Venture Capital

Every Investor is Different. But. 22 Reasons I Won’t Fund You

echojason@gmail.com'

Jason Lemkin

Apologies for the title of this post, and perhaps the post entirely.  We try to keep things positive at SaaStr, and “22 Reasons I Would Fund You” would be a more positive title.  But it wouldn’t be as helpful.  The reasons one early stage start-up gets funded and another doesn’t can be opaque.  Some investors bet on the best engineering teams.  Others bet on traction.  Others are thesis investors.  Others bet on chutzpah.  Etc. etc.

So instead, let me assemble a checklist of 22 reasons I almost immediately pass on investing in start-ups that are interesting.  That otherwise might be worth digging in on more.  So if you take some of these issues off the table, maybe, it will increase the odds in your favor with fundraising in general.

  1.  Can’t See The Future.  I take it as a given you know your existing customers — even if it’s just 2 or 3 of them (ideally 10 for me).  And your existing market.  But if you can’t tell me the future (in your market) at least 3 years out … then it’s hard for me to believe in SaaS you’ll ever build a unicorn.  So I always have to pass here, no matter how good the metrics look today.  The very best founders can see the future.  Not perfectly.  But far better than I ever could.
  2. “Quarterly MRR”, 100% Gross Margins, and Other Crazy Metrics.  I’m not expecting you to be a CFA, CFO, or CPA.  But if your metrics make truly zero sense, to me, that’s a flag.  The biggest offender is “Quarterly MRR”, when founders combine three months of MRR into one number.  This doesn’t make you look 3x bigger.  It makes you look like you take me for a fool, or at least, are trying to pull the wool over my eyes.  Tell it to me straight.  I care far less about your exact MRR today, than where you are going.  Gaming the metrics doesn’t help here.  It hurts.
  3. --

    Founder Disalignment / Wrong Founder as CEO.  If the founders are going to break up in the next 12 months, the company can still make it.  But it’s not a journey I want to be on.  On a related point, more than 3 co-founders is a flag.  Not a deal breaker, but worrisome.  Companies can’t be run by a quorum.  At least.  Not well.

