The lot of a VC is to turn down virtually every business plan we see. The list of reasons I turn down plans is endless; the plan may a) not fit Meritage’s investment focus, b) not fit my investment interests/thesis, c) require too much capital for our firm to participate, d) be too early or too late; or perhaps I just think the investment is doomed to fail. Again, the reasons are myriad and there are too many to list here. There is, however, a small subset of plans that I would put in a unique category; the “turndown with encouragement”.
If I review your plan and I give you a turndown with encouragement, you will know it, because I will tell you that you are in this special category. What I am saying is that the answer is no, but that there is a risk in the business, that I believe could be fatal, but if mitigated, could put you on a path to wild success. If I could mitigate the risk by investing in the business, and working with you to mitigate the risk, I would not be saying no now. Rather, I’d consider the investment further and begin working with you to mitigate the risk; maybe even before closing an investment. But I’m not taking that step, because I believe the strategy for mitigating the risk is unclear.
This often confuses entrepreneurs and frequently solicits the response, “but isn’t venture capital all about taking risk.” From my perspective the answer is yes and no. Successful venture investing is about taking risks that you are comfortable with and that you believe can be mitigated. But on the flip-side, it is also about avoiding risks for which the mitigation plan is unclear. This is particularly true of risks that, if not mitigated, could deliver a fatal blow to the business.
If you get a “turndown with encouragement” from me, take it for what I mean it to be; genuine interest combined with caution. If I’m right, and you mitigate the risk, you may have your pick of venture investors, including me; and before you know it, I’ll be competing vigorously to get into your deal.