that they led a round for hardware) (@peterjcolbert)
This is an interesting one, because you see VCs deviate from their thesis sometimes. (Every VC does it – we’ve done it too.). VCs will often say they don’t invest in hardware. Or ad revenue based models. Or e-commerce. Or in some geography. And then you see a portfolio company on their website that is clearly in one of these categories.
You should just ask a VC about it directly.
The reason for this is usually along one of these lines:
A. They used to invest in that category but are now over-indexed. Or they invested in that category previously as an angel or with a past fund. I.e. they used to make those investments but no longer do.
This is important to understand, because if the reason the firm is passing is that they are waiting for some liquidity on existing positions in your space, there could potentially still be an opening for an investment later. This is rare, BUT possible – this has happened once to a company that I’ve backed before.
B. They are experimenting outside their thesis. E.g. They may not usually invest in South America, but they may make 1 investment to learn about the market. They may not invest in hardware, but may invest in 2 companies to learn about the space.
Unfortunately, if this is the case, you can try to hard to convince a VC to do more experimentation in that category, but because VCs have mandates — i.e. they have an agreement with their investors that they would focus on investing in certain categories / theses, they will likely not want to deviate *too* much from their thesis. VCs are judged by their investors on whether they end up investing based on the strategy that they claimed they would.
C. They had a special relationship with the founder.
There is nothing you can do about this. People back their friends all the time regardless of what they are building.
I think it’s easy to walk away fuming mad thinking that a firm is filled with hypocrites, but it’s worth just bringing up with a VC: “Hey you mentioned that you don’t do hardware, but I noticed on your website that you’ve invested in X. Am curious how that fits your thesis?” You may not like the response and it may not change anything, but on rare occasion it may open a door for you.
3) I don’t think this can be a venture scale business. (@kirbywinfield)
I’m of two minds on this one.
A. There are a lot of companies who seek out venture funding who are actually NOT a good fit for VC investors. Entrepreneurs should be aware of the return profile that VCs are looking for. Loosely speaking, VCs are looking for a minimum of 100x return in the course of 5 years or so. This comes out to achieving roughly $100m runrate within the next 5 years. Is this what you want to do?
B. However, on the flip side, what ideas will be able to achieve $100m runrate in 5 years is tough to say. VCs often have preconceived notions above what can get to this level and what cannot — and they are often wrong. Companies that tend to get overlooked are in categories such as e-commerce, for example. Are you selling a widget that will likely max out at $5m in sales per year? Or are you the next Stitch Fix?
My advice here would be to first understand for yourself if you want to be growing a business that goes to $100m in annual revenue in 5 years (and the work / hiring that will be required to do so). And if so, what do you think that path looks like if everything goes well? How will you get to $2m runrate this year and then more than double your sales each year thereafter?
And if the answer is that you don’t want to run this type of business, there are other avenues of funding. Angel funding, crowdfunding, revenue-based financing are all good channels that are now rapidly growing.
4) But how will you manage being a mom AND running a startup? (@hustlefundvc)
Ugh. Are we in the 21st century? Move on from any VC who asks this. It’s not worth it.
5) We’d be interested when we see a bit more traction. (@msuster)
Ah, the classic ask for more traction. Basically, the VC doesn’t have conviction right now, but maybe, just maybe, more traction would give him/her the conviction to do your deal. The reality is that most investors can’t articulate what level of traction they would want to see in order to invest. Obviously, if you earn $100m in the next 2 months, everyone will be onboard, but what if you get to $100k / mo runrate in the next year — is that interesting? Well…it depends. And unless you are an asshole or a fraudster, VCs always want to preserve optionality to see you in a year and check on your business.
So, although this is a frustrating response, the right way to play this is to triage investors quickly. Put this VC in a “not interested” bucket. Continue to send him/your monthly investor updates, but you’re better off trying to find someone who has conviction today than trying to convince someone to get conviction — even with traction. You just need to meet a lot of investors and triage a lot of investors quickly in order to find the right investors to bring into your company.
6) Maybe you should raise more and grow quicker. (@justinpushas)
This is just a stupid comment. If a VC really believes in your business, he/she will commit to your round, and will either help you fill your larger round or write a bigger check. But, investors who say things like this without any action are either just oblivious or not helpful, and should just move on from these investors. As we all know, founders who struggle to raise $250k are also going to have a tough time raising $2.5m.
That being said, I would recommend that every founder develop multiple fundraising plans. This will allow you to pitch a different amount of money to bigger or smaller investors with different milestones and goals that you would achieve with different investment sizes. And then if you do receive this question, you can point to a larger fundraising plan and mention that you have thought about a larger plan and are open to raising more money but are also not limited in growth if you cannot raise that amount now.
7) Come back when you have a lead (@stefanopep3)
The herd of sheep comment! A variation on this is, “I’m committed once you have a lead.” This is a positive way for a VC to say no for now, but if you have enough fundraising traction, then he/she wants to get his/her foot in the door.
It’s important to clarify what a VC means by this, though. Does this mean he/she is interested:
This is important to clarify, because VCs mean different things when they ask about a lead VC.
If it’s the former — come back when most of the round is committed — you can build your round in many different ways. You can bring together a party round of smaller investors without a lead on a convertible note or SAFE. It’s actually quite common these days for a smaller fund to set terms on a note or a SAFE and bring together a round that way.
