How To Know If A VC Is Interested In Investing In Your Startup

Source: Medium, Aaron Dinin, PhD
Photo: Andrea Piacquadio via Pexels

Interpreting investor interest isn’t alway easy, and there’s a good reason why

“I just had a great meeting with a VC,” a founder was telling me. “He said he’s meeting with his partners later this week and would discuss our company. What are the next steps for fundraising? Do they give us their term sheet? Or do we need to get with a lawyer to create a term sheet and then send it?”

“Hmm,” I said. “Maybe I missed something. Why do you think a term sheet is coming?”

“He said he really liked what we’re doing,” the founder responded. “When he asked if we had any other investors, we told him we have other people interested, but we were still looking for our lead investor to set the terms. He said they like to lead deals. Plus he told us he’d definitely be discussing us with his partners in their weekly meeting.”

“Did he hand you a term sheet?” I asked.

“Well, no,” replied the founder.

“Did he tell you he was putting together a term sheet?” I asked.

“No,” the founder said again.

“Did he do or say anything that explicitly indicated an interest in investing?” I asked.

“He asked what kind of terms we were looking for,” said the founder, though it was more a question than a statement.

I shook my head and smiled as I recalled being in the same position dozens of times. “None of that means the VC was interested in investing,” I said.

The founder looked dejected. “It doesn’t?” he asked incredulously. “Then how will I know if a VC is actually interested in investing in my startup?”

Entrepreneurs are customers

In my earliest days of fundraising, I was horrible at judging whether VCs were interested in investing based on their responses to my pitch. Admittedly, some pitches went terribly, and I could tell there was no way I was raising a penny from that particular investor. However, I left the majority of my fundraising pitch meetings thinking I had some non-zero chance of scoring an investment.

For the record, in my first three years of fundraising, I raised exactly zero dollars from venture capitalists. Since I had somewhere north of 100 VC meetings during that time, I think it’s safe to say my intuition didn’t match reality.

So what was happening? Why was I so confident the pitches went well while having so little success closing investors?

In retrospect, my problem was that I didn’t understand the dynamics of the VC-entrepreneur relationship during a fundraising pitch. Because I was the person pitching, I felt like I was the person trying to make a sale and the VC was a like potential customer. But that’s not true. When you’re an entrepreneur talking with investors, you’re actually the customer.

That’s right… during VC pitch meetings, you’re not the seller. You’re the buyer!

VCs are salespeople

Sure, when talking with VCs, you probably don’t think of yourself as the customer. From your perspective during a pitch meeting, you’re trying to “sell” the VC on making an investment. However, from the VCs perspective, if you’re an investable company, chances are other investors will think so, too. At that point, the VC needs to sell you on taking investment from that VC’s firm rather than other firms, which makes you the customer. After all, without startups to invest in, VCs don’t have a product to sell. They need great startups in order to exist. In contrast, startups don’t need VCs in order to exist.

Once you realize you, as a startup founder, are the customer in an investor-startup relationship rather than the seller, your interactions with investors will start making more sense.

Think about it this way: When someone is trying to sell something, they’re focused on making the sales prospect feel good. That’s true whether it’s in a department store, a restaurant, or a car dealership.

In fact, the car dealership analogy is probably a great way of thinking about VC meetings. Imagine VC firms as being like luxury car dealerships. Just because someone walks into a Porsche dealership, it doesn’t mean that person is a great fit to purchase a Porsche. Maybe the person is just browsing. Maybe the person wants a Porsche but has a family of four and it’s not a practical car. Maybe the person can’t afford the Porsche.

Whatever the case, the salesman in the Porsche dealership is going to politely greet the person. He’s going to offer a bottle of water. He’ll probably even let the person take some cars for a test drive. But he definitely won’t say, “You clearly can’t afford this Porsche.”

Why would the salesman say that? What would he gain? Sure… maybe the person isn’t a good Porsche customer right now, but what about in the future? Or maybe the person has friends who would be good Porsche customers. Or maybe the person loves writing Yelp reviews, and the salesperson doesn’t want to see, “This Porsche dealership is filled with a$$-holes” posted across the Web.

The same is true for VCs and the way they cultivate relationships with entrepreneurs. When you’re pitching a VC, you might not be a perfect customer right now; however, as a startup founder, you’re still a potential customer in the future, and you’re going to be treated in the same way most businesses treat potential customers. In other words, the VC is going to try to make you feel welcome and comfortable, and the VC is going to try to give you a good experience in order to maintain the overall quality of the brand. But don’t mistake those things for interest in your startup. If your startup is a good potential investment, the VC will make sure you know.

In fact, when a VC is interested in making an investment, the VC will act a lot like that Porsche salesman. In other words, the VC isn’t going to let you out the door without trying to make a compelling sales pitch. And if you do leave the meeting without signing a term sheet, you won’t have to follow up. That VC will be calling you and trying to close the sale.

https://medium.com/swlh/how-to-know-if-a-vc-is-interested-in-investing-in-your-startup