Why Hearing “No” in a Fund-Raising Process is Actually Healthy
Every entrepreneur wants to hear “yes” during the fund-raising process but I would argue that being too risk averse and not pushing hard enough and be willing to hear a “no” is what holds back many people from “yes.”
I believe people generally hate making decisions and especially so when they involve commitments and risks. This is true of any buying process where a customer has to make a large investment decision on your software or when an investor must decide whether to give you $ 5 million. In the case of the investment they are often also not only committing personal risk of looking bad at their partnership if things don’t go well but also countless hours of board meetings, financial reviews, legal documents across what is often 7–10 years or more.
So it should be no surprise that “yes” doesn’t come easily. But “no” also doesn’t come as easily as most people would like so entrepreneurs get stuck and frustrated by this endless string of “maybes” or non-responses. When somebody has to tell you no, the potential investor must:
- Feel discomfort of letting you down. Investors are human, after all
- Come up with a valid reason because they know in communicating with founders if there’s no reason to say “no” you can generate bad will
- Risk missing out on an inflection point: Investors of course are also concerned about saying “no” too early in the process when they can “hang around the rim” and see what happens?
- Possibly offend and entrepreneur leading to reputation risk amongst other entrepreneurs. Investors fear that saying “no” to you now will offend you and have them tell other entrepreneurs and/or make it harder that they’ll come back to you in the next round
For these reasons and more fund-raising often leads to a frustrating sense of never really knowing where you stand with most of your prospects and founders often have no plan for how to push prospects along — often out of fear that being too pushy could lead to an earlier “no.” Maybe this is reverse “hanging around the rim” where if you keep you VC process going long enough you’ll eventually get to “yes?”
Of course stringing out the process doesn’t lead to good outcomes. I spend a lot of time coaching entrepreneurs through their fund-raising processes by doing “pipeline reviews” of all of the firms with whom they are speaking. These are similar to the pipeline reviews I used to do with sales reps when I was a CEO. What I’m looking for in the conversation is:
- Whom at the firm are you meeting with? Do they have authority to invest? Do they have influence? Can they get deals done? Do they understand your space?
- When was your last contact? How many meetings have you had? What information did they request? When did you last hear from them? What feedback did they give you about the process?
- What is your next step in the process? It surprises me how few entrepreneurs even know what the next step is. Because entrepreneurs often don’t feel comfortable in a sales process (as a fund-raising process is) they often don’t enquire about the approval process at the firm. It is perfectly acceptable (and should be required!) to politely ask about the process.
The net result is that often I find founders who don’t really know where they stand, what they would need to do in order to get an investment, who has to decide, what is the process to get that decision and what are the next steps in the process.
My belief is that founders often don’t push hard enough in asking for more meetings, asking where they stand, asking what the next steps are in part because they know that if they push too hard they might hear “no.” I often counsel people that they might need to hear 20 “no’s” in order to get 3–4 firms that move closer to a “yes” but those 3–4 firms might not make progress without the founders taking a bit of a risk on the process to get to yes.
I actually have to admit that I learned this from Carly Fiorina. When I was young in my career I did some consulting for the European arm of Lucent. We were working on their go-to-market strategy for Europe and Carly was Group President of the division where I was advising (a $ 19 billion line of business) at Lucent and she flew out for the final presentations. She stood in front of the sales executives and shouted at them like she was a high school football coach. She was imploring them to push harder in their sales process. To go “top down” in all of their campaigns. To use advisors or contacts to help them build executive-level relationships. And to be willing to hear “no” as long as it came quickly. That they shouldn’t accept a “muddy maybe” where buyers avoid making a decision. She told them they should embrace “no” because if they say “no” they were likely to say “no” eventually anyways so it’s better that you know early and can focus your resources on places where you had a better chance of getting to “yes.”
It was deeply uncomfortable for me because it was a sort of in-you-face, aggressive, go conquer the world kind of speech. But honestly it changed me in positive ways because the message — however hard to hear — resonated. It conveyed urgency, it implored people to respect their own time as much as they respected customers’ time and it asked that people have the courage to face rejection. I have now developed this into my own standard (softer) speech I give to entrepreneurs.
