Investors Won’t Reveal the True Reasons for Passing on Your Startup

Founders often find themselves in the dark about why investors pass on their ventures. At the recent TechCrunch Early-Stage event, Tom Blomfield, group partner at Y Combinator, shared his invaluable insights into this intricate world.

He bluntly stated, “At seed stage, frankly, no one knows what’s going to fucking happen. The future is so uncertain. All they’re judging is the perceived quality of the founder. When they pass, what they’re thinking in their head is that this person is not impressive enough. Not formidable. Not smart enough. Not hardworking enough. Whatever it is, ‘I am not convinced this person is a winner.’ And they will never say that to you because you would get upset. And then you would never want to pitch them again.”

According to Blomfield, understanding the Power Law of Investor Returns is crucial. He emphasizes, “Every VC, when they’re looking at your company, is not asking, ‘oh, this founder’s asked me to invest at $5 million. Will it get to $10 million or $20 million?’ For a VC, that’s as good as failure. Batting singles is literally identical to zeros for them. It does not move the needle in any way. The only thing that moves the needle for VC returns is home runs, is the 100x return, the 1,000x return.”

He stresses the importance of presenting a compelling vision, market understanding, and growth strategy to convince investors of the startup’s potential to achieve extraordinary returns, even if the likelihood seems slim.

Blomfield also highlights the significance of addressing the market size, stating, “The importance of addressing the market doesn’t stop at understanding the Power Law of Investor Returns. Another crucial aspect is the size of your addressable market. Your Total Addressable Market (TAM) represents the entire revenue opportunity available if you were to capture 100% of your target market.”

He also highlighted the contrasting motivations and criteria of angel investors compared to professional investors. Angels, typically investing their own funds, often exhibit a higher propensity for early-stage deals. Their investment decisions are frequently swayed by the founder’s charisma and the startup’s vision, even in its nascent stages.

Working with angel investors offers additional benefits, including their potential to facilitate introductions to other investors and catalyze momentum in the fundraising process. Many successful rounds commence with key angel investors, whose involvement attracts larger VC interest, thus amplifying the fundraising efforts.

Blomfield warns against taking investor feedback at face value, stating, “The takeaway from this is when an investor gives you a bunch of feedback on your seed stage pitch, some founders are like, ‘oh my god, they said my go-to-market isn’t developed enough. Better go and do that.’ But it leads people astray, because the reasons are mostly bullshit. You might end up pivoting your whole company strategy based on some random feedback that an investor gave you, when actually they’re thinking, ‘I don’t think the founders are good enough,’ which is a tough truth they’ll never tell you.”

In conclusion, Blomfield emphasizes the importance of seeking insights from founders whose companies have not thrived within an investor’s portfolio. He advises, “The successful founders are going to say nice things. But the middling, the singles, and the strikeouts, the failures, go and talk to those people. And don’t get an introduction from the investor. Go and do your own research. Find those founders and ask, how did these investors act when times get tough.”

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