With some frequency, I, like many investors, find myself passing on the opportunity to invest in a startup that is built upon the foundation of a strong idea and solid operating plan. Furthermore, in many cases such as this, I expect the entrepreneurs to make a substantial return for themselves (assuming that they finance their company properly). Ultimately, while saying ‘no thanks’ to a company that’s likely to become a nice business feels unnatural, it can be the right decision for an investor.
When a VC passes on a company that seems poised to succeed, he may do so because the company is not a fit with the VC’s thesis. The company might be based in a geography or sector in which the VC doesn’t invest. While VCs will make exceptions in these situations to pursue attractive opportunities, the bar for doing so is higher than the bar for investments that fit the thesis and other preferences of the investor.
A third situation, which less frequently leads to exceptions, is when the company is not likely to scale sufficiently to meet a VC’s investment requirements. An entrepreneur can make a nice return on a company that sells for $25 million, whereas medium-sized and large VC funds might be seeking exit values of at least $100 million. While it’s strange to pass on an opportunity where the entrepreneur is poised to do well, it’s the right choice for the fund’s economics.
The important takeaway here is that VCs pass on opportunities for a multitude of reasons, many of which are not tied specifically to a specific team or business idea. As a result, you shouldn’t take it personally if a VC passes on the opportunity to invest in your company.
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