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Dealing with No, Getting to Yes

Few words in the English language express finality like “no.” Yet, if you intend to chase your dreams, live the life an entrepreneur, and get your business idea funded, it is likely a response you will hear more than a few times. In our missive, How Financial Markets Impact Your Small Business, we submitted that the timeline for raising capital can take anywhere from 6 months to 1 year from start to finish. Built into this time horizon is the expectation that an idea will be turned down numerous times.

In the blockbuster movie The Godfather, the thread “it’s not personal…it’s strictly business” was woven into the storyline and revisited numerous times. That same premise is applicable to the world of business funding. An investor may entertain 50 or more potential opportunities before finding one that is compelling enough and meets their investment criteria. The flip side of the coin is they are passing on a vast majority of the deals that are put in front of them. The message here is simple: not all ideas are good ones; not all ideas receive funding.

Potential investors reject business proposals for both quantifiable and qualitative reasons. In our narrative, Just What Are Investors Looking For Anyway?, we presented the concept of a risk-reward paradigm whereby investors perform a mental calculation of the perceived risks. When these risks collectively outweigh the potential return, the tendency is to turn down the opportunity.

Sometimes the elimination is not a matter of risk, but a function of fit. After reading a business plan cover-to-cover and listening to a sales pitch, an investor may decide that the proposal is not suited for reasons that are not readily transparent. Moreover, some investors possess a certain expertise and, therefore, only entertain deals that hover around specific industries: medical technology, Internet infrastructure, e-commerce, consumer products, etc.

Aside from the Common Reasons Business Plans Get Rejected, investors pass on business opportunities for some of the most basic reasons. Very rarely does one single element drive the decision to not move forward. Some investors may be looking for specific financial criteria such as an embedded rate of invested capital (ROIC) hurdle, a more attractive valuation, a greater percentage of ownership, or some combination thereof. Other times the reason may be broad and not well-defined – “we did not believe the concept or management would be successful.” While the result may be the same, the reasons are as wide-ranging and exhaustive as one can imagine.


Moving Forward

While rejection can be emotionally painful, it can serve as a wonderful opportunity to learn. Perhaps the worst way to handle rejection is to literally walk away (this rarely happens, but there have been episodes). Our advice is simple and straightforward: be gracious and magnanimous, and ask for any feedback that might be helpful going forward. This not only demonstrates your business maturity, desire to learn, and dedication to seeing your vision fulfilled, but could serve you in the long-run.

The private equity and venture investing world is small and the principal actors do communicate with one another. Even though a business idea may be wrong for one investor, it does not mean that it is unsuitable for all. We have observed instances where a proposal was initially rejected, then after a period of fermentation an investor changes their mind and decides to take a second look. We note, however, that this is the exception and not the rule.

An investor’s decision to bypass your business opportunity most likely has nothing to do with you – “it’s not personal.” Do not get discouraged. Take any advice and counsel you receive and fold it into your presentation and delivery. Getting a business funded often takes persistence, creativity, and flexibility.

We have said it numerous times in our other narratives, investing is both art and science. Every investor has certain criteria and checklists that must be fulfilled before getting to yes, and it typically takes several meetings and/or conversations to get there. More often than not, public and private funding is a tumultuous journey, not a destination.