Investors are often criticised for not giving clear or sufficiently direct feedback to entrepreneurs as to whether they want to invest and “no” can be communicated in many different ways (which can all mean different things).

In order for a investor to say “yes” to an opportunity and to issue a termsheet they need to have a very high level of enthusiasm conviction in the deal. They need to want to commit significant time, resources and political capital internally. The deal also needs to be better than other opportunities they are seeing at the time (even very good ones), because most firms have limited execution capability.

If I were to quantify this enthusiasm, I would say that it needs to be at the 95th percentile. There are a few reasons for this:

• Growth investors typically only do a few deals a year and usually invest a lot of capital and time upfront – it’s a big commitment. One needs to feel excited enough that this opportunity is “the one”.
• The partnership nature of funds is designed to test conviction. That conviction needs to be able to withstand partner feedback and robust challenge. If you’re not both excited and convinced about the opportunity, it’s not going to stand up to scrutiny in the partnership.
• The conviction needs to withstand the inevitable tempering by the deal’s negatives, which tend to reveal themselves during the investment process (and afterwards!). There is a “golden moment” early in the process when you know all the positives of the deal and are yet to learn the negatives (the 95 per cent conviction point). In our team we’ll jokingly tell each other “enjoy this moment because the deal is only going to get worse from here!” The higher the conviction level at the outset, the more robust the deal will be as the negatives emerge.

If your company is in the top 5 per cent that go straight to “yes” then that’s great. The other 95 per cent usually receive one of the 50 shades of “no”, for example:

• “No means no”: outright “no, this is not for us” – very clear, there is zero chance of a deal and so its best to explore other alternatives for financing.

• “It’s not you, it’s me”: this is usually a “hard no” but done in a way that aims not to offend – for example “we love what you’re doing but we don’t invest in hardware companies unfortunately”. The positive feedback is there to soften the blow but if the deal is out of scope it’s unlikely ever to progress.

• “I’m not ready for that kind of a commitment…”: for example “we like the opportunity but it’s currently below our size bar”.

This last one is tricky – it could mean one of three things:

• The investor likes the deal but needs further market validation. Most investors have some scale thresholds (e.g. more than $5 million revenues). In my view it’s worth nurturing relationships with companies that are ‘below the bar’ because many investments are made after a long courting period over which a relationship strengthens, conviction grows and the company reaches the bar.
• No feedback. This is usually a hard no, either from someone who is avoiding the discomfort of delivering the message or can’t be bothered to provide the feedback. If the investor is unresponsive its probably safe to assume that it’s a hard no.
• Feedback that just doesn’t make sense: There appears to be no logical reason why the investor doesn’t want to move forward. Your company is in an area they like, your metrics are what the look for, they have previously indicated interest etc. This either has absolutely nothing to do with you or, it has everything to do with you….

It may be that:

• The investor may not have the capacity to progress your opportunity due to other deals or portfolio work
• The investor actually likes all the attributes of the deal but can’t articulate (sometimes even to themselves) why they don’t want to invest – the investor just doesn’t “feel it”. Sometime this is the result of a previous bad experience with a company a bit like the one they are looking at
• It’s fund related – for example, the firm may be in fundraising mode
• Or… it may just be you! – No one wants to tell a CEO that they don’t have confidence in him/her, so there will usually be lame excuses that don’t make sense

There are many other shades but I think you get the point and I’ve exhausted the 50 shades metaphor!

—

Hillel Zidel is a partner at Kennet Partners, a growth equity and growth buyout fund with offices in London, Frankfurt and California.

See also: What metrics do start-up investors look for?