This is Kristen O'Brien, Managing Editor at NFX, and this is the founder list. Audible versions of essays from technology's most important leaders selected by the founder community. This is 15 annoying things VCs say or ask, written by Elizabeth Yinn, co founder and general partner at Hussle Fund, Today's blog post is all about the annoying things that VCs commonly say or ask. I did a call out on Twitter this week, and these are the VC James.
That the crowds have bubbled up as the most annoying things out of a VC's mouth. 1, what if Google builds it at Profish? This one was cited a lot by many people on Twitter in various forms. There were variations, e g substitute Google with Amazon or Facebook Morgan other big company. Admittedly, it's a valid question. What if the 800 pound gorilla in your space does copy you? What is your edge? How will you win? Pete are a couple of answers that may help.
A, large companies are so large they aren't able to prioritize or even care about your small opportunity relative to their huge company In the case of Google specifically, it has actually been shown that building a Google product competitor can actually be a great opportunity. Many people would much prefer to pay for products so can get customer support when something goes wrong. A free Google product will never answer a customer's calls or emails. Companies like Mixpanel, optimizely.
Super human and many more have built big businesses by going head to head with a free Google product by charging customers and providing a better experience. So it's actually validation of your market if Google is interested in your space. B, big companies by definition are no longer nimble. You, in contrast, are able to run circles around them. Can you prove that you're nimble by shipping quickly? Can you show that customers love you more than Google?
These are concrete things that you can point to in conversations with VCs. 2, we don't invest in hardware only to find out that they Pete around for hardware at Peter Jake Holbert. This is an interesting one because you see VCs deviate from their thesis sometimes. Every VC does it. We've done it too. VCs will often say they don't invest in hardware.
Or add revenue based models, or e commerce, or in some geography, and then you see a portfolio company on their website that is clearly in one of these categories. You should just ask a VC about it directly. The reason for this is usually along one of these lines, a, they used to invest in that cash category, but are now over indexed, or they invest in that category previously as an angel or with a past fund, I. E, they used to make those investments, but no longer do.
This is important to understand because if the reason the firm is passing is that they are waiting for some liquidity or existing positions in your space, There could potentially still be an opening for an investment later. This is rare, but possible. This has happened once to a company that I've backed before. B, they are experimenting outside their thesis. IG, they may not usually invest in South America, but they may make one investment to learn about the market.
They may not invest in hardware, but may invest in 2 companies to learn about this space. Unfortunately, if this is the case, you can try hard to convince a VC to do more experimentation in that category, but because VCs have mandates, I. E. They have an agreement with their investors that they would focus on investing in certain categories or thesis they will likely not want to deviate too much from their thesis.
VCs are judged by their investors on whether they end up investing based on the strategy that they claim they would. C, they had a special relationship with the founder. There is nothing you can do about this. People back their friends all the time, regardless of what they are building. I think it's easy to walk away fuming mad thinking that a firm is filled with hypocrites, but it's worth just bringing up with a VC.
Hey. You mentioned that you don't do hardware, but noticed on your website that you have invested in X. I'm curious how that fits your thesis. You may not like the response, and it may not change anything, but on rare occasion, it may open a door you. 3, I don't think this can be a venture scale business at Kirby Winfield. I'm of 2 minds on this. A, there are a lot of companies who seek out venture funding who are actually not a good fit for VC Investors.
Entrepreneurs should be aware of the return profile that VCs are looking for. Loosely speaking, VCs are looking for a minimum of 100 times return in the course of 5 years or so. This comes out to achieving roughly 100,000,000 dollars run rate within the next 5 years. Is this what you want to do? B. However, on the flip side, what ideas will be able to achieve $100,000,000 run rate in 5 years is tough to say.
VCs often have preconceived notions about what can get to this level and what cannot, and they are often wrong. Companies that tend to get overlooked are in categories such as e Commerce, for example. Are you selling a widget that will likely max out at $5,000,000 in sales per year? Or are you the next stitch fix?
