Q: As a venture capitalist, what are some red flags that would make you reject a startup immediately?
One of the worst things you can say to a VC is "we're not growing because we're fundraising"
There are no excuses in fundraising pic.twitter.com/oZZFGK8tyE
— Jason ✨Be Kind✨ Lemkin (@jasonlk) October 6, 2022
First, there is a lot of marginal behavior that doesn’t lead to an immediate rejection, but does lead to immediate skepticism:
- Metrics that don’t quite make sense. Weird metrics like “Quarterly MRR” or odd ways to describe revenue are immediate flags. If the metrics still look interesting, I might still want to meet, but I start off very skeptical.
- Anyone but the CEO reaching out. This is close to a red flag. It has to be the CEO doing the fundraising. A co-founder is OK, but really it should be the CEO.
- In a competitive space, not being clear on why you are different and why you win. Super clear. In some spaces, there are just so, so many vendors. If it’s not immediately clear why you’ll win, that’s close to an immediate pass.
- Putting too many gates in front of key information. There is a time and a place for using Docsends, for making it harder to get to a deck, or even making it hard to schedule a meeting to meet. But save those until you are hot and have more investors than room on your cap table.
- Making it too hard to meet. Related to the prior point, but selling stock is … selling. Again, if you have more demand than capacity, you can set the terms for a meeting. But if you are in sales mode, make it easy. Meet where they want, and when.
- Making capital seem fungible — even though maybe capital is fungible. But an email saying “I’m meeting 20 firms when I am in town next week, here is my availability” isn’t an instant pass. But it’s close. This can create urgency, but it also can get busier folks to just pass.
- You’ve burnt too much capital already. This isn’t an auto-reject, but it is close. If you have burnt, say, more than $3m-$4m on the way to $1m ARR, it starts to get tough to invest (at least for me), unless you are truly a rocketship. Put differently, you sort of need to have spent < half of what you are raising now to make the venture math pencil out.
For me at least, the following are clear auto delete / archive:
- An agent reaching out. Don’t have a banker, or a contractor, or an agent reach out.
- Not knowing who I am. If you don’t know who I am or SaaStr is, I never respond. Spray-and-pray sales techniques aren’t great for fundraising.
- Having no idea I already invested in the space. Not every deal that seems competitive with a prior investment really is. Sometimes it is, sometimes it isn’t. But if you know your space well, you should have identified a potential conflict.
- Angry, sexist, too defensive, or otherwise inappropriate tone. This should go without saying, but it is more common than I wish.
- Telling me you are struggling to find investors and/or are running out of money. I do have empathy — lots of it. Just not around investing my own capital. 🙂
- Wanting to just meet for coffee, and/or just not sharing enough information to know if it’s a fit. Others have a different perspective, but this is my #1 bit of advice. Some folks will want to meet just for coffee, or will be OK with a teaser email or a teaser deck. I don’t have the time for coffee. But — I’ve built a SaaS company that is now doing $100m+ in ARR. I’ve invested in 25+, including 3 Unicorns. I know how it works. So just tell me why you rock. Why you are awesome. Why you win. Tell me. Just share it. Do that, and I’m pretty sure I’ll want to meet that day. But coffee? I’d love to. But …
Here’s an example of 2 success stories I funded for millions from cold emails: 2 Cold Emails I Funded For Millions
And a deeper dive on top rookie errors pitching VCs here:
(note: an updated SaaStr Classic post)