A Venture Capitalist Told Me How He Decides Which Startups to Fund, and I Couldn’t Believe It | by Aaron Dinin, PhD | Oct, 2022

The real reasons people invest in startups aren’t always what you think.

Photo by Sander Sammy on Unsplash

I was giving a fundraising talk to a group of entrepreneurs when one of them asked a surprisingly tricky question:

“What’s your most memorable fundraising moment?” she asked.

I had to stop and think. Was it the first time I got a “yes” from an investor? Was it the time an angel investor wrote me a check for $50,000 on the spot? Was it the time I embarrassed myself trying to set up my dream VC in a real elevator?

As I pondered my answer, the experience that kept popping into my mind was probably one of the less notable moments in my fundraising journey, but it was oddly memorable, so I decided to share it. Here’s the story I told you…

I suggested a medium-sized VC. I had previously raised a $1M seed round for the same company and was working on my Series A. The VC and I seemed to be vibing (for lack of a better word) and he was giving all the signs of exploring a deal, so I decided to to push for the next step.

“Sounds like this is all making a lot of sense for both of us,” I said as our meeting drew to a close. “We’re in your sweet spot in terms of transaction volume, we have the traction you’re looking for, this is a hot area you’ve been trying to invest in and clearly your background and experience could bring a lot of immediate value for what we do. What are the next steps to move forward with a potential investment?”

Also Read :  ‘Govts have failed women entrepreneurs in Nagaland’ | MorungExpress

The VC laughed. “Oh god no,” he said, “there’s no way I’m investing in you.”

“What?” I said surprised. My paydar rarely ignites so dramatically. I was sure he was interested and I said so. “But why not?” I continued. “Everything you’ve told me makes it seem like we’re exactly the company you’re looking for.”

“The company definitely is,” he said. “But the problem is not the company. You’re the one.”

“Me?” I asked, trying not to sound as offended as I was. “What’s wrong with me?”

“This is your first venture-backed company, isn’t it?” I shook my head to admit it was. “That’s the problem,” he continued. “I can’t invest in a first-time founder.”

“Why not?” I pressed.

“It’s a key part of my investment strategy,” he explained. “I only invest in founders who have raised at least $1 million and whose businesses have failed.”

“Wait a minute,” I said, wanting to clarify what I’d just heard. “Are you saying you only invest in failed founders?”

“I would not speak of failed founders,” he replied. “The founder could have taken a company public and had a huge exit. However, what I’m looking for are people who at some point in their careers have had the experience of starting a business that was on the road to success, only to then take the wheels off. Since you haven’t experienced this yet, I can’t invest in you. I am sorry.”

Also Read :  Manhattan is no longer the center of entrepreneurship in New York City

I was so surprised by his answer that I didn’t say much more. Instead, I packed up my things, shook his hand, and left.

“This all happened about 10 years ago,” I told the group of students I spoke to after sharing the same story I just shared for you all, “and I still think about it often. I think that makes it one of my most memorable fundraising experiences, even though I know it’s not particularly interesting.”

The girl who originally asked me to share my most memorable fundraising moment raised her hand again and I called her. “Why do you think you always remember this moment?” she asked. “What was so special about that?”

I shrugged my shoulders. “In hindsight, I think I wish I had asked more questions,” I told her. “I should have tried to understand his logic better and how his experiences showed him the value of this particular strategy.”

“Do you think that’s a good strategy?” she asked.

“I already do,” I admitted, somewhat embarrassed. “I mean, at the time I couldn’t believe he made his investment decisions like that. But in hindsight, I don’t think it was a bad strategy.”

Also Read :  QDB announces winners of ‘Entrepreneurship World Cup’ national qualifiers competition

“Why not?” She wondered.

“The venture I proposed ultimately failed,” I replied. “I dragged on for a few more years trying to raise more money but never did and eventually shut it down. And yes, that experience sucked. But if I’m honest, I’ve learned so much from failing with this company that I have a lot, a lot, a lot of better entrepreneur because of it. In other words, I was almost certainly a safe founder to invest in after failing, so I can see the logic from an investor’s perspective.”

In fairness, I should have added in my response to them that I don’t have the data to know if focusing on previously failed founders is a sound investment strategy, but that’s not the main reason this moment was so memorable for me either . Instead, being rejected for not failing enough helped me better appreciate my failures.

As someone who has had both successes and failures in the startup world, I personally recognize that I usually learn more from my failures. I suspect if we’re all being honest with ourselves, the same is true for most of you reading this.

What that tells me, and why my most memorable fundraising moment was when a VC told me they only invest in failed entrepreneurs, is that failure is not an end. It’s a start. Our mistakes make us better entrepreneurs.

Leave a Reply

Your email address will not be published.