My advice here would be to first understand for yourself if you want to be growing a business that goes to $100,000,000 in annual revenue in 5 years, and the work slash hiring that will be required to do so. And if so, what do you think that path looks like if everything goes well? How will you get to $2,000,000 run rate this year and then more than double your sales each year thereafter?
And if the answer is that you don't wanna run this type of business, there are other avenues of funding, angel funding, crowdfunding, revenue based financing, are all good channels that are now rapidly growing. 4. But how will you manage being a mom and running a startup at Hussle Fund VC? Ugh. Are we in the 21st century? Move on from any VC who asked this, it's not worth it. 5, we'd be interested when we see a bit more traction at M Suster.
The classic asks for more traction Basically, the VC doesn't have conviction right now, but maybe just maybe more traction would give him her the conviction to do your deal. The reality is that most investors can't articulate what level of traction they would want to see in order to invest. Obviously, if you earn $100,000,000 in the next 2 months, Everyone will be on board. But what if you get to $100,000 a month run rate in the next year? Is that interesting? Well, it depends.
And unless you are an asshole or a fraudster, VCs always want to preserve optionality to see you in a year and check on your business. So although this is a frustrating response, the right way to play this is to triage investors quickly. Put this VC in a not interested bucket. Continue to send them your monthly investor updates, but you're better off trying to find someone who has conviction today than trying to convince someone to get conviction, even with traction.
You just need to meet a lot of investors and triage a lot of investors quickly in order to find the right investors to bring into your company. 6, Maybe you should raise more and grow quicker at Justin Puches. This is just a stupid comment. If a VC really believes in your business, He, she will commit to your round and will either help you fill your larger round or write a bigger check. But investors who say things like this without any action are just oblivious or not helpful.
And should just move on from these investors. As we all know, founders who struggle to raise $250,000 are also gonna have a tough time raising two and a half $1,000,000. That being said, I would recommend that every founder develop multiple fundraising plans. This will allow you to pitch a different amount of money to bigger or smaller investors with different milestones and goals that you would achieve with different investment sizes.
And then if you do receive this question, you can point to a large fundraising plan and mention that you have thought about a larger plan and are open to raising more money, but are also not limited in growth if you cannot raise that amount now. 7 Come back when you have a lead at Stepan Opep3. The herd of sheep comments, a variation on this is I'm committed once you have a lead.
This is a positive way for a VC to say no for now, but if you have enough fundraising traction, then he, she wants to get his, her foot in the door. It's important to clarify what a VC means by this though. Does this mean he, she is interested when you have most of your round committed?
Once terms have been set, If another investor is taking a board seat and is providing serious responsibility for the investments, I. E. No party rounds, this is important to clarify because VCs mean different things when they ask about a lead VC. If it's the former, come back when most of the round is committed. You can build your round in many different ways. You can bring together a party round of smaller investors without a lead on a convertible note or safe.
It's actually quite common these days a smaller fund to set terms on a note or safe and bring together around that way. And if a VC is just looking to evaluate terms, then you can create your own terms on a or safe and bring together around that way. And if a VC is just looking to evaluate terms, then you can create your own terms on a note or safe and present those to the VC.
And lastly, if the VC is looking for a true lead VC to invest the majority of the round and take a board seat, etcetera, then this is a completely different ask from the prior two. 8. Let me know how I can help. Founder asks for Beller. Crickets at Kwan. When I started my VC career, I asked this question to a few entrepreneurs I met with. I genuinely wanted to be helpful. Then I quickly realized that there was literally nothing I could help with. Beller founder just wanted investment Beller.
And if I investing, I couldn't even do introductions to other investors because it would be a bad signal. 9. Nothing. They ghost you. At Amit Shah. Crickets, 10. Contact us if you like, but we prefer warm introductions at CW Lucas. I find this ironic VC's prefer warm introductions, and yet there are a lot of VC analysts who sent outbound emails to startups completely cold asking to chat. My recommendation here is to try to get a warm referral to a VC.
Just in general, it's always better to have a common connection to build rapport with, That being said, a lot of the newer VCs, especially micro VCs, are okay with cold emails. For reference, 20% of our deals coming completely cold, and we see no difference in performance the cohort of companies that came in cold versus warm. My prediction in the next 5 years is that the VC world will move to largely accepting good cold emails.
