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One VC's 3-Step Filter for Saying 'No'

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I’ve you’ve ever been stung by the rejection of a VC, this post ought to help you put the experience into perspective. In Why Am I Passing?, VC blogger Brad Feld lays out the filtering process he uses to determine whether or not to even invest time looking at a potential portfolio company.

Sure, plenty of VCs can pay high-minded lip service to the question of how, and why, they vet ideas the way that they do, but Feld’s essay offers one of the clearest — and therefore most credible — explanations I’ve heard yet.

He writes: “Every day I tell at least one entrepreneur that I am passing on investment in their company. Some times I tell 10. I don’t know what the most in one day is, but it’s probably more than 25. [So] I’ve come up with a set of filters to quickly turn down deals. This is an important process as [I] want to maximize my time working with my existing portfolio companies.”

Who can argue with that rationale? (And there is always comfort in numbers!) So, Feld continues:

My first pass filter has three parts to it.

1) … “is this in a theme that I’m currently interested in.”
2) … whether or not I think the people involved can create a huge company.
3) … “is this deal potentially in the top five things we are currently looking at.” [emphasis ours]

Clearing the top five priorities in Feld’s field of interest seems a discouragingly high bar, but it makes perfect sense…

You want a VC who will be enthusiastic about and prioritize your company, don’t you?

But a word of caution here: even if you make it through Feld’s “first pass filter” (or any VC’s fist-level vetting) it doesn’t mean you’ll get funded.

We’ll only make a half dozen new investments or so a year [and] the cumulative number of “top five deals” we [see] in any given year might be 50 to 100…we are going to spen[d] real time with a lot of companies that we won’t invest in.”

This is where the process can seem arbitrary, Feld admits. “There are different triggers for each company and it’s not predictable. I imagine this can be frustrating for an entrepreneur because it feels like you are making process with us when we suddenly say ‘we are passing.'”

But of course, the sooner you hear ‘No’, to sooner you can move on to a VC who will prioritize your company. You want to be one of the “top five” — not just “top five”-qualified.

Anyway if you’re thinking of fundraising, do read Feld’s whole post. In fact, print it out and put in your wallet, or on your wall — where you can review it after every rejection you get in the future, because we all know there will be many!

One post script:
Feld (refreshingly) considers how his decision-making process impacts the entrepreneurs he meets — and especially those he does engage with but still turns down:

I’m wondering how entrepreneurs that I’ve passed on perceive this…. I encourage public or private (whatever you are comfortable with) feedback on this – did you feel like the experience with me was a rational one or an arbitrary one?

Is the first time I’ve seen a VC ask for such feedback. Take him up on the offer!!
Read more from Feld on his blog, Feld Thoughts.

Have you been told ‘No’? what was it like for you?