SPEAKER_03: investor spends two minutes writing the email, and then later hears that you've pivoted your entire company because of it. Right? Not a huge signal of conviction.
SPEAKER_02: Hello, this is Michael with Harge and Brad. Welcome to Inside the Group Partner Lounge. So as YC Group Partners, we find ourselves repeating the same,
SPEAKER_00: often seemingly obvious advice to founders over and over again. Before COVID, we'd often gather together in the Partner Lounge at the YC office
SPEAKER_03: to try to figure out why this was the case and how we can help startups figure it out faster.
SPEAKER_02: Today we're going to talk about what to do when an investor says no to investing in your startup. Our saying at YC is believe the no, don't believe the why. Yeah. So to set this up,
SPEAKER_00: one thing we end up doing a lot is pumping belief back into founders who have had their confidence shaken by these investor rejections. And it always surprises us because from our perspective, the founders are the experts on their product, the market, like everything they're doing. They think about it day in and day out, and yet they can have everything sort of shaken by investor who spent 30 minutes with them. And so we want to figure out what's going on.
SPEAKER_02: And it's funny because oftentimes that 30 minutes is like over Zoom, while like on Slack doing email, right? Like maybe not the most engaged 30 minutes. Exactly. So Brad, what do you think the lies that founders are telling themselves? Like when a founder gets a rejection from an investor, the polite investor who bothers to write why. What do you think is going through a founder's head? Well, the first thing going through the founder's head is this investor is an expert
SPEAKER_03: and they are telling me the truth in this follow up email that they sent me. I follow them on Twitter and they tweet about my market all the time. They worked at a company in this market sometime in their past. They work at Fancy Fund X. Therefore, they know everything about what I'm doing. And whatever they told me in that rejection email, that must be the reason and the problem with my startup.
SPEAKER_02: Which is so sad. I mean, how many YC applications do we read and what percent of the time do we raise our hand and say, oh, yes, I know everything about this space. I'm qualified to judge this idea. It's like I think under 1% of the time. Yes. Yeah.
SPEAKER_03: It basically never happens. I mean, investors may have a passing understanding of what you're doing, but almost by definition, if you're doing a startup, there's something new and novel about it. And you are the expert, not the investor. And so whatever the reasons they're giving are not like canon. They don't know any more than you do. And they almost always know much less than you.
SPEAKER_00: It's like that saying, right? It's like, oh, what is it like, you know, a little bit of knowledge can be dangerous. It's like I think investors end up knowing just enough to be dangerous. And it's a job where you're often selling. So you're very confident in sort of how you articulate your opinions. But like, yeah, you don't actually get the deep insights because you're not like in it building the thing. Just why investors have like a 90% failure. Like most investments are bad decisions.
SPEAKER_02: I think we see this in practice, too, because we will see founders who will pitch investors, get nos, apply to YC, get into YC. And those same investors will say, now I want to invest in your company. And nothing has changed. No fundamental thing has changed in that company. Yet the investor changes their mind. That doesn't sound like the opinion of an expert, right?
SPEAKER_01: Sounds like a herd animal.
SPEAKER_03: Sounds like a herd animal. So you get this rejection and you think, well, I'll go back to them. I'll convince them that they're wrong, that they misunderstood something. And if I say the right thing in the follow up email or I can somehow get them on another call and address their concern, everything will change. The words themselves don't mean a whole lot. It's a reason, but it doesn't mean it's the reason. And it's not always up for actual debate. It's never up for debate, really.
SPEAKER_00: You guys have had this situation, too, where it's like, founder comes back, you say, oh, yeah, like the investor said that if we were in like this market instead of this market, we'd like, you know, they'd be a lot more excited. So we think we're going to, you know, go after that. And you're thinking, I wish I could explain to you how this is going to make you less attractive. Like the fact, like because it gets to the heart of like investors also are aware they're not experts. So if a founder actually like actions on your feedback in sort of like a material way, like it makes you less than life for a good investor. I think it makes you less than likely to want to invest. You don't want to invest in someone who is relying on you for product insights.
