Investors Said No, Now What?

Investor spends two minutes writing the email, and then later hears that you've pivoted your entire company because of it. Right? Not a huge signal of, uh, conviction.

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Hello, this is Michael with Harj and Brad. Welcome to Inside the Group Partner Lounge. So, as YC group partners, we find ourselves repeating the same, often seemingly obvious advice to founders over and over again. Before COVID, we'd often gather together in the partner lounge at the YC office to try to figure out why this was the case and how we can help startups figure it out faster.

Today, we're going to talk about what to do when an investor says no to investing in your startup. Our saying at YC is, "Believe the no, don't believe the why."

Yeah, so to set this up, one thing we end up doing a lot is pumping belief back into founders who have had their confidence shaken by these investor rejections. It always surprises us because from our perspective, the founders are the experts on the product, the market, like everything they're doing. They think about it day in and day out, and yet they can have everything sort of shaken by an investor who spent 30 minutes with them.

And so, um, we want to figure out what's going on. And it's funny because oftentimes that 30 minutes is like over Zoom while, like, on Slack doing email, right? Like maybe not the most engaged 30 minutes.

Exactly. So, Brad, what do you think the lies that founders are telling themselves? Like, when a founder gets a rejection from an investor, the polite investor bothers to write why. What do you think's going through a founder's head?

Well, the first thing going through the founder's head is: this investor is an expert, and they are telling me the truth in this follow-up email that they sent me. Um, they— I follow them on Twitter, and they tweet about my market all the time. Um, they worked at a company in this market at some time in their past. They work at a fancy fund, X; therefore, they know everything about what I'm doing. And whatever they told me in that rejection email, that must be the reason and the problem with my startup.

Which is so sad. I mean, how many YC applications do we read, and what percentage of the time do we raise our hand and say, "Oh yes, I know everything about this space. I'm qualified to judge this idea." It's like, I think under one percent of the time.

Yes, it basically never happens. I mean, investors may have a passing understanding of what you're doing, but almost by definition, if you're doing a startup, there's something new and novel about it, and you are the expert, not the investor. And so whatever the reasons they're giving are not like canon. They don't know any more than you do, and they almost always know much less than you.

It's like that saying, right? It's like, oh, what is it like, you know, a little bit of knowledge can be dangerous. It's like, I think investors end up knowing just enough to be dangerous.

Um, because, and it's a job where you're often selling, so you're very confident in sort of how you articulate your opinions. Um, but like, yeah, you don't actually get the deep insights because you're not like in it building the thing. Just why investors have like a 90% failure rate, right? Like most investments are bad decisions.

I think we see this in practice too because we will see founders who will pitch investors, get no’s, apply to YC, get into YC, and those same investors will say, "Now I want to invest in your company," and nothing has changed. Like, no fundamental thing has changed in that company, yet the investor changes their mind.

That doesn't sound like the opinion of an expert, right?

No, it sounds like a herd animal. [Laughter]

So you get this rejection, and you think, well, I’ll go back to them. I’ll convince them that they’re wrong, that they misunderstood something, and if I say the right thing in the follow-up email, or I can somehow get them on another call and address their concern, everything will change. The words themselves don't mean a whole lot.

Um, it's—it’s—it’s a reason, but it doesn't mean it's the reason, and it's not always up for actual debate. It's not; it's never up for debate, really.

Do you guys have had this situation, too, where it's like if a founder comes back, you say, "Oh, yeah, like the investor said that if we were in, like, this market instead of this market, we’d like, you know, they'd be a lot more excited." So we think we're gonna, you know, go after that, and you're thinking, I wish I could explain to you how this is gonna make you less attractive.

Like, because it's—it gets to the heart of like investors also are aware they're not experts. So if a founder actually, like, actions on your feedback in sort of like a material way, like it makes you less—like you're a good investor. I think it makes you less unlikely to want to invest. You don't want to invest in someone who is relying on you for product insights, right?

Yeah, I mean, let’s play this out. Harj, an investor spends two minutes writing the email, and then later hears that you've pivoted your entire company because of it, right? Not a huge, uh, signal of conviction.

I think the other lie the founders tell themselves is that the glaringly bad thing about my company isn't the reason why this investor didn't invest. It's the reason that they wrote on the piece of paper.

So it wasn't, I don't have a technical co-founder; it wasn't that like I've got negative margins; I'm about to run out of money; it wasn't that I'm building like a non-software product, and like this investor likes investment software; it wasn't that like every time I pitched this company to this investor, I haven't grown, I haven't launched.

It's not those things. The investor said my market's too small; I bet it's my market's too small, and it's like, eh, it's probably one of those other things.

Like, it's—or at least, hey, check those other things. Like if you're checking a lot of those boxes, you should believe the why even less.

Maybe investors have a bigger, broader view about the market in like an abstract way. Like they have, like, they can talk about, you know, like big picture census data or something. But like you should always be able to sort of inform them with anecdotes from like real users.

Like anytime someone says, well, I don’t know, don’t like 60% of us consumers not want to purchase blah blah blah, you should say, well, actually, like I've been spending the last month with like, um, Uber drivers, and actually, like they have—like they’re like loving our product because of like these reasons.

Like, it's like, um, like—and that’s when I get worried if a founder can't come back. Even if I feel like I better understand the user than the founder does, that's a bad sign.

What about, Brad, and we get these a lot in YC Demo Day because founders pitching a lot of companies—I mean, founder's pushing a lot of investors. What about when the founder is hearing the exact same thing? Like it's the same why over and over again?

Yeah, we see that a lot. We have founders that line up dozens and dozens of meetings, and they go and, you know, rip through 25 of them, and they come back and it turns out 23 of them all gave the exact same reason.