  4. Exit Strategy Slide.  I want to hear that you are building a unicorn — or at least, trying.  At least that you believe you are unicorn hunting.  An Exit Strategy Slide almost by definition tells me you aren’t.  So do something different.  Give me a “Comparables Slide” instead.  For example, with Automile, your Comparable could say “Like Fleetmatics, Acquired by Verizon for $2.5 billion, but Addressing a Larger Segment of the Market”.  That gives me confidence.  Telling me you have a plan to sell for $50m does not.  At a minimum, just delete this slide if you are presenting to any VC fund > $60m or so in size.
  5. Lack of Understanding of the Competition.  Almost everyone has competition.  I get worried if you have no respect for your competition, but sometimes, I can get past that.  But not understanding your competition?  That’s a No.  Why do your competitors beat you?  Why do you lose deals?  What are they good at — at least, on a relative basis?  Yes, you have a few better features.  Of course you do.  That’s why you have paying customers.  But how will the competitive landscape look next year, and the year after?
  6. I Wouldn’t Work For You.  This one you can’t really control, but I only want to invest in founders that can build a management team.  Otherwise, you’ll stall out somewhere between $1m and $5m in ARR, when you need to build a real set of VPs.  If I wouldn’t work for you … then I can’t help you recruit folks that will.
  7. Too Slow.  And/or Late.  You’re in sales.  If it takes you a week to respond to an email.  If you show up late and don’t email me ahead of time.  If you don’t take an amazing VP intro I give you.  I’m out.
  8. Don’t Want Me.  I’m quirky here, but I want to know that you want me as an investor.  There are many sources of capital.  If I am a fungible source of capital, I’m probably the wrong choice.  If you don’t really think I might be able to be the most useful investor to you, at least a certain stage … then it’s probably not a good fit.  At least, make me believe this 🙂
  9. Party Round.  This isn’t an absolute, but I don’t want to be one of 20 investors in the round.  I’d prefer to be the only investor, or if that doesn’t work, one of the 2 big ones at least.  20 investors?  Well, no one is on the hook for helping the company.  Except me.  And if I’m 1 of 20 … you’re asking too much of me.
  10. Convertible Debt and SAFEs if Round Size is Material.  If you are raising $500k, anything is good, debt, SAFEs, IOUs, MOUs.  But $2m+ on debt or SAFEs?  95% chance I’m out.  No one really cares as much here.  So you are raising too much without anyone with enough skin in the game.  Who is going to help you raise the next round?  Recruit the VPs?  I won’t if I don’t have enough vested in you.  So it’s easier just to pass here.
  11. No One on the Board Representing the Investors.  This is related to the last two points, but if no one is going to be on the board to at least represent all the investors, I’m out.  I don’t want, need, or care about control.  But I do care about fiduciary responsibilities and checks and balances.
  12. screen-shot-2016-12-11-at-4-22-42-pmAny Inappropriate, Sexist, Locker Room, or other Such Comments.  If you think there’s even a 1% chance you’re saying something offensive, just don’t bring it up.  There are 100 reasons this isn’t OK.   I don’t just mean the blatant stuff.  I also mean slightly more subtle stuff.  Even best case, I won’t believe you can build a unicorn if I feel at all you aren’t committed to building a truly welcoming and diverse environment.  Best case, 50-90% of the world won’t really want to work for you.  That’s a problem.
  13. Can’t Get to The Point.  I don’t need 28 slides on how Everything is Going To the Cloud.  The pitch really should take less than 5 minutes.  The pitch really should be distilled to one slide.  I’ll make a Go/No Go decision in 5 minutes, and a tentative decision in 20 minutes.  If you aren’t done with The History of the Internet by Minute 21 — It’s Hopeless.  Stick that in an Appendix.
  14. Want to Have Coffee First.  I drink 4 cups a day.  But I don’t have time for this.  I have infinite time to meet with great founders doing something great.  I have no time to meet for that 5th cup of coffee to “share notes” or “talk about what we’re doing”.
  15. Will Only Send Me Information in “Proprietary” Format.  Sometimes I will read a locked DropBox, or a Protected Box document, or a docu-send.  Sometimes.  But usually, I won’t.  I’ll move on.  Send me a good old fashioned PDF as an attachment.  Together with your model as a Google Sheet or .XLS.  Whatever is so secret, just keep it out of the materials.  Use these amazing, limited visibility products for sales.  Or even for angels, it’s fine, a good idea, use them there for sure.  But not if you want me to write you a $1m, $2m, $3m+ check.  Show me you trust me.  Not that I’m one of your 300 sales prospects.  Maybe I don’t deserve the trust yet.  But fundraising is all about building trust.  If I feel like 1 of 300 … I’m out.  Right or wrong (maybe, wrong).
  16. Telling Me the Price is Going Up.   That’s great.  Go ahead.  Herd the cats.  But I’m not buying laundry detergent here, folks.  If the price goes up, and it’s still good for both of us, so be it.  But telling me the price goes up at Midnight isn’t the way to build a 10+ year relationship.  But again, this may work well for small angel checks.
  17. Messed Up Cap Table.  If you wait to raise $2m on a $6m pre, but you already raised $5m on a $15m pre from, say, an odd mix of billionaires … this is too hard for me to fix.  It’s not a complete No, but usually, I’ll quickly pass if the cap table is too messed up.  If you have a quirky cap table — acknowledge it up front and say we can work on it together.  Then I’m back in.  But I don’t want to spend time on companies that are structurally unfundable, no matter what the other positives are.
  18. CEO Doesn’t like Sales — and The Hunt.  This is just me.  But if you don’t really want to sell.  To go hunt that bigger deal, that better logo.  I’m out.  The converse is, a bad arse hacker/engineer that has also learned to love sales.  Well then, that combo — that’s something special.
  19. Don’t Understand How I Can Help.  This is also just me.  But if I’m not sure I can truly help move the needle, then I feel like fungible capital again.  I don’t want to be that.  If I can’t help you recruit a management team, help you drive upmarket, promote you, help you scale … then that means there’s someone better than me out there for you.  This is also why it’s harder for me to invest if at least the CEO isn’t the Bay Area, ideally full-time, but at least, half-time.
  20. Not Aggressive Enough.  Follow up.  Get me what I need.  Don’t be reactive.  If you are too passive, then … can you really sell?  Can you really compete?  Maybe.  But I worry.
  21. Bad Crazy.  You have to be “good crazy” to build a Unicorn.  It’s just way too hard.  You have to recruit too many people, suffer too many dramas, too many near deaths, too many cancelled deals, too many lost partnerships.  You have to be good crazy to build a unicorn.  Anyone sane will sell before that 🙂  But be respectful.  Be aggressive, but not a stalker.  Follow up once a week, but not once an hour.  Make me believe you will drag the team to the summit.
  22. Too Balanced.  Sorry about this one.  I know some will flame me for this.  But too many hobbies, too many avocations.  It’s healthy.  It’s balanced.  But building something big in SaaS is too hard.  I really want your avocation to be the same as your vocation.  I don’t want you in the office 100 hours a week.  Actually, I don’t even want you in the office 40 hours a week — I want you out with customers 🙂  But when you’re home.  When you’re out to dinner.   When you’re relaxing at the beach.   Even (sorry) when you’re with your family.  I want you obsessing about your company.  Not your wine collection.   Not because I think this is healthy.  It’s not.  But because I think it’s what it takes to win.  This is sad to say, but any Unicorn CEO will admit that while Family Comes First.  It actually comes second.   This is sort of awful.  It takes its toll.  But it’s also generally true.

