How to turn a investor from a "no" to a "yes".

This article is about how to regroup when you reach out to investors and they say “no” to your venture, and what you can do to change their minds or find an alternative route.

Assuming you're confident that venture capital is the right funding option and you are right for venture capital, you have properly qualified VCs and have your hitlist to hand. If you have all the basics covered and in place from a business plan, pitch deck, financial model, up-to-date cap table, IP and legal filings and have collated those docs in a data room then you should be prepared.

If you've already made several pitches and you have heard a strong of responses from “we're not making investment in that space at this time"”, "you're too early", roughly translated means "come back in 6 months when you've got more traction" or some other generic response its time to reflect.

Understanding Investor Feedback and the Importance of Reflection

To regroup effectively, it's vital to address the weaknesses in your plan and prepare for the next opportunity, ideally in 12 to 18 months. The saying that VCs behave like penguins—where one jumps and they all jump—is somewhat accurate. However, they often don’t explicitly say “no.” More commonly, you’ll hear responses like “maybe,” “not right now,” or “my partners aren’t sure.” While they may not wish to invest based on your current traction, they might keep the door open for future discussions, which is precisely what you want. This way, you can return to them later with a fresh set of facts and figures, transforming their “no” into a “yes” by demonstrating your capability to execute on your promises.

Pitching for investment is akin to making a sales pitch; it's a hustle. Each “no” could bring you a step closer to a “yes.” Embrace your losses gracefully and seek feedback, even if it’s not entirely forthcoming. Many investors prefer to avoid delivering bad news, often opting for vague responses. Be sure to thank them for their time and inquire if you can reach out again in a few months after making progress. Ironically, investors would much rather say “yes” than “no,” especially in today’s market, where solid opportunities are scarce.

The year 2022 marked a turning point, with deal flow plummeting. VCs became preoccupied with administering support to life support to portfolio companies and reassuring their limited partners (LPs) that the decline was merely a late-stage phenomenon. You need to accept the prevailing market cycle. Receiving a “no” from VCs in 2024 differs significantly from being told “no” in the 2020 and 2021, when funding was more accessible. If you were raised funds over two years ago, you will find it much tougher now. Before the Ukraine conflict, investors were intoxicated by cheap capital and the attractive returns that VC exits offered, especially when compared to a stagnant fixed-rate environment.

The market continues to nurse its hangover, deal-flow is still down and investors are much more discerning and harder on deal terms. Still, companies with robust fundamentals continue to raise and there is a huge amount of dry powder available for attractive opportunities, particularly at the seed stage. As we look to 2025, I predict the market will trend sideways.

Regrouping After Investor Rejections: Strategies to Change Minds or Find Alternatives

Whilst generic responses don't provide any real clarity or useful feedback its best to keep moving forward and consider there are many reasons why they passed. The investor could be talking to competitors already, have invested in the space, not actually be interested in the space (just fishing). Alternatively, they may have been burnt by a bad deal in same space, they are not impressed by the team or have conviction in their capability. They could also just be having a really tough day with back to back calls that are sapping their attention. So before you quit line up some more meetings and don't let it grind you down.

After making several pitches for investment, you may encounter a range of negative or opaque responses, such as, "We're not investing in that space at this time," or "You're too early," which essentially means, "Come back to us in six months when you've gained more traction." When faced with these generic responses, it's crucial to take a step back and reflect.

If the majority of investors say say no, it’s not a coincidence. There is probably a flaw in your plan or, even if that isn’t the case, you need to regroup because you’re still not getting traction with investors. Meeting with more VCs after 12-15 have said no, is probably not worth the time. Instead, reboot your plan of attack — which is what this article is going to drill into.

The cliche that VCs are like penguins is debatable that is, when one jumps they all jump, however on the flip side they rarely actually say “no”—more often they say “maybe”, or “not right now”, or “my partners aren’t sure”, or “that’s interesting, let me think about it”. Whilst they may not wish to invest in your company given the current traction, they reserve the right to come back into the deal further down the track and that’s exactly what you want—you want to be able to go back to them with a new set of facts, figures and convert them from a "no" to a “yes” validating that you can execute on the promises you make.

Pitching for investment is a sales pitch, its a hustle, and every no as the cliché goes, is "one step closer to a yes" so gracefully accept your losses and ask for feedback (which they probably won’t give you, at least not completely honestly—nobody likes giving bad news and will opt for the easy way out), make sure you thank them for their time, and ask if you can call them again in several months when you've moved the needle. Ironically, they would rather be saying “yes” than “no”— especially in the current market where good deals are few and far between.

Strip down and rebuild your investment playbook.

Take the time to step back and analyse the facts of your plan and objectives. Consulting with other founders, advisors, and investors will help identify weaknesses and enhance how investable your company’s is. Encourage candid feedback, as honest perspectives can illuminate potential pitfalls you might have overlooked.