And if a VC is just looking to evaluate terms, then you can create your own terms on a note or a SAFE and present those to the VC.
And lastly, if the VC is looking for a true “lead VC” to invest the majority of the round and take a board seat, etc, then this is a completely different ask from the prior two.
8) Let me know how I can help! Founder asks for help. *crickets* (@quan)
When I started my VC career, I asked this question to a few entrepreneurs I met with. I genuinely wanted to be helpful. Then I quickly realized that there was literally nothing I could help with. Hah. Every founder just wanted investment dollars, and if I weren’t investing, I couldn’t even do introductions to other investors, because it would be a bad signal.
9) Nothing. They ghost you. (@ameetshah)
10) Contact us if you like but we prefer warm introductions. (@cwlucas)
I find this ironic — VCs prefer warm introductions, and YET, there are a lot of VC analysts who send outbound emails to startups completely cold asking to chat!
My recommendation here is to try to get a warm referral to a VC. Just in general, it’s always better to have a common connection to build rapport with. That being said, a lot of the newer VCs (esp microVCs) are ok with cold emails. (For reference, 20% of our deals come in completely cold, and we see no difference in performance between the cohort of companies that came in cold vs warm)
My prediction in the next 5 years is that the VC world will move to largely accepting *good* cold emails. Most cold emails are terrible and will likely be ignored, but you do have a shot if you can send a strong cold email.
11) (Live product, thousands of users) “Yes but what *traction* do you have?”
(Gets in to YC) “Your valuation is so HIGH now!” (@kristentyrrell)
This is the typical Goldilocks and the 3 Bears problem. At first, you’re “too early” — you don’t have enough traction. And then, once you get there or another investor participates in your round and drives the valuation up, then you become “too late” — the valuation is too high.
As frustrating as this is, this is just a matter of luck / timing and fit. As pre-seed investors, I am susceptible to this as well in some sense. We invest really early (from a valuation perspective), so, by definition, we are not looking for traction. This means that we make our decisions entirely based on gut instinct of the opportunity. So, if we don’t have conviction in the business idea, we will pass. And once a founder proves with traction that we were wrong, we still won’t be able to invest, because the valuation will be too high. That’s frustrating but I’d say frustrating for VCs who miss out too — as you may have seen from the Uber IPO, lots of VCs lost out on a lot of money, because they didn’t have conviction in the idea.
There’s a lot of gut instinct in this business, and to be honest, to be great at it, you only need to be right about 20-30% of the time. It’s like baseball – you strike out most of the time. If you were to work at any other job — imagine if you were say a surgeon — if you were right only 20-30% of the time, you would be fired and everyone would be dead.
Now, this doesn’t apply to multi-stage investors. If they miss out on your seed round, you can still re-approach them at the series A or the series B.
12) Why hasn’t this been done before? (@jacobshiach)
This is a seemingly ridiculous question, and it may also seem that a lazy VC may not want to do his/her own homework. But, this question is meant to test how you think through trends and changes in your ecosystem. If you believe that markets are efficient, your opportunity should not exist. Why? Because if it’s an obvious opportunity, it means that everyone would have done it already.
So what is your key insight or secret that enables you to know about this opportunity that others do not. Is it your domain knowledge? Is it that the opportunity is in between two sectors that most people are not familiar with? Is it a behavioral trend that is happening to a certain demographic that you are a part of but most entrepreneurs are not? Whatever it is, every startup needs to have a good answer for this. Heck, even funds get asked this question — why aren’t other funds doing your strategy? And I’d say, as annoying as it is, it’s a legit question.
13) How can this be a billion dollar company? (@rkorny)
You might wonder why VCs are so obsessed with billion dollar businesses. This is because the economics of running a fund are so tough. Basically, you have a bunch of portfolio companies that will completely fail. So whatever 1-2 winners you have, will need to make up for that failure plus much more to return multiples for the fund. (Read more here: https://elizabethyin.com/2016/05/15/whats-the-difference-between-angels-and-seed-vcs/)
This means that VCs are looking for 100x+ multiple at a minimum on a successful company, and if they are coming into your round at the seed stage — say at $10m post money valuation, 100x on that is roughly a $1b exit not accounting for dilution. So this comes back to the question from above — do you want to be raising money from VCs? Is this the type of business you want to be running?
14) What’s the moat? (for a seed stage company) (@chloealpert)
This is super annoying for a seed stage company, because obviously there is no moat.
Thinking longer term, however, simplistically, there’s only one way to have a moat — and that is, your customers love you so much, they will never want to leave you and keep coming back. There could be a lot of ways to build this — e.g. you have a better user experience / product, you have more data to make your solution better / more accurate, you have greater network effects and therefore have a better product, etc. Depending on your idea, the way that you achieve this outcome will differ a lot.
VCs want to understand at scale, how you will achieve this. This is especially key for companies that have commodity products — such as finance. You don’t want to be competing on price or better deals, etc. How will you build that better / smarter product? How will you build that retention in business model? VCs want to understand how you think about this 5 years from now more than what things look like today.
15) We’re going to pass but will be cheering for you from the sidelines. (@comaddox)
This is just a ridiculous phrase and pet peeve of mine. What is this? Bring It On?