SPEAKER_03: Right. Yeah. I mean, let's play this out hard. Investor spends two minutes writing the email. And then later hears that you've pivoted your entire company because of it. Right. And not a huge signal of conviction.
SPEAKER_01: Not a huge signal.
SPEAKER_02: I think the other lie the founders tell themselves is that the glaringly bad thing about my company isn't the reason why this investor didn't invest. It's the reason that they wrote on the piece of paper. So it wasn't I don't have a technical co-founder. It wasn't that like I've got negative margins. I'm about to run out of money. It wasn't that I'm building like a non software product and like this investor likes to invest in software. It wasn't that like every time I pitch this company to this investor, I haven't grown, I haven't launched. It's not those things. The investor said my market's too small. I bet it's my market's too small. And it's like it's probably one of those other things. Like it's or at least, hey, check those other things.
SPEAKER_01: Like you're checking a lot of those boxes. You should believe the why even less.
SPEAKER_00: Maybe investors have a bigger, broader view about the market in like an abstract way. Like they have like they can talk about, you know, like big picture census data or something. But like you should always be able to sort of inform them with anecdotes from like real users. Like anytime someone says, well, I don't know, don't like 60 percent of U.S. consumers not want to purchase blah, blah, blah. Usually you say, well, actually, like I've been spending the last month with like Uber drivers and actually like they have like they're like loving our product because of like these reasons. Like it's like and that's when I get worried. If a founder can't come back, if I feel like I better understand the user, then the founder does. That's a bad sign.
SPEAKER_02: What about Brad? And we get these a lot in YC Demo Day because founders pitching a lot of company. I mean, founders pitch a lot of investors. What about when the founders hearing the exact same thing, like it's the same why over and over again? Yeah, we see that a lot.
SPEAKER_03: We have founders that line up dozens and dozens of meetings and they go and rip through 25 of them and they come back. And it turns out 23 of them all gave the exact same reason. They might have said this market's too small or you're spending too much on advertising. I don't see how your unit economics work. When everyone says the same thing, the takeaway still isn't believe that. It's think about it. It's assess it, like dig into it. Do you think that's a problem? Is this actually one of the things that you're wary of with your own startup? Still don't take it at face value, but you should listen to it. You know, we tell founders to take notes and jot down how the meeting went, what they can do better next time. And sure, you should write the reason down. Don't forget it. But our advice is not to internalize it and kind of absorb it into your, you know, your mindset for the company. Should know about it, but not soak it in.
SPEAKER_02: I think this is the algorithm that I run when founders are fundraising. It's like the first thing, the first time they tell me there's a rejection and a why, I ignore it completely. If they've gotten like 15, 20, 25 rejections, I then ask, are the whys consistent? And only if then the whys are consistent. Do I even think this is a data point to be considered at all? Like at all amongst all the other data points.
SPEAKER_03: And the important thing to point out here is that the only way to get this kind of signal is to pitch a lot of investors. Right. So you get this, you get this rejection the first time, the second time, and you keep going, right? You keep pitching investors. One or two of these doesn't get it done. So let's talk about the other side.
SPEAKER_02: What are the real whys? Like I might argue that like the really brave and honest investors might give you some of these whys. These are whys that maybe you should pay attention to if you're getting them. So what do you think? What's in the first, what are on your lists of the real whys?
SPEAKER_03: I think a big one is you sit across from the person and in the course of the conversation, you think,
SPEAKER_03: I have a really hard time seeing this person building and running and leading a large organization. And that's a huge question that's on the table at every stage of investing, especially early on. And if the person just doesn't seem organized or fired up, we've all met people that run big organizations and they are very impressive, unique individuals. And if that doesn't seem like you in the meeting, you know, that's a big reason.
