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Why I Say “No” to a good opportunity

I have to say “no” very often to people I like with really good business opportunities.  It is the nature of any buying job that you say “no” a lot more than “yes.”  And often I can’t enumerate the reasons for my decision not to invest.  I can list a few, but I try not to do that because the entrepreneur will go out and fix those few things and expect a check the next day.

I was recently raising money, and on the receiving end of nearly as many “no” answers as I was handing out.  And I always fished for reasons so we could address them, and inevitably the reasons were not satisfying and left me scratching my head.  I am certain that entrepreneurs often feel the same way when I say no.  So, I thought I would create a master list, in order of importance, of reasons to help demystify the whole “no” thing a bit:

1. I am just not emotional about the opportunity.  A chord was not struck.  If I am not energized by the presentation, I am not going to invest.  Life is too short.
2. I am energized, but there is no real evidence the company will succeed.  AKA “too early.”  “Early” is a moving target within our firm, and across firms.  A science-based deal with a finished product that is pre-revenue is later stage than a web deal with 100,000 users, unless they are all subscribers paying $100/month, in which case it is too “late” stage for us, another moving target, which is code for “this business will probably be priced out of our range.”
3. The market is too small.  Total available annual market is the product of number of likely customers and price.  If that product is less than $500 million annually, then the equity upside is too limited for us to invest.  Think about it.  If you get 100% of the market, you have a $500 million business with no growth prospects, which sells for 1x revenue if you are lucky.  We own 20% of that.  So the best possible outcome (something we never achieve) is $100 million back to our fund.  This is a bet we can’t make.
4. I don’t want to work with the entrepreneur.  Most investors have this as #1.  I am much more realistic here.  Entrepreneurs are all flawed people obsessed with changing the world.  I can’t expect them to be uniformly pleasant.  Some of my best deals have been run by great entrepreneurs with whom I have good relationships , but I am not eager to join them for a weekend on the cape.  But if I plain don’t want to work with someone, that kills it.  Again, life is too short.
5. There is no evidence of sustainable competitive advantage.  Emphasis on “sustainable.”  We are looking at a deal that edges twitter with an interesting search product.  Today, Twitter isn’t doing this.  Tomorrow?  They might.  Very hard to bet on something where a large competitor could shrug and crush you.
6. The competitive space is too noisy and dynamic for me to make an intelligent assessment.  It might be the next Facebook, but I am just not current on every market.  I know a great deal about web advertising.  I don’t know much about storage virtualization.  And I don’t like relying on experts for competitive assessments.
7. Impossible to predict the winner.  In many cases, there is a clear market need but no barrier to entry.  The winner will be determined by a “Black Swan” (aka luck) occurrence that nobody can predict.
8. Too capital intensive.  This should actually be much further up the list.  Deals that will take $100 million to get to profits are not for me.  This wipes out most clean tech deals.
9. Bad existing investor base.  Current investors are a basket of angels that invested at $10 million pre and we have to reset the price and terms and they will all be angry about that and resentful.  Resetting cap tables can lead to a dysfunctional investor syndicate, which is a big deal come exit time.
10. Team all over the place.  Generally, I like everyone to be in one space pulling the oars in unison. 
    

So that is the top 10.  Generally it is a combination of these things that leads to a no.  But it only takes one.