Understanding reasons for VC rejections – Customer, Traction, Growth, Scaling?

Approximately 1-2% of relevant deal flow for a VC firm will become a portfolio company. Hence, rejecting entrepreneurs is something a VC professional will have to do as  part of his job. As most people have an intrinsic urge to be liked, I believe most VCs want to be honest about their rejections. However, the honest opinion isn’t always appreciated. For that sake, let us clarify reasons VCs reject!

This is the third edition of the “Understand Reasons for VC Rejections” blogs. Read the first one here. Read the second one here.

A clear reason for ventures to get rejected is when they are not clear about ‘what’ they are looking investment for. Obviously this is a result of not knowing where the company is at, at that specific moment. So start by finding out the venture is before pitching at all.

Spending half the pitch on scaling makes no sense when there is only one customer and spending time on the product market fit when the company is growing rapidly does not make any sense either. Lets clarify how to pitch an position a venture when asking for an investment.

1. The company has one customer, this is the moment that we can start talking about Product-Problem Fit. This is great as this is a reason to pitch a VC that many more are to come and is initial proof of a viable business. It seems sensible to pitch that with the investment you are able to get more customers and prove that this is a market.
2. The company has a couple of customers and is signing more every week or month, this is the moment that we can start talking about Product-Customer Fit. Great stuff, because the VC pitch can be much more bold now. An idea about the huge market size can be coined and that should get people interested. It seems sensible that with the investment you are going to test the other markets and prove that this huge market is actually within reach.
3. The company has quite some customers and is growing at a steady pace, this is the moment that we can talk about Product-Market Fit. This is the moment that things are getting comfortable and VCs usually start pitching you. On the other hand side, they’ll only give you the investment if the pitch is perfect. It seems sensible to pitch in what markets the company is actually moving along and could aim for market leadership. The company should have initial proof of some metrics to be able to scale, but certainly needs a plan and investment to test the real scaling metrics. This is what the investment here is all about.
4. The company is growing fast, the market is large, the amount of customers that are using the product is many. The pitch is clear, this company is aiming for market leadership and a really large exit. The investment is for growth only, no testing anymore, just scaling.

Being clear about this makes it much easier to start discussions with VCs and bring the conversation further. The strange thing is that every founders should have figured out all of the four phase. However, talking about and spending the majority of the time on the phase which applies to the venture at that moment is more important than proving that you got it all covered!