This is just me.  Others feel differently.  But if you see just a few weaknesses on this list in yourself, maybe, make 1 or 2 changes.  I think your fundraising will go much better if you do.

Published on December 12, 2016
  • Thanks, this is an interesting list you composed. When you say you want the founder to be in the Bay Area at least half time, does that imply you’ll work with them that much or do you just want them to be available for you? I am asking because I would imagine you have more then 2 companies that you are vested in so there is no way you can actually spend that much time with a single company, or am I wrong in this? What type of interval are you looking for?

    When I’ll take my startup to the US then I believe the NY / Boston area might be a better for me to be at. Hypothetically would it be a problem to say fly in once a week for a full day? Or some other “fixed” schedule?

    • jlemkin

      IMHO you should be in the Bay Area if a lot of your customers and partners are here. It definitely helps with VP-level talent recruiting, but, if none of your customers and partners are in “tech” it’s usually not worth it.

  • Parker Woodward

    22. Oh how true. That must have been difficult to publish…but glad you had the courage to say it.

    P.S. Please never stop writing. Love it! Always have to pause to read your writing…even if it’s not applicable, there is always a gem or two (or 22 in this case) worth the read!.

  • Vasu Prathipati

    “I have “like minds.” You know, I’ve been fortunate to play in Los Angeles, where there are a lot of people like me. Actors. Musicians. Businessmen. Obsessives. People who feel like God put them on earth to do whatever it is that they do. Now, do we have time to build great relationships? Do we have time to build great friendships? No. Do we have time to socialize and to hangout aimlessly? No. Do we want to do that? No. We want to work. I enjoy working.”

    – Kobe Bryant (re #22)

  • #23 could be a lack of understanding of their customers. It’s also surprisingly when startups don’t specfically who needs their products.

  • Yaniv Tal

    I struggle a lot with 22. Jury’s still out. On the one hand focus is everything and I agree about hobbies / commitments. Still not sure about family / a few key relationships though.

    1. The #1 biggest driver of success is the team. Will the best people in the world want to work for you if you’re not a role model to them? If you can’t maintain strong relationships in your own life?
    2. Those key relationships help you manage your psychology which is critical on the rollercoaster.
    3. Relationships require investment and a lot of work – especially when your work is all consuming. Do you have to strain and edge right up to that line from time to time? Probably can’t be avoided – but I’m not convinced a real do-anything-for-you partner can tolerate second place.