SPEAKER_02: Or let me say that slightly. Let me extend that. If it doesn't seem like you're aspiring to become one of those people, right? Like you don't have to be that person today, but if it doesn't even seem like that's on your agenda. Yeah. And believe it or not, folks, we run into that a lot and investors do in general.
SPEAKER_03: A lot of people think that fundraising is about things other than raising money to build a really big company. And it's not.
SPEAKER_00: Yeah, I kind of think what's going on in the raw truth is investors are doing two things. You're that pattern matching to previous successes and answering the question like, do you pattern match to founders I've had success with in the past? And then they're stack ranking like of all the founders I've worked with and are currently pitching me. Like, where do you rank? And the truth is you get a no because either you don't pattern match or you might pattern match and you don't stack rank. Like you might be like, yeah, you remind me of the kind of founders I've done well with. But actually, you're just not as good as the other ones I'm talking to right now. And that's kind of the blunt thing that's going on. But no one ever wants to say that.
SPEAKER_02: No one ever wants to say that. Well, and it's interesting because oftentimes with the stack ranking thing, it can be as simple as that, like, oh, you have the credentials, but you're not communicating clearly. Like, I don't really understand what you're saying, which is like, wow, it's a hard one, right? It's like shit like. Or I don't believe your numbers, like you gave me conflicting numbers and you cast some doubt. I feel like for those, it's so tricky because it's like, man, I could like your space. I could think that you've got good credentials, but like, you undermine yourself. Those are tough.
SPEAKER_00: Also, to give investors some credit, maybe ourselves, we're rejecting companies from YC. Like the founders change as well. Like you might reject a company when the founders haven't actually gone out and spoke to any users or they're like two weeks into it and they might not impress you with anything. But then a month of like real work, they come back and the same founders can just seem different. Like they've got real insights. They see more, their confidence has grown by and it's sort of like you're hearing a different pitch. And so I think in those reasons, it's actually fair for investors change. Like we do. We certainly like reject a company and then they come back and you're like, oh, wow, OK, like not like I'm having a completely different conversation with a different person. Like totally want to invest.
SPEAKER_02: In fact, I think that separates YC. I would be very interested in here if there's any other fund that funds people that it rejected. Sixty percent of the companies that do YC were rejected at some point in the past. Like I would be shocked if there's any fund that does that or any school or any selective institution that looks back at a failed applicant and says like, let's give them another try.
SPEAKER_00: Yeah, because one of the pieces of advice I repeat after demo days over and over again is keep a list of the investors that said no, like who seemed reasonable about it and like just keep like keep sending them updates, keep sending an update every month. And shockingly, if things start going well, those same investors will reach out, like change their mind. Like I've seen this happen over and over again for YC companies, but it's not natural for a founder. Like they just assume that once someone said no, it's a no forever. And yeah, you can't convince them to change their mind with words, but you can with actions.
SPEAKER_02: Well, I think and that's probably the best takeaway here, right? In some fundamental way, instead of losing your confidence, stop fundraising, like massively change your product based on some reject email or whatever. If you actually just change the facts of your business, right? Like make progress more often than not. The investor will look at that progness as a much better signal than any modification you made to your deck or any modification you made to the words in your pitch. Like that progress is signal. And that's probably the secret behind YC is that with multiple applications, we can see progress. And wow, it's like progress is exciting to invest in progress. And what this looks like often is the founder says, what do I say to this investor to get them to change their mind?
SPEAKER_03: And we say, tell them about the 10 new customers you just closed. And it takes a second for that to land, realizing that they need to go get 10 more customers and then tell them about it and not just write something different back to the investor. They have to change the facts.
SPEAKER_02: So with that, to wrap up, in fundraising season, the most common thing we say over and over again is believe the no, don't believe the why. The founders throughout fundraising, as long as you keep confident and realize there's more investors out there, there's always more investors out there and you stay confident you're doing yourself a service. Don't fall into these traps. Don't fall into these traps. All right, Brad Harge, great to see you. See you guys.
