Apologies for the title of this post, and perhaps the post entirely. 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.
I thought it might be helpful to assemble a checklist of 22 reasons I almost immediately pass on investing in start-ups that are still 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.
- 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.
- “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.
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.
- 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.
- 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?
- 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.
- 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.
- 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 at a certain stage … then it’s probably not a good fit. At least, make me believe this. 🙂
- 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.
- 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.
- 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.
- Any 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.
- 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.
- 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”.
- Burn Rate is Just Too High. Folks with bigger investor wallets may be OK with this, but when I’ve invested in SaaS startups at the late seed-stage who just have too high a burn rate … it never works out. They never catch up. Their CACs or cost structures are just too high.
- 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.
- 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.
- 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.
- 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.
- 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.
- Wrong Kind of 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.
- 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.
(note: an updated SaaStr Classic post)