“People are afraid to hear ‘no’ so they don’t push hard enough. You need to be polite, but if you respect yourself you’ve earned the right to ask the awkward questions about where you stand and what comes next. If people tell you ‘no’ as a result of a polite push they were going to say ‘no’ anyways. But often if they don’t say ‘no’ you’ve just got yourself a commitment to re-engage.”
I push for commitments in my own job, sometimes beyond my comfort level. I once had a potential LP back in 2010 (when fund-raising as a VC was harder for me) tell me that he thought he was a better fit to look at our next fund rather than this one. I had learned that this is a standard line every LP uses to have an “easy no” for VCs. He hadn’t actually told me ‘no’ so I figured, “what the hell?” I’d give it a bigger shot.
I told him, “why don’t you come visit me in LA. I’ll set up a dinner with 6–7 VC firms and a bunch of prominent local entrepreneurs. At the end of it if we’re not a good fit — you’ve at least gotten informed about the LA market for when you do ever want to invest? What have you got to lose? Besides — the weather in LA is great this time of year!” I then stayed silent. It’s hard and awkward to do this because silence demands a response.
He said it sounded like a good idea and he committed to coming right then and there on the phone. Phew. I was relieved. I had no downside. At the very least I would build a better relationship and help other VCs in LA get to know an important potential LP. He did come, he enjoyed himself, learned a lot and we became much closer. What I liked about this approach is that he could “see me in the wild” how I normally am with my peer group rather than pitching Powerpoint at conference room table to his colleagues and him.
Then he went a little bit dark on me. It wasn’t surprising — if he engaged he’s have to make up his mind and I knew he was leaning against saying “yes” but I forced myself to actually hear “no” from him. I asked him for a quick call to give him an update on my progress. I used this opportunity to turn this into asking him how the trip went and what he was thinking about LA. He told me, “I had a great trip. But honestly we normally invest $ 15 million in funds and I don’t think I have the time to get the work done in order to make a commitment to your fund. I’ll try to get the work done but I doubt we’ll have a positive answer in this process. In any event give me time to do the work.”
I knew that I was going to get sucked into another 6–8 weeks of avoidance, some basic analysis and likely no progress. So I pushed harder, being willing to embrace a “no.” I told him, “Listen, why don’t you just give me $ 5 million. I don’t need the $ 5 million, it will be amongst our smallest commitments. But I know that if you invest you’ll take more time to get to know us. If you like us over the next three years I promise you a $ 15 million allocation in our next fund and if you’re not happy I promise not to hassle you for another dollar. You literally have nothing to lose. What do you say?”
Yes, this was out of my comfort zone. I was pushing for a “no” but hoping for a “yes.” This wasn’t the first time I had pushed this hard and I had certainly heard “no” many times back then. But this time he told me he’d think about it and we scheduled a call 48-hours later. And as you imagined, he said, “yes.” I couldn’t believe it. For us $ 5 million was a small check but it was a victory.
The firm he invested from has now invested more than $ 30 million with us but as importantly he changed jobs and moved to another firm and he went on to commit $ 70 million over a 6-year period of time at this other investment firm. He also has gone on to become one of my closer LP advisors. He pushes me hard on issues that have helped me grow.
But I swear to you if I hadn’t been willing to hear “no” I never would have gotten a “yes.”
Embrace “no” and don’t take it personally. Embracing “no” will unlock your much bigger potential.
No SUCKS, but it is also liberating.
Wait, there’s more!
This is part of a series on fund-raising advice for entrepreneurs and VCs. You can see the first post “Lemons Ripen Early,” which also has an outline and a link to all of the other topics.
Photo on Visual Hunt
Why Hearing “No” in a Fund-Raising Process is Actually Healthy was originally published in Both Sides of the Table on Medium, where people are continuing the conversation by highlighting and responding to this story.