Reasons we don't invest - and how to read them
I analyzed Heal Capital's decline reasons for over 100 recent startups. There is one reason we are not being honest about...
++Disclaimer: These are my personal views, not those of Heal Capital. @Heal: pls don’t fire me ++
The invisible rules of the venture game dictate how VCs give feedback - and in which depth or honesty. I believe you can cluster VC feedback in several categories, which in turn can guide your response as a founder. Time for more transparency around our decision making.
As a first step, I went through our most recent 100 declines at Heal Capital. Here’s what I found:
Before we start, a note on methodology: Such an analysis will always be subjective. The most frequent reason is not included: “out of scope”. Further, it’s important to mention that these are our internal notes, not what we tell the startups - more about that later.
Let’s read the chart:
1. The “classic” decline
Not believing in a market (incl. dense competition) or scalability or business model are clearly leading decline reasons. That’s logical, since every VC has to invest along their theses. We are essentially little decision-making machines filled with biases and hopes, using pattern-matching in high frequency. Traction plays an interesting role in this mechanism, I’d view it as a way to confirm and multiply our believes.
What this means for founders:
If you get this reply, go find a different VC with a different thesis for your round. You won’t change the VCs’ believes with arguments - unless you come back with significantly more traction. In case you were wondering, this type of answer often comes in the form of “we can’t see the upside” or “we don’t believe it’s a VC case”. It means the investors don’t buy into the whole package (yet). “Too early” is better, it leaves the door open for a later round.
2. The “secret” decline
Looking at the chart, I immediately wondered: Why is founders only in 3rd place? Shouldn’t a stellar founding team be every early-stage investor’s top priority? In short, yes. We can draw two conclusions: a) we are not critical enough at judging teams or b) we are not honest enough in documenting it. I believe the latter one.
What it means for founders:
If VCs are not convinced by your team, you won’t hear it from them directly. They will point to others reasons for the decline. These reasons might be completely legit, just not the leading factor. Sounds unfair? Perhaps, but there is zero incentive for a VC to put their reputation on the line and tell you you’re a bad founder. Just be aware and try to find objective feedback on your team from other sources once in a while.
3. The “technical” decline
Equity story is not a frequent decline reason, but it might surprise founders how prominent this is in VCs’ internal discussions. What’s an equity story? In short, it means all technical factors contributing to a company’s projected financial return: ownership in the cap table, further financing needs, dilution, and exit ambition. If these don’t match the VC’s expectations, the startups looks unattractive. Many funds have ownership targets (we at Heal aim for 10%+) and expect a certain founder ownership (e.g., 60%+ before Series A). In some cases it tips the scale to the decline side.
What it means for founders:
If a VC believes in you, they will figure out a way to fix the equity story. If not, save yourself the time and move on.
4. The “on-the-side” decline
Product and tech are rightfully last in this ranking. Products change and a strong team will always handle it. This is never the main decline reason.
What it means for founders:
Double check your assumptions around product demand, but likely the VC just doesn’t believe in market and team in the first place.
Can we change the feedback paradox?
Ultimately, declining startups is part of the venture game. Over time, you learn to read and navigate it. Nonetheless, the inherent difficulty of feedbacking directly and honestly bugs me sometimes. It’s especially hard when the founders are directly affected.
Let me know what you think:
Happy Tuesday,
Lucas