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September 08, 2005

The Art of Saying No -- without Saying No

The Art of Saying No — without Saying No

If one were to do a “keyword” frequency analysis of VC communications with entrepreneurs, the actual usage of the word “No” by VCs wouldn’t necessarily look anymore common place than in other executive professions.  In fact, I would hazard to guess (or to hoist by my own petard) that most VCs rarely, if ever, use the actual word NO.  

However, if you did a “concept” frequency analysis of VC communications, you would probably find that the concept of NO is more prevalent in venture capital than almost any other profession.  This makes sense since even the most active firms are unlikely to end up funding more than 1% of the deals they screen.  (Firms who have higher rates are not really factoring in the degree to which their dealflow is “pre-screened” in their referral process — formally or informally.)  

VCs are very similar to psychiatrists — except that we treat visions with money rather than medication.  We spend a major portion of our time building close relationships with individuals possessed by visions so that we can probe their most intimate dreams, desires, and thoughts about unknowable future scenarios.  99% of these relationships culminate in rejection.  Being “nice guys”, we feel a responsibility to let them down politely, but in no uncertain terms — “we can’t go any farther in the relationship”. (Any semblance to high school “wham bam thank you mam” mating behaviours is purely coincidental.)

Given that the venture capital process is very similar to parenting where we are raising children to learn to stand on their own, it is not surprising that we have mastered the art of saying “No” a thousand and one ways without ever saying “No”.  The truth is no one really likes the word NO.  It’s a rather short, blunt, aggressive, and absolute term for rejection and it’s use causes unpleasant flashbacks to early childhood authority figures who are setting limits “for our own good” — which is probably why our most common euphemism for NO is the much friendlier sounding word “PASS”. 

Luckily, VCs have lots of convenient excuses that rhyme with “fit” to dismiss 99% of the deals we examine.   

The Danger of Saying NO 99% of the Time

99% of the time we pass on a deal, we never hear about that company again.  This is potentially dangerous.  There is a high risk that we take this fact, consciously or unconsciously, as positive reinforcement that we make correct decisions — a false validation of our world view through the absence, not presence, of contradictory evidence.  Clearly a subtly invalid methodology we are all prone to — especially when we so rarely make mistakes.

Three Good Reasons to Track Your Passes

I have three reasons I track my Passes — one childish and two mature —

• I Knew It
• I Blew It
• Curiosity

First, the childish reason:  I must confess that I do secretly derive some puerile satisfaction when I watch one of my brethren “stick their foot into it” — especially when “I knew better”.  Ideally, I like to see some (or all) of my concerns about a given deal come true — partly to feel smarter than my colleagues (childish reinforcement) but also to verify whether or not I was right to be concerned about potential risks I had identified during due diligence (mature learning). 

Start-Ups = Expensive Market Experiments

Start-ups are expensive market experiments where you often learn more from failure than success.  So when a colleague “sticks their foot into it”, it affords a huge opportunity to learn on someone else's dime. Granted, you haven’t paid for the box seats on the Board but the cheap seats often allow you to see the game more clearly without being distracted by the details of cursing and sweating among the individual players and plays.

Fear of Commitment

Also, on rare occasions, we pass on a deal because we “just don’t get it”.  Something we “can’t quite put our finger on” makes us feel uncomfortable about commitment.   It’s very disconcerting when it happens (which is rare of course) but it does happen.  Everything seems right — but your gut is screaming NO! NO! NO! (Notice how your gut is much less polite and has no problem using the word NO.)  On the plus side, these deals are often particularly rewarding to track and may help you clarify your thinking over time.

The No-Brainer PASS

99% of our Passes are “No-Brainer” Passes.   The fact that no one else gets “sucked into it” further reinforces our perception of the illusory “VC consensus” as to the viability of these projects. 

The Rare “Oops” PASS 

I know it’s extremely rare, but yes, every once in awhile, a PASS makes someone else filthy rich.  

This is usually very disruptive to one’s confidence as an investor — a very rude awakening to the fact that you can be wrong — even for the right reasons. ( see Management Hubris and the Humble Pie Matrix)

My “Miss List” or “PASS Regrets”

So, in the spirit of Bessemer’s Anti-Portfolio and the MOTUs that Got Away, I have decided to begin posting my own misses (rare though they may be) with my first MISS POST. 

And, Yes, it IS better to be lucky than smart.

Posted by cmayaud at 02:33 PM | Permalink| Comments (1)
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Posted by: Stewart at December 26, 2005 06:09 PM

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