To aid in this process, consider the "onion theory of risk," attributed to Marc Andreessen. Some investors view the risks associated with a start-up like peeling an onion—layer by layer, risks are minimized until an investor feels comfortable saying “yes.” The objective is to systematically reduce the perceived risks of your start-up until investing no longer seems daunting and appears practically feasible. This involves ensuring that the potential returns are backed by diligent examination and proof points over time.

The challenge of raising venture capital lies in systematically removing layers of risk from your startup, much like peeling an onion. The goal is to reach a point where an investor feels comfortable committing, reducing the perceived risks to a level that makes investing seem not only feasible but also appealing. This process involves demonstrating the potential for returns through thorough analysis and verified proof points over time, which reassures investors and mitigates their concerns.

Understanding these layers helps in crafting a stronger pitch and enhancing the overall investment proposition. In reality, valuation is a process of minimising layers of risk.

So what are these layers of risk for a fast growth start-up?

1. Founder Risk: The trajectory of a start-up heavily relies on the founding team. Ideally, this team combines a technical visionary with commercial expertise and financial skills and knowledge. Challenges often arise if the technical lead lacks scalability or if the CEO struggles to inspire confidence in investors. Many technically-focused teams excel in R&D but may falter in commercial execution. To effectively mitigate market risk, it's crucial to achieve a balance between technical skills, financial, commercial, experience on the team. Misalignment here can obstruct fundraising, hinder team growth, and ultimately restrict market entry.
2. Timing Risk: Consider whether your venture is entering the market too early or too late. If significant capital has already flowed into the space your attacking, it may be challenging to secure fresh capital . Economic factors can also inflate costs and decrease valuations, influencing the market cycle and your ability to raise capital.
3. Technology Risk: Assess whether your product is technically feasible. Does it rely on advanced technologies like artificial intelligence or quantum computing? If your innovations are cutting-edge, ensure that your team possesses the expertise to tackle the technical hurdles ahead including any regulatory issues.
4. Market Risk: Evaluating the size and growth potential of your target market is essential. Understanding whether your product address a significant and recurring pain point for customers is a good starting point. The severity and repeatability of the problem and the existence of a market gap can drive early adoption. A deep understanding of the customer and validating their willingness to pay is critical as well as understanding and addressing any market conversion challenges.
5. Competition Risk: Identify whether other start-ups are pursuing similar solutions. Consider how well your start-up differentiates itself from competitors, including established players. Conducting thorough research on the competitive landscape will prepare you for investor questions and highlight your unique value proposition.
6. Financing Risk: It’s vital to ensure that your financial forecasts are realistic and backed by research on comparable companies in terms of valuation. Post-investment, how many additional rounds of funding will be necessary for your start-up to achieve revenue generation or profitability? Having a clear long term funding strategy and understanding of future capital requirements will give investors more confidential you have a solid financial plan to achieve your milestones and long term growth objectives. A robust financial plan will withstand investor scrutiny.
7. Marketing Risk: Evaluate whether your value proposition effectively breaks through the market noise. Calculate customer acquisition costs and average value per client / customer assess whether revenue generated is a multiple of the cost of getting customers. What is your primary and secondary markets?
8. Distribution Risk: If your business model hinges on securing distribution or channel partners, prioritize establishing these relationships before fundraising. For example, mobile start-ups often struggle without agreements with major carriers.
9. Team Risk: Identify the key roles that need to be filled for your plan's execution. For instance, a start-up intending to develop a high-scale web service might require a capable VP of Operations. Assess whether your founding team can attract the necessary talent.
10. Location Risk: The geographic location of your start-up can impact your ability to hire the right talent within budget constraints. If going to the US the time difference between the East and West coast can make a difference to execution speed as the latter are effectively a day behind the UK.

By mapping out these layers of risk, you can more effectively target your efforts and show potential investors that you're aware of and addressing the challenges your start-up faces. When you stack up all the layers and look at the full onion you can see how challenging it is to mitigate all of them.

Thankfully, this is an area where investors love to help and a good way to engage their opinion on on your venture by unpacking those problems and getting their perspective on how to overcome and leverage their experience, knowledge, contacts and portfolio.

Engaging with experienced founders, advisors, or investors to evaluate each risk objectively can provide valuable insights.

Caution: Running through the investor gauntlet and receiving m=numerous rejections can trigger an existential crisis and significantly undermine your confidence. Its important to see it as a learning opportunity, just like building your company.

To navigate this challenging journey, it's always helpful to surround yourself with other founders who have successfully pivoted and been through the fund raising mincing machine. They can empathize with your struggles and guide you through the critical considerations necessary for reshaping your strategy and approach.

