I work with a bunch of founders who have incredible stories, great pitch decks and solid businesses — and they get confused when investors turn them down anyway. A lot of the time, it doesn’t matter how good your company is. What matters is whether it matches up with your investor’s investment thesis.
An investment thesis is sometimes a detailed document, sometimes a deck and sometimes something as vague as “we know it when we see it.” What it has in common, though, is that this is a set of “rules” that the VC has. It presents this thesis to its own investors — the LPs — so they have a feel for what the venture firm will be investing in. Investing outside of this thesis is sometimes possible for deals that are too good to pass up, but it will often take some managing on the VC/LP side of things.
What makes a “wrong” investor?
For some funds, this thesis might be really broad — “all early-stage companies in California” — while others get pretty narrow: “$1 million checks into crypto startups founded by college graduates from New Jersey that have blue hair.”
If you fall outside of their “thesis,” some investors might still invest — if an extremely promising opportunity comes along, they will at least consider it — but remember that the “thesis” is what the investment partners used to raise money from their limited partners (LPs). If a fund starts deploying a bunch of cash into startups that are outside the scope of the thesis, the LPs will start getting twitchy and could lose faith.
What goes into a thesis?
Investment theses will usually include some combination of the below. Some funds care a lot about some of these things, and others are less sensitive. To some, these things may be a deal-breaker — and others take a more flexible approach.
- Investment amount — Most funds have a minimum and maximum check size, and a min/max round size. This is often expressed as such: “We invest $2 million to $4 million into $4 million to $8 million rounds.”
- Lead versus follow — Some funds only “follow” — i.e., invest into rounds where a lead investor has already negotiated and vetted the deal. Other funds prefer to lead; they will negotiate a term sheet with the startup for the deal. Others are more agnostic and prefer a portion of each across the portfolio. The driving factor here is often that lead investors tend to take a board seat, and there are only so many boards you can support at any given time. Not leading a round because the lead investor is a great board member is a valid choice.
- Target audience — Some funds focus on business-to-business (B2B) companies, where the core sales dynamic tends to be a small number of large sales. Others focus on business-to-consumer (B2C) companies, typically making a large number of smaller sales. Others again invest in B2B2C — companies that supply businesses that supply consumers.
- Verticals — Some funds only invest in specific verticals, while others may explicitly say they avoid certain verticals. Example verticals might be medical tech, education tech, deep tech, space, crypto companies, surveillance companies, advertising technology, etc.
- Ownership targets — Some funds will only invest if they can own a certain percentage of the company they invest in at the end of the investment round.
- Institutional ties — Some funds are set up specifically to support graduates from a particular school or alumni network. These tend to raise money from the alumni network, too. Others might invest only in founders coming out of a certain company — for example, the Slack diaspora (i.e., companies founded by ex-Slack employees).
- Demographic — Some firms focus on investing along demographic boundaries — young founders, older founders, Latinx founders, founders of color, female founders, founders who have been in prison, etc.
- Geographic location — Almost all investment firms have geographic boundaries for where they source deals. They may invest only within — or outside of — certain areas, states, countries or regions.
- Opportunity size — Most investors invest in companies that have at least the possibility of an outsize return. In venture capital, most funds try to make investments where there is at least a possibility that every investment “returns the fund.” In other words: If they have a $100 million fund, and they make $5 million investments, they can make 20 investments in total. Each of these investments should have at least the outsize possibility of a 20x return — turning the $5 million investment into a $100 million return on investment. If your investment looks interesting, but the investors believe that you would be a 3x return at best, you probably wouldn’t raise money.
So, is that all? Well, not quite.
All of the points above are specifically tied to the thesis of the investor. If you tick all of those boxes, that isn’t the end of your journey — that’s the beginning. You still have to have a good team, solve a meaningful problem with a good solution in a huge market, with some traction and believability for the market you’re about to enter — and be able to wrap a great narrative around all of that as part of your pitch.
So, how do you know if your company is a good fit for the thesis? Ask them. Most investors are happy to tell you what their thesis is, at least in broad lines. Presenting your company or pitch deck will often get you a very quick thumbs up or thumbs down regarding the thesis. Ask the question: “What do you typically like to invest in?” and “Do you think my company is a good fit with your thesis?”
If you get a no, it’s OK to ask what aspect of your company isn’t a good fit. It’s possible that they have misunderstood something, and that it’s possible to correct the confusion at this point. You wouldn’t be the first startup to have been turned down over a misunderstanding — but counteracting that all starts with having a deeper understanding of the dynamics of how and why VC firms invest.
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