    Verdict in 10 years 🙂

  • Sonny Blarney

    Your comments are superficial and negative.

    “IF YOU WEREN’T A FOUNDER. YOU DON’T KNOW” is your tag line / moniker, and it really doesn’t make sense, at all. It mixes tenses, and it’s barely English. You didn’t think to have it even reviewed by someone who actually works in marketing? “If you weren’t a founder, you wouldn’t know” would be more linguistically correct. But notice it’s still in the negative? How about “Only founders know”. A little nicer, but it doesn’t matter, because it’s a crap moniker.

    “Be aggressive, but not a stalker. Follow up once a week, but not once an hour. ”

    It seems as if you have some personality-specific nuances, and can’t grasp that others are not mind-readers. That you have some ridiculously fine point for ‘how aggressive someone should be’ as an indicator of whether or not you will invest in them is basically ridiculous. Have you considered that other people have nuances? You put yourself at nearly the centre of every comment; it’s all ‘me me me, my needs, my nuances, my weird quirks that your future existence depends upon’.

    Instead of offering advice, you position all your concerns in the negative form. Instead of saying: “This is shit, or that is shit, I’m too busy to to listen to you over coffee” – you could turn it upside down. Most young entrepreneurs do not know the intricacies of your professional vocation. They don’t know what your daily life is like. You can say: “Generally, we’re pretty busy, and our time is very valuable – so we like to get to the point. A ‘coffee chat’ isn’t very valuable to either party, so it’s best to just come in for a pitch when you’re ready”. This is how to communicate without being a douche.

    You write very, very poorly. “Companies can’t be run by a quorum. At least. Not well.”. Every blurb was poorly written. How can an entrepreneur trust someone who doesn’t have a basic grasp of language?

    “If I feel like 1 of 300 … I’m out. Right or wrong (maybe, wrong).” Yes – it’s ‘wrong’. You wan’t your entrepreneurs to hustle, hustle, hustle? You understand how much risk and stress is involved in raising money? Of course those pitching to you are making many pitches. You should expect that. If you some reasonable interest in the situation, then perhaps there can be some expectation on your part that they would respond in kind, which is to say focus a little bit more on your specific talents.

    Your website is barely navigable – it’s not even possible to ‘scroll down’ (at least in Chrome, the world’s most popular browser) on the investment page to see your current investments… wherein we can discover that you basically have not much of a track record.

    But don’t take my word for it:

    So let’s just finish with a bit of self-awareness from Quora:

    “What are the elements of a successful venture capital firm?

    Jason M. Lemkin

    Returns.

    At least two 4x+ funds = true success.

    It does not matter if founders like you.

    etc. etc. etc.

    Returns.

    You are a financial product.”

    Since Saastr has no ‘returns’, I wonder what all of this advice is about?

    This article is quite a bad piece of PR, if you actually have any staff, they should have flagged it.

    • Yaniv Tal

      Hey Sonny, I’m ashamed for you that you think it’s acceptable to be so blatantly rude to someone who’s spending their time trying to help others. Everything you wrote is distorted and quite frankly ugly. I doubt anyone in this community would want to hear from you again so please take that attitude and find something more positive to do with your time. Thanks and bye.

      • ThyagSundaramoorthy

        You nailed it. All Jason is asking for is to cut-the-crap and get down to the freaking point, which is awesome. The above comment about “language” or politeness or “negativity” is a clear sign of an amateur who doesn’t understand money and power. Hey, after all, Jason is a millionaire investor and he can afford to make typo mistakes and still look cool.

  • #22 is the hardest for me. I put my heart and soul in my startup, but also in my kids. They’re not a hobby or a wine collection. They’re real, live people who need a mom. I know this harms my chances for startup success, but gotta be there for the people you love.

  • ThyagSundaramoorthy

    Awesome article as always!

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