If you manage to recalibrate your approach, secure investment, and then scale rapidly, you’ll emerge from the experience not just resilient but also battle-tested. This preparation will equip you for the rigorous process of taking your company public. You will need to meticulously compile admission documentation that details every conceivable risk and worst-case scenario in the risk factors section—this includes identifying dependencies, counterparty risks, and even environmental, social, and governance (ESG) risks. Embracing this thoroughness will strengthen your venture’s foundation and enhance its appeal to potential investors.

Strategies for Mitigating Risks

Once you’ve identified the layers of risk facing your startup, the next step is to develop strategies to minimize or eliminate these risks. Here’s how you can approach each layer:

1. Founder Risk: Strengthen your founding team by evaluating individual roles and competencies. If necessary, consider bringing in additional co-founders or advisors with complementary skills. Establish an experienced and influential board that can provide oversight and accountability, helping to navigate any potential conflicts among founders. An experienced and accomplished board is a strong validation signal to the market and social proof of your social currency.
2. Timing Risk: To improve your timing in the market, focus on generating traction. Gather customer feedback and adapt iterate your product accordingly. Demonstrating rapid month-over-month (MoM) and year-over-year (YoY) growth will reassure investors that you are not too early or too late in your market entry.
3. Technology Risk: The best way to address technology risk is to build a prototype or beta version of your product and get it to market as quickly as possible. Engaging early users for feedback can further validate your product’s feasibility. This tangible proof can provide investors with confidence in your team’s capability to execute, to build, sell and distribute! .
4. Market Risk: Conduct thorough market research to validate your assumptions. Gather data on customer pain points and willingness to pay. Establish relationships with potential customers to ensure that your product meets real market needs. Engaging in pilot programs with early adopters can provide valuable insights.
5. Competition Risk: Differentiate your offering by clearly defining your unique value proposition. Continuously update your competitive analysis to identify strengths and weaknesses in competitors offerings. Make sure your marketing messaging effectively communicates what sets you apart. Understanding your competitors’ funding history can also inform your strategy and approach. Get close to the competition.
6. Financing Risk: Clearly outline your financial roadmap, projecting how many rounds of financing you’ll need and at what stages. Utilize data from comparable companies to bolster your projections. This transparency will give investors confidence in your financial management.
7. Marketing Risk: As discussed above, develop a strong, sharp differentiation that resonates with your target audience. Invest time in creating detailed unit economics to illustrate customer acquisition costs and lifetime value (LTV). This understanding will allow you to present a robust marketing plan that shows how you intend to drive revenue.
8. Distribution Risk: If your business model relies on specific distribution channels, prioritize securing those partnerships before your fundraising efforts. Build relationships with potential distribution partners and offer incentives that align with their goals and help you build market share and don't pose a competitive threat to partners.
9. Team Risk: Assess the key positions required for the business over the longer term and aim to plug any skills gaps in the team.. Create a hiring strategy that addresses these gaps, making sure to communicate this plan to potential investors. Building an option pool to attract top talent including board advisors may incur some dilution, but it’s essential for long-term success.
10. Location Risk: If your start-up is based in a location that lacks access to capital or talent, consider broadening your search for investors or talent. Attend networking events in major start-up hubs or utilize online platforms to connect with potential partners and investors. If expanding overseas think about time zones and how this will impact your business operations in the UK.

Venture capital is not really about finance its really about risk, VCs are taking calculated risky bets that's why its called “risk capital”—but in reality VCs want derisked opportunities where the certainty is high, they only have so much appetite for the unknown so the best thing you can do to maximise your chances of locking in investment is to highlight how you have reduced the risks your start up faces.

Effectively, investors think about value as the inverse of risk. The more layers of risk the lower the valuation. The more layers of the onion you peel away, the greater the valuation. So get peeling, layer by layer, starting with the big risks first.

Then, once you’ve done that, redraft your deck around the new facts. Get on the fund raising carousel and start pitching again and iterate your pitch based on feedback.

Engage with Investors for Feedback

An essential part of mitigating risk is to engage with investors throughout the process. Present your revised plans and ask for their insights on each identified risk. This engagement not only provides valuable perspectives but also fosters relationships that could pay off down the line.

Iterate and Pivot as Needed

As you implement these strategies, remain open to feedback and willing to pivot your approach based on what you learn. Continuous improvement is crucial in the start-up ecosystem. Regularly revisit your risk assessments and refine your strategies to adapt to changing market conditions and investor expectations.

Fundraising is often a challenging journey that tests a founder's resilience and perseverance. Hearing “no” from investors can be disheartening, but it's essential to maintain a positive outlook and continue moving forward.

Good luck out there 👍Like, comment and share 🙏💓

========

#linkedinarticle #fundinginnovation #fundingstrategy #riskcapital #duediligrnce #topvoice #investorinsights #startups #founders #innovationcapital #derisk #lessonslearned #realtalk