What to do when investors say “no”?
Take a closer look at your investment proposal
Wednesday June 14, 2017,
5 min Read
Before approaching an investor or venture capitalist (VC), you should be well prepared with the basics. This means there should be a well developed business plan and business pitch. You must decide what kind of investor is right for your company and set up meetings with qualified VCs to make your pitch. You can never be too prepared when meeting investors, but such meetings don’t always go as planned. This article explores what to do when a VC investor says “no”.
If one VC says “no”, it probably doesn’t mean much and you could try your luck with a few others. If one investor says no, it could be for one of the following reasons:
The investor may have had a negative experience with a similar venture and is apprehensive of investing in such a venture again.
The investor doesn’t generally invest in such ventures to begin with.
The investment you are seeking is an amount higher or lower than is usually considered by the investor.
Take a closer look at your investment proposal
There may arise a situation where two or three investors say “no”- that too may be a coincidence. It’s only when you get consistent no’s from more than three or four investors that you need to take a closer look at your investment proposal. Meeting more investors when several have said no, is a waste of time. At this point, it is a matter of reviewing your existing plan.
Lay some groundwork so that you can go back to the same investor after figuring out what’s wrong. When an investor says no, be very polite in accepting the rejection and most importantly, ask them for feedback. Be sure to know exactly what prompted them to say no. An investor may not want to invest in your company given your current situation, so find out what they are expecting and incorporate those factors in before approaching them again.
Consider the business environment you are in. Is the industry in a downturn, are there issues with taxation in the industry, are technological advances in flux, is inflation unbearably high? There are many reasons that investors would become wary of a certain business environment. One of your options in such a case is to just wait out the bad times. Consider the rationality of the business environment so that you can fit your business plan into it.
Reboot your business plan. This is the most difficult part- changing your plan and what you are aiming to do, in order to make it more fundable. A lot of hard work goes into establishing a plan, and you may find it difficult to set in your ways. However, it is important to learn the “onion theory of risk” so that you know what investors are expecting from you.
The “Onion Theory”
The onion theory is a theory used by investors while determining the risk of an investment. The investor looks at an investment potential as an onion. Each layer is a risk that needs to be peeled away. Risk in a new business venture comes in layers that get reduced one at a time. As an entrepreneur your challenge is to keep peeling layers of risk off of your layers of risk till the investor say "yes".
Peeling off the layers of the onion- Potential Risks
Market risk - Is there a market for the product or service you are pitching? Will anyone want to purchase it? Will they pay for it? How much will they purchase it for? How do you determine that?
Are there too many other competitors already in this market? Is the new venture sufficiently differentiated from the others in the same market? Are there any impediments to entering the market which already has several players?
After an investor invests in this round, how many additional rounds of financing will be required for the venture to become profitable? What will the total investment required be in monetary terms? How certain are these estimates?
Can the product be built with the technology available? Does it involve extremely complicated procedures such as artificial intelligence or language processing? Are there fundamental technological breakthroughs that need to happen for the production of the product/service? If yes, then how certain are you that they will happen, or that your team is capable of making it happen?
Does this venture need distribution partners in order to succeed? Will it be able to get them, and how? For example, an ecommerce startup may need to tie up with a delivery and logistics service.
How much advertising and marketing will this venture need? How much will this cost? Will the advertising and marketing make it stand out? Will the marketing expenditure be worth it in the long run?
Once these risks are addressed, it would be pertinent to approach investors again to see if you have sufficiently peeled off the onion, that is, mitigated potential risks. It is thus very important to be able to bounce back and recalibrate after several investors have said no. Remember, investors saying no is just the beginning of a long journey of entrepreneurship.