Why Investors Aren’t Calling You Back

Entrepreneurs are constantly befuddled by how an investor would choose one deal over another to review or invest in. The refrain pretty much looks like this:

“What?! How can that investor possibly invest in {Insert Undeserving Startup Name} when my company is far more attractive?”

The truth is there are lots of potential reasons for these decisions, but it’s important to understand what the landscape looks like, and how your deal stacks up to others.

It’s Kind of Like a Dating Site

Imagine investors were just regular people like you on a dating site. They would sort through tons of profiles looking for a few things that are important to them. Maybe it’s the picture, maybe it’s your height, maybe it’s whether or not you like long walks on the beach.

Are these investors going to call every single person, go on a date with them, and then figure out whether or not they should get married? No, of course not.

They are going to whip through profiles as fast as possible until they see some sort of signal that indicates they should even bother composing a message.

These signals for dating exist for investing as well. What’s more important is that you understand how you stack up against other deals.

Recognize Deals Are Competitive

A funny thing happens when you raise your hand and say you’ve got money to invest. You instantly become smarter, funnier, and far more interesting to a whole bunch of people who would love to have some of that money. (I’m kidding… sort of.)

For this reason, most investors aren’t sitting around waiting for one person to show up at their door with “the best deal ever.” It’s more like a huge line of people pushing each other to get to that door.

If you can appreciate that you’re competing fiercely with lots of other deals at the same time, you’ll understand why small red flags can easily keep you from ever getting a meeting to begin with.

Small Red Flags Are a Big Problem

There’s no absolute science to how every investor thinks. Some may only invest if they have a strong personal connection to someone in the deal. Others don’t use anything but their gut instinct.

Still, there are a number of red flags that tend to steer the majority of investors toward one deal over the other.

High Valuations Or Bad Terms

Deals that have an extraordinarily high valuation relative to where the investor thinks the price should be can sometimes warrant a pass. If you’ve been in business for 3 months and are looking for a $20 million valuation, that might be a problem.

Sometimes the deal type itself could be a problem. Some investors might hate convertible notes and are just going to move on to a deal with a (hopefully modestly) priced round.

No Personal Connection

When an investor writes a check, big or small, it often helps to have some personal connection to the deal. It may be that they know someone who’s worked with the founders. It may be that another investor in the deal has invested with them before.

Most VCs will tell you that theirs is a business relationship before all else, because they are making a few very large bets, and having the relationship to source and bet on the deal is critical.

On paper your deal might be better, but the fact is the investor hasn’t worked with you before, and the person they are writing the check to has a better relationship. Never discount nepotism.

No Lead Investor

I’ve written before about the importance of having a lead investor in your deal. This helps an investor pick your deal over another because it indicates that someone else has already done some diligence, and backed that diligence with a check.

Investors have more money than time, so any indicator that they can save a little bit of time by not having to start absolutely from scratch is really helpful.

That’s Just The Beginning

These are just a few of the many signals that investors rely on when sifting through the many offers on their desk. What’s more curious to note here is that none of what I’ve described has anything to do with your actual company.

It’s not that you have a terrible company (though, maybe you do). It’s that you don’t have the proper signals that warrant investors to look at your company to begin with.

Just like dating, don’t worry about who’s not calling you – worry about turning the first dates you do get into marriages. It’s all you really have the power to do.