One hard part about investing is that you have to pass on good companies and good people - you say "no" a lot. One hard part about being a founder is that people say no when you try to recruit them, customers say no when you try to sell to them, and investors say no when you pitch them - you hear "no" a lot. And especially when pitching investors, it is hard to know the real reason why they passed because they still want to be your friend in case the company starts to do amazingly well in the future and then they want to invest, or you start a new company they want to invest in.
As I think more about becoming a professional investor, I'm refining how I give feedback to founders when they pitch me and I decide not to invest. Having read dozens of these venture capitalist pass emails from companies in my portfolio that were fundraising at various times, I think there is an opportunity to improve them for both the founders and the ecosystem as a whole.
I'm going to try to be more upfront with the reasons why I passed. I'm going to offer feedback on the business and market. I'm going to try to offer to help in some way (if I have not already done so in the meeting). And, I'm going to offer motivation by telling the entrepreneur to prove me wrong. For example, here is an email I sent today to a founder I like who is starting a business I like. I'm curious what you think.
Dear Founder -
We've chatted and have concluded that we don't think this is the right investment opportunity for us right now. We try to be pretty upfront and clear with our feedback (unlike some others), so here goes:
We LOVE how you are uniquely qualified to be the founder for this business and have a lot of domain expertise. We also really admire you passion, hustle and dedication to the vision and business. We're big fans of yours.
We're too worried that other companies that are well funded and have a head start (not only in terms of product, but also in terms of already having a team onboard and productive) will make it just too hard to build a big enough company for the returns needed for a VC-type investment.
My advice is to sign up 1-2 customers to pre-pay you $100k each for a 2-3 year license of the platform as development partners. And then take that cash to hire the team and build product. If you bootstrap this way you'll have a ton more ownership and can more easily set the terms for future fundraising (if you need it).
Feel free to keep me in the loop with updates on the company and if there is some way I might help, do not hesitate to ask. My broad mission is to help build more great companies in Boston.
PS - Please prove us wrong. Nothing would make us happier than to have you build a billion dollar company here in Boston. I would gladly and publicly admit how wrong I was at your IPO party. And, feel free to use this email as motivation. :)
PS - You might have noticed I said "we" in the email. More on that later, so stay tuned.