Most cold emails are terrible and will likely be ignored, but you do have a shot if you can send a strong, cold email. 11. Life product, thousands of users, yes, but what traction do you have? Get sent to YC. Your valuation is so high now at Kristen Terrell. This is the typical Goldilocks in the three bears problem. At first, you're too early. You don't have enough traction. And then once you get there and another investor participates in around and drives the valuation up, you become too late.
The valuation is too high. As frustrating as this is, this is just a matter of luck timing and fit as Pete seed investors. I am susceptible to this as well in some sense. We invest really early from evaluation perspective. So by definition, we are not looking for traction. This means that we make our decisions entirely based on gut instinct of the opportunity So if we don't have conviction in the business idea, we will pass.
And once a founder proves with traction that we were wrong, we still won't be able to invest. Because the valuation will be too high. That's frustrating. But I'd say frustrating for VCs who miss out too, as you may have seen from the Uber IPO lots of VCs lost out on a lot of money because they didn't have conviction in the idea. There's a lot of gut instinct in this business. And to be honest, to be great at it, you only need to be right about 20 to 30% of the time. It's like baseball.
You strike out most of the time. If you were to work at any other job, imagine if you were, say, a surgeon, and if you were right only 20 to 30% of the time, you would be fired, and everyone would be dead. Now this doesn't apply to multistage infesters. If they miss out on your seed round, you can still re approach them at the series a or the series b. 12, why hasn't this been done before at Jacob Sheuck?
This is a seemingly ridiculous question, and it may also seem that a lazy VC may not want to do his her own homework, but this question is meant to test how you think through trends and changes in your ecosystem. If you believe that markets are efficient, your opportunity should not exist. Why? Because if it's an obvious opportunity, it means that everyone would have done it already. So what is your key insight or secret that enables you to know about this opportunity that others do not.
Is it your domain knowledge? Is it that the opportunity is in between two sectors that most people are not familiar with? Is it a behavioral trend that is happening to a certain demographic that you are part of, but most entrepreneurs are not. Whatever it is, every startup needs to have a good answer for this. Beck even funds get asked this question. Why aren't other funds doing your strategy? And I'd say as annoying as it is, it's a legit question.
13, how can this be a $1,000,000,000 company at our corny? You might wonder why VCs are so obsessed with $1,000,000,000 businesses This is because the economics of running a fund are so tough. Basically, you have a bunch of portfolio companies that will completely fail. So whatever 1 to 2 winners you have will need to make up for that failure plus much more to return multiples for the fun. This means that VCs are looking for 100 times plus multiple at a minimum on a successful company.
And if they're coming into your at the seed stage, say at $10,000,000 post money valuation, 100 times on that is roughly a 1,000,000,000 exit, not counting for dilution. So this comes back to the question from above. Do you want to be raising money from VCs? Is this the type of business you want to be running? 14. What's the Pete for a seed stage company at Chloe Pete?
This is super annoying for a seed stage company because obviously there is no mote Thinking longer term, however, simplistically, there's only one way to have a moat, and that is your customers love you so much, they will never want to leave you and keep coming back. There could be a lot of ways to build this. ED, you have a better user experience.
Products, you have more data to make your solution better, more accurate, you have greater network effects, and therefore, have a better product, etcetera. Depending on your idea, the way that you achieve this outcome will differ a lot. VCs want to understand at scale how you will achieve this. This is especially key for companies that have commodity products, such as finance. You don't wanna be competing on price or better deals, etcetera.
How you build that Beller, smarter product, how will you build that retention in business model? VCs wanna understand how you think about this 5 years from now, more than what things look like to day. 15. We're going to pass, but we'll be cheering for you from the sidelines at cinematics. This is just a ridiculous phrase and a pet peeve of mine. What is this? Bring it on.
For more audio essays from the people who've built companies like Flint cart Facebook Beller HubSpot and Dropbox, visit the founder list atnfx.com Omri subscribe to the NFX podcast at podcast.nfxdot com or wherever you get your podcasts. I'm Kristin O'Brien, and this is the founder list.