Ever had a conversation like this?

Investor: This is an incredible concept! You guys are going to change the world!

You: Thank you so much! So, how much do you want to invest?

Investor: Well, actually, I couldn’t get my partners there. But you guys are going to do great! Keep me posted and let me know how I can be helpful.

You: *Scratches head*

We investors ply startup founders with big smiles and happy talk. Star fruit, anyone?

Many founders hear nothing but compliments but come away without a check. Why do investors do this?

As someone who nodded and smiled at founders for a good long while, allow me to pull back the curtain…

Preserving Optionality

Or in plain English, “keeping your options open.”

Maybe an investor thinks that a startup they meet with is not going to make it. But they could always be wrong.

Really wrong.

If the company takes off in a major way, the VC may find himself begging to get into the Series A when he missed the seed round. And if that happens, he doesn’t want the founder angry at him because he was too candid at a meeting 2 years ago.

Reputation

As an angel investor or VC, your reputation is everything.

If I tell a founder the hard truth that his company is burning too much money and may go out of business, he might accept that as constructive criticism. But he might also get very upset with me.

Founders talk to each other. If that entrepreneur tells two dozen others that I’m a jerk, there goes my deal flow.

It is in the interests of the founder for the investor to be honest. It can help the founder improve her pitch or fix issues in her business.

But it’s not in the investor’s interest! He’s more interested in avoiding a hit to his reputation than in helping a struggling founder.

Tell Them Why Their Baby’s Ugly

After hearing complaints about happy-talking investors from some of the best founders I know, I’ve changed my approach. When I’m not interested in their company at this time, I’ve started trying to tell founders in a direct but polite way.

I also try to explain why they don’t meet my criteria for investment and how they might meet it in the future. As noted angel investor Zach Coelius said, “You have to tell them why their baby’s ugly.”

The Time for Honesty Is Now

Being honest with founders is especially important right now. The fundraising environment has gotten a lot worse for startups in the last few months.

Many startups will not survive this. If giving a founder some constructive criticism prevents a business from dying and a bunch of people from losing their jobs, that’s a risk we investors need to take.

We have to remember why we’re really here: to build the ecosystem and help new companies grow and thrive.

Please remember this when an investor gives you constructive criticism: she’s actually taking a risk she doesn’t really have to take. Whatever decision you make, at least consider the investor’s ideas.

What frustrates you about dealing with investors? Leave a comment at the bottom and let me know!

Have a great weekend everyone! 👋

More on tech:

The Burn Multiple: What Is It, and What Can It Do for You?

Inside Today’s Early Stage Venture Market

What the Best Founders I Know Have in Common

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