

VC: "Saying No Sucks…" - cwan
http://www.highway12ventures.com/2010/02/01/saying-no-sucks/

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coffeemug
_This doesn’t mean that these aren’t great companies or worthy investments,
just that they aren’t right for us right now._

This is the very example of dishonesty he talks about. A company is either
going to make them a ton of money, or it is not. If a VC thinks it is going to
make them a ton of money, there is no such thing as "isn't right for us right
now". If Larry and Sergei came to a VC firm that only invests in space
exploration and offered to take their money in exchange for stock, they'd do
it in a heartbeat. If a VC thinks it isn't going to make them a ton of money,
it can be the most right company in the world, and they still won't invest.
The hardest part of being honest is being honest with yourself.

~~~
mos1
Just because you don't understand something doesn't mean they're lying.

If you are presented with 500 investment opportunities a year, and only have
enough capital to fund 5 of them, you are going to pass on a lot of +PV
opportunities.

Maybe they appear positive to you, but don't cross your hurdle rate. Maybe
they're overly correlated with other existing investments, so despite being
positive, they're not ideal for your portfolio. Maybe you want to avoid
certain risks because you already have that risk in your portfolio. Maybe
you're running a double or triple bottom line company, and it works
financially, but is inferior to another investment in another way. Maybe it
has more vol than you can fade. Maybe it's fantastic, but you have another
investment that's _really_ fantastic.

There are almost countless reasons that a company could be great and a worthy
investment, without being right for a particular investor at that moment.

~~~
coffeemug
Look, I agree with you in theory, but in practice these reasons are an
exception rather than the rule. 99 times out of 100 that's _not_ why a company
gets rejected (and in the one case when it does get rejected for that reason
and that reason only, the founders know it).

VC business is too binary and too cutthroat for these things to matter in any
other than exceptionally odd cases. Since nine out of ten investments fail,
they need to fund companies that have a chance of giving a 10x return _just to
break even_. Considering that the limited partners could put their money into
treasuries instead, they probably need to double the fund's worth to justify a
high risk investment. That means that other than breaking even, they need a
company that has absolutely _massive_ returns. A google, basically.

There is no "ok", "good", "fantastic" and "really fantastic". It's either a
google or they're out of businesses. So if a company like that comes along,
unless it's a _really_ edge case, all other reasons get swept under the rug.
And if a company isn't a google, well then, it wasn't a good investment for a
VC business model anyway.

~~~
mos1
Not every VC firm expects 90% failures.

As a very public counter example, Fred Wilson has stated that his lifetime
failure rate is 20%. To get it that low, he most definitely had to pass a lot
of profitable but high volatility opportunities.

Highway 12 Ventures has 20 companies listed in it's portfolio, and 5 of them
are already successful exits. Their portfolio is not large enough to allow for
very low success rates, and their past experience seems to re-confirm that
they do not generally invest in super-high-risk activities.

Further, VCs are not interchangeable. They have different areas of expertise.
This will lead to them investing in markets they understand, and often passing
on opportunities in markets where they're less familiar, even if everything
seems perfectly reasonable.

Accusing them of being dishonest for noting that they routinely pass on good
investments is absurd. I'm certain that they do so on a _very_ regular basis.

------
joshu
A good chunk of the time, the "no" is because of things the investor cannot
articulate.

The other problem with saying "no" is that you get rapidly trained not to give
advice or further details, as there is a class of entrepreneur who will make
the suggested changes, come right back, and ask for the money.

I've thought a lot, lately, about becoming a professional investor. This is
the part that stops me.

