Why VCs Don't Say "No" to Entrepreneurs, and Why This is Bad for Everyone

It's a pretty common scenario. An early stage entrepreneur sets out to raise venture capital and meets a couple of VCs. If you meet this entrepreneur after a couple of first-meetings have taken place with VCs, she / he is usually on a high. Most VCs have expressed interest in the venture. All seem to be impressed. All have asked for more information. Some have been kind enough to bestow valuable advice without asking for anything in return. All you can do is congratulate the entrepreneur.

The problem with this picture is that most VCs are perpetually "interested." Few say an outright, "No." Let us try to understand the reasons and repercussions of this.

VCs Don't Say "No," As They Might Someday Be Interested in the Deal

Several VCs operate on the principle that nothing is to be gained by saying, "No." Might as well string the entrepreneur along. You never know when someone turns the corner and becomes investible.

VCs Don't Say "No," As They Want to Know Who Else Is Interested in the Deal

There is some amount of herd-mentality in the VC industry. Sometimes VC deals start appearing like an "I'll find a greater fool" kind of investment decision. At such times, knowing that a startup seems to be generating interest among other VCs becomes a significant factor in choosing to invest.

VCs Don't Say "No," As They Want to Learn More About the Venture

This bothers me a lot. I worry that prospective acquirers and investors have too much of an opportunity to learn about the inner workings of a business venture. For mature companies going in for big-ticket private equity deals, the negotiators and intermediaries seem well versed with this problem. But early stage entrepreneurs could spill their guts out to a VC. The presence of competitive companies in the VCs portfolio makes this all the more worrisome.

Information Asymmetry -- A Major Competitive Advantage for VCs

It is not just about the risk of misusing competitive information. Insider information has always been a major competitive advantage for VCs. Ultimately VC investment becomes a game where information asymmetry patterns can predict the winner. A VC who has far more relevant information is more likely to produce greater returns. And entrepreneurs can be a major source of such relevant information. This is one more reason to string entrepreneurs along.

No VC Should Do That

As an observer and a participant in the early stage ecosystem, I am convinced that VCs need to be pretty rapid in conveying their decisions to entrepreneurs. Sure, go ahead and take all the time you need to decide. But once you have decided not to invest, please tell the entrepreneur. Why this would be good for entrepreneurs is obvious. But it also helps VCs, as it enables them to move to further rounds of due diligence, closing, monitoring, and assisting companies that do fit the bill.

All VCs Don't Do That

Let me not mislead you into believing that all VCs follow the never say, "No" philosophy. There are certainly those who can be pretty upfront, and rapid, in their rejections.

The author of this article, Ajeet Khurana, mentors start-ups. An angel investor, trainer, author,

entrepreneur and digital marketer, he is a member of the screening committee of Mumbai Angels, one of India's oldest angel networks. He sits on the boards of Carve Niche Technologies and Rolocule Games. You can reach him on LinkedIn and Twitter.