Back in the day when I was sending out business plans to venture investors, one of the frustrating parts of the process was the number of “thanks, but no thanks” replies. Short, sweet, and utterly useless feedback. As an entrepreneur, it was very frustrating. Still, I must say that when, several years later, I was wearing the VC hat myself, I sent out a lot of those same perfunctory dispatches.
The thing is, while the details vary from fund to fund, pretty much every VC has some sort of “sanity check” screen at the top of the funnel. A cursory review taking anywhere from ten seconds to maybe ten minutes (usually shorter rather than longer). Most deals don’t pass the sanity check screen.
Broadly speaking, deals flunk the sanity check for one (or both) of two reasons. The first reason is fund fit. Issues like wrong stage of investment; wrong industry; wrong geography, etc. Essentially, the deal just doesn’t fit the fund’s investment thesis. The second reason deals flunk the sanity screen is that the deal is, how shall I say it, obviously not ready for prime time: that even a cursory review reveals fundamental, deal-killing flaws around the team, market, technology, or financial profiles.
Unfortunately, pretty much every deal that flunks the sanity check screen ends up with the STD (Standard Turn Down). Something along the lines of “thanks for sharing your plan with us, but it does not fit with our current investment criteria. Best of luck with your venture.”
Now, when a deal flunks the sanity check screen because of lack of fit, the entrepreneur cannot really complain about a pro forma STD. A modicum of pre-submission internet research should have clued in the entrepreneur that her/his startup was not within the particular fund’s areas of interest. Yet, what about deals that pass the deal fit test, but are otherwise so flawed as to flunk the sanity screen? Surely, the VC could offer a little constructive feedback on what she/he thinks makes the deal unfundable?
Well, yes (in the perfect world) and no (in the real world).
First, most people don’t like telling people in general that their baby is, in fact, more than a little ugly (though I must confess some rather enjoy it). And, frankly, most entrepreneurs, particularly those who most need that kind of news, don’t respond constructively to it. More importantly, in my experience, it’s one thing to shuffle through a few pages of an Executive Summary with a dozen plus pages of slides and quickly conclude that a deal is not investable. It is quite another to think through and articulate the various reasons for the same.
So, for example, recently I was asked to review a startup plan in the medical device space. The materials included thirty-some slides and a handful of pages of text. Two things were apparent in the first thirty seconds: the materials reflected a lot of work, and the deal was not fundable.
If I was wearing my VC hat, that would have been the end of it. But I was wearing my “help out a colleague’s client” hat, so something more was required. So, I did a little internet research; gave the slides and written materials a quick but complete read through; prepared maybe a page-and-a-half critique highlighting a half-dozen or so “big picture” problems; and tossed in a referral to a webinar on business plans for startups as something the entrepreneur might find useful.
Now, that might not seem like all that much effort on my part. It did, however, take something on the order of two to three hours of my time. Which is fine given the hat I was wearing but would have been difficult to justify if I had been wearing my VC hat. That’s because most VCs (or at least the people who screen deals for them) are on the receiving end of several insane business plans every day. If they invested a couple of hours in all of them, there would be little time for “real VC work” (dealing with plans that pass the sanity check; making investments; managing portfolio investments; and raising the next fund).
If, as an entrepreneur, you want to maximize your chances of getting something more than STDs from VCs, you should double-down on two of the more conventional snippets of wisdom in the venture capital game. First, do a little research before you send your plan to a particular VC, and you won’t get so many deal fit smackdowns. Second, get your plan in front of investors via warm introductions from people they know and respect. That won’t guarantee more than an STD, but it usually begets at least some real feedback. And if your potential warm introduction is reluctant to pass your plan along, that’s likely a good indication that it wouldn’t, as it stands, pass a VC’s sanity check.