When investors refuse you

Previous parts: First part .

This article describes what to do when venture capitalists (hereinafter referred to VC) refuse to invest in your project, and you either change the course of their thoughts or look for other ways.

I dare to assume that you have made all the initial preparations: developed a plan and strategy, realized that you really needed investments and investments needed you, organized meetings with qualified VCs and took the first steps.
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They gave you the answer, and it turned out to be negative.

To get a refusal once doesn’t mean anything. VC may have just a bad day. He could have had an unpleasant experience with a company from your group, or he had an unpleasant experience with a company with a similar name. Maybe there was an unpleasant experience with the founder of any other company that looked like two drops of water to you. Maybe the engine of his beloved Mercedes SLR McLaren boiled that day somewhere on the highway. Maybe anything.

Do not despair and go and meet with another VC. If you went and met with three VCs, and they all refused you, then this may be just a coincidence. Do not despair and go and meet with another VC.

But if you met with five, six or eight VCs, and they all refused to you, then this is no longer a coincidence. Most likely, something is wrong with your plan. And even if everything is in order with him, it may turn out that something is really wrong, otherwise you would have been invested in it for a long time. Meeting with other VC after you refused a large number of previous - a waste of time. Instead, better review and correct your plan. And this is exactly what is described in this article.

1. Set aside the main part to return to it later

There is an opinion, and it is correct that VCs are rarely refused, more often they say something of a kind: “Maybe”, or “Not now”, or “My partners are not sure”, or “Interesting. But I would think a little if you don't mind it. ” They do it because in this case, they are not eager to invest money in your company, but if everything changes, they want them to have the opportunity to return to this conversation in the future. This is exactly what you need so that you have the opportunity to return to them with a set of new opportunities, change the course of their thoughts and get the same cherished "Yes."

Therefore, treat failure with ease. Politely ask them about their opinion (although they are unlikely to tell you, in any case, honestly, because no one wants to call someone's child a freak, believe me, I did it). Thank them for their time and ask if they will mind if you call them when something changes.

Believe me, they want to say “Yes” rather than “No”, because they want to get all the best investment opportunities they can get.

2. Look around

If you were refused in 1999, this does not mean the same thing as if you were refused in 2002.

If you were refused in 1999, then I am sure that you are a great person, and you have great potential, and that your mother loves you very much, but you really have the wrong plan. If you were refused in 2002, then you may have been the second Google, but most of the VC was hiding under the tables at that moment, and they missed it.

I think that now the environment is much more favorable than it was at that time. A large number of business plans receive funding, and with them the bad ones, but not all bad ones. I will continue, but provided that the situation remains just as good, because if the time becomes very favorable or, on the contrary, unfavorable, then in any case, most of what is said will bear little benefit. .

3. Redo your business plan

This is the most difficult thing - to change the facts in your business plan and the facts of what your company is trying to do in order to increase the chances for your company to invest.

In order to describe the aspects that you need to rethink in the process of changing your business plan, let me introduce to you the onion theory of risk.

If you are an investor, then you look at the risks surrounding the investment, like onions. In the same way as if you cleaned the onions by removing them layer by layer, the risk of investing in startups consists of layers that you take off one by one, reducing their number. Your task as a founder trying to get an investment is to remove the risk layers from your “onions” until VC says “Yes”, until the risk of investing money in your company ceases to be terrifying and investing in your startup risky.

What layers of risk exist for high-tech startups?

In fact, it all depends on the startup, but here are the standard risks:

Foundational risk - does your startup have the right founding team? The standard founding team usually consists of a great technologist, plus someone who can manage the company, or at least start it. Is a technologist really needed? Can a business man run a company? And what if the team does not have a business person? Is it possible that they are business people, but there is no technologist; Is it then likely that there is no opportunity to water the investment?

Market risk - is there a market for the product (in this case the product and service carry the same meaning)? Will he be in demand? Will you pay for it? How many? How do we know?

Competitive risk - are there many other startups that do this? Is this startup different from other startups, or other projects visited?

Temporary risk - is it a bit early? Isn't it too late?

Financial risk - after this round of financing, how many more rounds will the company need to become profitable, and how many investments will it take? How much can we be sure that these calculations are correct? How do we know?

Marketing risk - will this startup make its way through the crowd? How much does it cost? Will the purchase price of a single user be lower than the amount this user will bring?

Distribution risk - does this startup need distribution partners to succeed? Can he get them? How? (For example: for almost all mobile startups, distribution contracts with the main mobile operators are needed in order to achieve success).

Technological risk - can they create a product? Does this sound like rocket science, or artificial intelligence, or the processing of a human voice? Do you need any fundamental breakthroughs for this? If so, how far can we be sure that they will occur, or that this team will be able to make them?

Production risk - even if we assume that this product can be created, will this team be able to create it?

Hired risk - who needs to hire a startup in order to carry out his plan? For example: a startup is planning to create a large-scale web service and she will need a financial director - can they hire a good director?

Location risk - where is the startup? Can they hire literate people in this place? And will I, as the company's vice president, have to drive more than 20 minutes in my Mercedes SLR McLaren to get to him?