They might have said this market's too small, or you're spending too much on advertising, I don't see how your unit economics work.

Um, when everyone says the same thing, the takeaway still isn't believe that. It's think about it; it's assess it. Like, dig into it. Do you think that's a problem? Is this actually one of the things that you're wary of with your own startup?

Um, still don't take it at face value, but you should listen to it. You know, we tell founders to take notes and jot down how the meeting went, what they can do better next time. And sure, you should write the reason down; don't forget it.

But our advice is not to internalize it and kind of absorb it into your, you know, your mindset for the company. You should know about it, but not soak it in.

I think this is the algorithm that I run when founders are fundraising. It's like the first thing—the first time they tell me there's a rejection and a why, I ignore it completely. If they've gotten like 15, 20, 25 rejections, I then ask: are the why's consistent?

And only if then the why's are consistent do I even think this is a data point to be considered at all, like at all among all the other data points. And the important thing to point out here is that the only way to get this kind of signal is to pitch a lot of investors, right?

So you get this—you get this rejection the first time, the second time, and you keep going, right? You keep pitching investors. Um, one or two of these doesn’t get it done.

So let’s talk about the other side. What are the real why's? Like I might argue that like the really brave and honest investors might give you some of these why's. These are why's that maybe you should pay attention to if you're getting them.

So what do you think—what's in the first? What are on your lists of the real why's?

I think a big one is you sit across from the person, and in the course of the conversation, you think, I have a really hard time seeing this person building and running and leading a large organization, and that's a huge question that's on the table at every stage of investing and especially early on.

And if the person just doesn't seem organized or fired up, um, we've all met people that run big organizations, and they are very impressive, unique individuals. And if that doesn't seem like you in the meeting, uh, you know, that's a big reason.

Or—let me say that slightly—let me extend that. If it doesn't seem like you're aspiring to become one of those people, right? Like, you don’t have to be that person today, but if it doesn't even seem like that's on your agenda...

Yeah, and believe it or not, folks, we run into that a lot, and investors do, in general. Um, a lot of people think that fundraising is about things other than raising money to build a really big company, and it's not.

Yeah, I kind of think what's going on in the raw truth is investors are doing two things. They're pattern matching to previous successes and answering the question, do you pattern match to founders I've had success with in the past?

And then they're stack ranking. Like, of all the founders I've worked with and are currently pitching me, like, where do you rank? And the truth is you get a no because either you don't patent match or, like, you might have a match, and you don't stack rank.

Like, you might be like, okay, yeah, you remind me of the kind of founders I've done well with, but like, actually, you're just not as good as the other ones I'm talking to right now.

Um, and that’s kind of the blood thing that's going on, but no one ever wants to say that. No one ever wants to say that.

Well, and it's interesting because oftentimes with the stack ranking thing, it can be as simple as that. Like, oh, you have the credentials, but you're not communicating clearly. Like, I don’t really understand what you're saying.

Yeah, which is like—wow, it’s a—oh, it's a hard one, right? It's like—or I don't believe your numbers. Like, you—you gave me conflicting numbers, and you—and you—you cast some doubt.

I feel like for those, it's so tricky because it's like, man, I could like your space; I could think that you've got good credentials, but like, oh, you undermined yourself.

Those are tough. Also, to give investors some credit, maybe ourselves, we're rejecting companies from YC. Like, the founders change as well.

Like, you might reject a company when the founders haven't actually gone out and spoken to any users or they're like two weeks into it, and they might not impress you with anything. But then a month of like real work, they come back, and the same founders can just seem different.

Like, they've got real insights, they see more, their confidence has grown. Like, and it's sort of like you're—you're hearing a different pitch.

And so I think in those reasons it's actually fair for investors changing. Like, we do—we certainly like reject a company, and then they come back, and you're like, oh, wow, okay!

Like, nap—like I’m having a completely different conversation with a different person. Like, totally want to invest! In fact, I think that separates YC. I would—I'd be very interested in hearing if there's any other fund that funds people that it rejected.

Sixty percent of the companies that do YC were rejected at some point in the past. Like, I would be shocked if there's any fund that does that, or any school or any selective institution that looks back at a failed applicant and says, like, let’s give them another try.

Yeah, because one of the pieces of advice I repeat after demo days over and over again is keep a list of the investors that said no, like who seemed reasonable about it. And like just keep—like keep sending them updates. Keep sending an update every month.

Um, and shockingly, if things start going well, those same investors will reach out, like change their mind. Like I've seen this happen over and over again for YC companies.

But it's not natural for a founder. Like they just assumed that once someone said no, it’s a no forever.

And yeah, you can't convince them to change your mind with words, but you can with actions.

Well, I think—and that's probably the best takeaway here, right? In some fundamental way, instead of, you know, losing your confidence, stop fundraising, like massively change your product based on some reject email or whatever.

If you actually just change the facts of your business, right? Like make progress. More often than not, the investor will look at that progress as a much better signal than any modification you made to your deck or any modification you made to the words in your pitch.

Like that progress is signal, and that's probably the secret behind YC, is that with multiple applications, we can see progress, and wow, it's like progress. You is exciting to invest in progress.

And what this looks like often is the founder says, what do I say to this investor to get them to change their mind? And we say tell them about the 10 new customers you just closed.

And it takes a second for that to land, realizing that they need to go get 10 more customers and then tell them about it. And not just write something different back to the investor, but they have to change the facts.

So with that to wrap up in fundraising season, the most common thing we say over and over again is believe the no, don't believe the why.

The founders throughout fundraising, as long as you keep confident and realize there's more investors out there, there's always more investors out there. And you stay confident; you're doing yourself a service.

Don't fall into these traps. Don't fall into these traps.

All right, Brad, Harj, great to see you. See you guys.

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