Comment by jacquesm | Hacker News Reader

Comment by jacquesm | Hacker News Reader

The reason VCs say no 'without saying no' is because they would like to keep the door open in case you and your crazy idea - against all odds - succeed and need a follow on investment a while from now.

The reason they say no to begin with is because you are not pitching in a vacuum, you are pitching together with another 1,000 or so companies in a year, 900 of those will get 'no' right off the bat, 100 will get a meeting (or two) dedicated to reviewing their proposition in more detail, 10 of those will enter due diligence (at substantial risk to the VC in case the deal does not go through) and maybe 8 out of those 10 will get funded.

The amount of time wasted on worthless pitches by people that don't stand a chance of getting funded is very large, and no amount of feeling that you are entitled to funding is going to get you funded unless you manage to convince the other side of the table that you are one of those 10, which means you need to look better than the other 990. Good luck!

> 10 of those will enter due diligence (at substantial risk to the VC in case the deal does not go through)

What exactly is the "substantial risk" that VCs take on by doing due diligence on ten companies a year?

DD isn't exactly cheap. And neither is partner time, that's probably a more precious resource than money at your average VC.

A failed DD says as much about the VC as it says about the company, it more often than not translates into 'VC didn't do their homework', and it can really eat into the '2' of the 2 and 20, those DD costs will come straight out of the operating capital of a fund. Especially for smaller VCs this can really hurt.

Thanks for the detail. To me, that sounds like the cost of doing business as a VC, more than risk. Forgive me if I have a little less empathy for the other side :)

Well, I see both sides. VC is not the money printing machine that many people make it out to be, lots of VCs work hard, take tremendous risk and in the end end up with relatively little to show for all their effort.

2% of the capital under management is a lot when a fund is large but when a fund is small (say 50M) it translates to 1M of operating capital for a year when all capital is invested. That's only the case at the end of the fund cycle, the time before then there will be on average only half of that available. If a full process DD (legal, commercial, technical, financial) costs $200K then even a single failure will substantially eat into the operating capital for that VC and may in fact harm their ability to do future deals.

Not having empathy for the other side is not very productive, either from the VC's point of view or from the point of view of the start-ups. I've seen more start-ups that try to play tricks than I have seen VC's (but I've seen both).

Got it. Thanks :)

What is VC due diligence like?

I think it depends on the fund. Jonathan Hsu of Social Capital wrote a 5 part blog post on how they do it [0]. They even built a tool that companies interested in pitching upload their user & revenue data into, it's pretty neat.

[0]https://medium.com/swlh/diligence-at-social-capital-part-1-a...

I've written about that:

https://jacquesmattheij.com/due-diligence-survival-guide

Essentially they will build a hypothesis around what makes your company worth investing in (e.g. great goto market, passionate customers, technology likely to be bought, ...) and will focus on double-checking what they believe needs to be true for that is actually true. Essentially it's broken down into:

Technology due diligence (by an outside contractor)

- understand architecture

- interview CTO

- understand technology choices

Essentially the technical DD is whether your CTO knows what they he is doing and can actually deliver the roadmap.

Go-to-market DD

- call with your channel partners if you have them

Product DD

- call with a sample of your customers

- Actually try the product themselves

Team DD

- reference calls on all founders + backdoor references

- CV's of core team

Business audit

- P&L

- cashflow

- cap table

- sales activity (growth, churn, acquisition)

Due Diligence should not raise any surprises and confirm what you have pitched them. It's a very rational thing to do before you wire a few million into a company you have met only a few times.

> Due Diligence should not raise any surprises and confirm what you have pitched them.

This is key and something that I have explained multiple times over the last couple of years to people that really did not get why a surprise or two during a DD were a 'big deal'. DD is confirmatory, not discovery.

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