You know, when you put it all together, and look at what happened, then you will be very much puzzled by the question: "How did you actually invest money in someone?"

What you need to do is to: take a sober look at all of this, and also add to it all those risks that are specific to your startup and the category of startups to which it belongs; imagine yourself in the place of VK; and answer the question: “What can be done to minimize the risk of investing in this startup?”, and then do all these things.

This is not the most joyful process, because this can seriously change your plans, but if you look at it from the other side, this is a great practice. Then later you can easily take into account all the risks and all the bad things that can happen, including global warming, when your company prepares registration documents for S1 for submission to the Securities Commission.

Some ideas for risk reduction

Founding risk is the most difficult. If you are a technologist and one of the founders, and your partner is a business person, then you need to consider the possibility that VC will consider that a business person will not be strong enough to hold the post of general director. Or vice versa, he will assume that the technologist’s knowledge is not enough for product development. You will have to change one or several founders, and / or add one more.

I put it in the first place, because The chances that someone will be honest with you in this matter are incredibly small.

Market risk - you may have to probe the market at a practical level. Sometimes a more detailed study and analysis of the market will solve the problem, but in most cases you will have to find several consumers in order to prove that the market actually exists. Preferably paying customers. Well, or, as a last resort, a credible researcher who will explain the VC to the hypothetical possibility of the existence of a market.

Competitive risk - are your differences so obvious? Explore this fact from start to finish. Many startups do not have significant differences even when they have already invested in them. If you have no idea about how much and how you are different or superior to your existing and non-existent competitors, then it is better for you not to start a company until you solve this issue.

Two additional nuances in competitive risk that spoil everything to the founders when talking to the VC:

Never say that you have no competitors. It speaks of naivety. Huge markets attract competitors, and therefore if you have no competitors, then you apparently chose a bad market. Even if you think that you have no competitors - create a foothold of competitors, taking them from adjacent areas, and be ready to speak decisively about how you look like them and how you differ from them.

And never say that your calculations show that you will be incredibly lucky, even if you manage to get 2% (of your huge) market. This also speaks of naivety. If you want to capture only 2% of the market, then the big companies that will get the remaining 98% will simply crush you. You should have a theory of how you will get much more than 2% of the market (I’m talking about 2%, that’s a cliche, and if you are a VC, then you most likely have already heard it from someone .).

Temporary risk - the only thing you can do in this case is to move forward and prove that you are not too early or too late. Getting customers is the only thing you can do in this case.

Financial risk - seriously consider how much money you really need to rise after this round of financing, and try to bring your business plan into a more believable form so that you need less money. For example, you can serve Crystal (approx. Translator: ~ $ 500 per 1 liter bottle) for a presentation, not Louis XIII cognac, Remy Martin “Black Pearl” (approx. Interpreter: $ 9000 per 750ml bottle).

Marketing risk - first, make sure that you have very sharp differences, because without this you can hardly stand out from the crowd.

Then simulate in detail the process of acquiring customers and make sure that you can visually show that you will receive more income from the client than it will cost to attract. For example, this is a big problem for startups chasing a small market. If it turns out that you need a huge amount of money in order to attract customers, then try other ways of marketing. For example: shadow marketing or viral.

Distribution risk is also a very serious moment. If you have this risk in your plan, say, you need key distributors to make it work, then my advice to you is to lay the plan on the shelf and do something else. Otherwise, you will need to go and get a distributor before you get the money, which is almost unreal.

Technological risk - there is only one way to solve this issue; create a product or at least a beta version of the product, and only then go to ask for money.

Production risk is the same answer; create it.

Hired risk - the best way to solve this issue is that you should find out about what position / positions you are worried about VC, and add it / them to the team of founders. This means that you have to share, but, most likely, this is the only way to solve this problem.

Location risk is the only risk you enjoy least. If you are not in the center of the technological development of your country, and you have problems getting money; you will have to move. That is why almost all the films in the USA are shot in Los Angeles, and that is why most of the technology start-ups that invested money are in Silicon Valley and several other places; because there is money. You can start a company anywhere, but you are unlikely to invest in it.

You probably noticed that most of what you have to do is develop further. Move ahead with your business plan to get an investment.

Perhaps you will ask the question: "How should I manage to do this before I receive the investment?"

Try to find a business angel; try to find the first potential customers; try to work, and in the evenings to engage in the project or take a break from work and live some time on credit cards.

Many start-ups went one of these ways, and luck smiled on them, but many were not lucky. No one promised it would be easy. The most valuable thing you can do is create a product. When in doubt, focus on that. The next right thing to do is to get clients, or if you are creating a web service, then try to achieve a growth in views.

The whole theory of venture capital is that VC invests in risk. Another name for venture capital is risk capital. But the problem is that VC has no desire to take very serious risks, so your goal is to reduce them to a minimum.

Peel the onions!

And after you finish - start from the beginning with new facts, take new steps and repeat if necessary.

And remember that "Yes" can always turn into "No", until the money went to your company account. Therefore, always leave options to the very end.