May 20 2008

Saying "no" can be hard to do

At the risk of opening myself up to a landslide of snide comments expressing sympathy for the "difficult" job a VC has saying no to so many potential investments, but in the interest of being open about the experience of venture capital from the inside I offer up the following thoughts:

Sometimes it’s very easy to decide to decline a company’s request for financing (and we see literally thousands of plans a year, so we’re pretty well practiced at it).  Many times the company simply isn’t a fit for our investment focus (we get a few "invest in our [pick one] manufacturing/car wash/custom painting/etc business" requests ever year).  Or the business plan is clearly off base (my personal favorite from this genre was the company that planned to colonize the moon for the purpose of reducing the cost of launching satellites – which they were going to build from materials they were to mine from the moon).  Lots of others are potentially interesting but for one reason or another just don’t make the cut.  The ones that pique our interest we start a dialogue with, which typically involves several meetings, background due diligence, etc.  Some of these businesses we will relatively quickly decide are not a good fit and they fall off the list.  Then there are the ones that we really dig into.  While we pride ourselves on moving quickly through our investment process, being quick doesn’t mean not being thorough – we do a lot of work looking into investment opportunities before we make our final decision to invest. 

As we’re moving through this process there continue to be a meaningful percentage of companies that we ultimately decide not to pursue an investment in.  I like to think our process is a pretty open one (specifically that we’re very clear with the entrepreneurs that we’re working with what our outstanding questions/areas of concern are).  But even when it’s clear that we’re just not "there" on a deal it can be difficult to turn down an investment late in the game.  I’m not talking about reaching the decision to say no – we have a well exercised process and a very open patter of communication at Foundry that I think allows us to make very good decisions throughout our deal process. I’m talking about actually making the phone call to someone you’ve been working with for months, who has been answering your questions, putting up with your requests for more data and with whom you’ve likely been engaged in pretty detailed business planning.

I had a particularly challenging example of this about a month ago when I turned down an investment in a company that I was really close to saying yes to.  In this case I particularly liked the founder (we had both a great personal and professional connection) and the business was in an area that I know extremely well.  I did a ton of work on the opportunity and as a partnership we had many conversations about the business (while I had been leading the work all of my partners had spent real time looking into the business and had met the founder several times).  Ultimately I couldn’t get over a handful of concerns about where the market (and in this case specifically competition) was moving and as a result turned down the chance to invest.  Probably the hardest "no" that I’ve ever had to give . . . .

Note: the company in question had another source of funds and is off and running on executing against their plan.