Asking for funding from Venture Capital (VC) investors is likened to the same statistics of getting rejections from Tinder.

Okay. That’s not a good analogy, but you get the point — fundraising for your startup is tough.

I wrote in Aug 2016 on “How to think like a VC before asking for funding” which explained the official questions that VCs would be thinking.

Even though you may have a great pitch and a great proposition, VCs still reject investing in your startup.

During the conversations, they showed their support and financial commitments to you.

But, why then did they reject at the last minute? What gives?

When I was fundraising for my e-commerce startup 14 years back, I met 30 investors, but only three agreed to invest and I only raised 15 per cent of my target.

It became a lingering thought in my mind as to why I was unable to fundraise more despite my startup having great traction with the right ingredients.

Now, as a VC helping my startups get follow-on funding, I found myself in the shoes of an investor and came to understand the hidden reasons why VCs reject a potential investment.

These are reasons which are never mentioned officially, fueling your frustration as you wonder if you have done something incorrectly.

The truth is: it’s not you, but the VC.

So read on if you want to know what exactly goes on behind-the-scenes.

All capital is committed to existing investments

Startup founders have an impression that VCs have endless pots of gold ready to invest in startups at any one time.

That’s far from the truth.

VCs may have already committed fully to their funds, usually within the first three to five years (also known as the necessary investment period).

If you have requested for investments but have gone past that timeframe, there is no way an investment can be made.

Sometimes, they have already completed investing in their first capital call and could be waiting for a second call much later.

The investment period and capital call periods are usually well-kept secrets within the VC firm.

Despite no further funding allowed, VCs do not want to admit that they ‘ran out of money’.

Instead, they would want to show that they are still active in the game.

They would be willing to meet you to get updated with the latest technology trends or to obtain potential deal stories for their pitches to future Limited Partners for their next fundraising.

Difficulty in justifying to the investment committee

A VC firm is made up of partners, who will generally review and decide whether they should invest in a startup.

Some VC firms require unanimous approval, while some may have ‘silver bullet’ approval or majority approval.

How individual VC firms work is also a well-kept secret.

If you did not work directly with the Partners, it will be the job of the Principal, Associates or Analysts who will justify and fight for your startup to be invested to the committee.

If the VC is part of a corporate grouping, it may have even more clearance checks and approvals from other divisions or even higher management.

In every organisation, people always want to look good with their colleagues.

If the person supporting your startup finds it difficult to justify to the investment committee, he will look bad and loses his credibility.

It can be harder if the VC needs to get a unanimous decision.

Losing credibility could mean even more difficulty in getting investment approvals in future or even a promotion.

So, rather than taking the risk, that VC might just reject it outrightly.

The lack of trust in a founder

In Asia especially, trust is a very important trait that needs to be cultivated.

VCs don’t just give money for investment and walk away. They seek relationships.

They have to be working closely with the startup founder for a long time.

What’s more, it is about putting money into the hands of the founder and trusting the founder makes the right decisions and calls in spending that investment.

If there is no trust, the deal to invest will likely fall through.

After speaking to fellow VCs, I deduced that many startup founders in Singapore tend to be too transactional and Western-styled.

This is ironic as Asians are more focused on guanxi, the Chinese word for relationships.

Maybe it is due to the Singaporean meritocratic belief that one can work hard and be rewarded.

But, we forget that relationships are the ones that bind partnerships between investor and entrepreneur.

In my personal experiences, I found entrepreneurs tending to treat VCs like ATM machines.

Many entrepreneurs fail to be sincere and keen on developing a proper relationship.

There seems to be an urgent rush to get investments in without properly ‘investing’ in the relationship.

To me, it delivers a ‘one-night stand’ turned thoughtless-shotgun-marriage vibe.

At TRIVE, we take an average of four to six months in building friendships before considering any investment.

It is only after establishing trust when we can start being real to each other and this helps to mitigate any potential conflicts due to misunderstanding and mistrust in the future.

So until trust is built, it could be a probable reason why you got rejected for investment.

The VC had to choose between you and another startup

It sucks, but you were outshined by others.

VCs get many decks being submitted for review for investment.

TRIVE gets an average of 200 decks via online each month.

We barely have time to call not more than 10 per month for a meeting. Plus, we only invested in 3 last year, a 0.125 per cent chance of success.

I heard of other VCs averaging 1000 decks or more while their investment rates are considerably lower by a lot.

At every round of investment meeting, there will be unofficial quotas being set.

A list of investments is presented before the committee and they have to filter candidates, due to the limited deployment of capital.

Also Read: 5 things startups should know about Corporate Venture Capital

I recalled one startup seeking Series A which was a really good decent traction and scalable model.

Discussions were optimistic and the VC was confident in the investment committee’s approval.

Sadly, the startup got rejected for investments and upon some further prodding, I learnt that the committee could only choose one for that day, among the six that were presented.

Your startup doesn’t seem right somehow

VC investment is more of an art rather than a science, especially in early-stage investments.

There is not much financial data available, especially from a young company.

For professional VCs, prudent and detailed due diligence (DD) is done on the industry, market, background checks and competitor analysis.

But, even the best DD does not guarantee the full assurance of an investment.

VCs will then have to rely on their own gut feeling and intuition.

Despite how amazing a startup may be, sometimes there is an inexplicable lingering feeling that there is off.

Also Read: Here are 15 awesome startups that will pitch at TOP100 APAC 2019!

And once there is an iota of doubt, the deal does not go through.

I am too polite to tell you that your startup isn’t good

One interesting value of Asian culture is to be polite and adopt discretion when rejecting.

I have come across instances where a founder told me about his rejection from a VC with no reasons given.

It is only in privacy when my fellow VCs admit to each other why the startup is lacking.

When I asked why the VC declined to share the cause of rejection with the startup, the VC revealed his fear of coming across rudely.

Rather than providing constructive feedback, they just felt rejecting without reason would end the discussion cleaner and faster.

Concluding thoughts

When I ask entrepreneurs how they receive successful funding, they usually shrug and say, “I got lucky.”

There’s some level of truth in that statement.

While we can always say the startup has promising prospects, the hidden reasons why VCs would say no to an investment are variables one is unable to easily predict.

My advice is to accept these variables as part of fundraising and to keep persevering until you get the right investor on board.

Photo by rawpixel on Unsplash

This article is part of the “Startup Advisories” series, where I provide SEA startup founders articles on challenges my startup mentees go through. Discussions in this article were based on feedback from mentees, VCs and my own personal experiences.

Christopher Quek is a startup advisor and mentor to Singaporean entrepreneurs. His full range of SEA articles are found on christopherquek.com.

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