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I run an accelerator. Here are 4 things startups can learn from rejection

Understanding why a venture capitalist rejects your startup can help founders build better businesses.

I run an accelerator. Here are 4 things startups can learn from rejection

[Photo: CopleyNathan/Pixabay]

BY Katharine Schwab6 minute read

When I pitched my first startup to angel investors and VCs, I was often told they were concerned that I didn’t have a cofounder. This feedback drove me nuts, because it wasn’t for my lack of trying. I didn’t know many people who had the startup bug back then, and certainly fewer who could afford to work without pay. So I decided to forge ahead alone.

I pitched that startup hundreds of times, and I failed to raise any capital for it. Sometimes I took the feedback personally. I was angry, hurt, and frustrated. There were plenty of successful solo founders out there—why did investors assume I wouldn’t be one of them?

Sometimes I blamed it on bias. As a female, Latina, immigrant founder with an infant at home, I was acutely aware of the huge, systemic gender gap in venture capital. I knew full well that I was an outsider, not “in” with the Silicon Valley elites, and that even when I got a meeting, I faced powerful biases every time I pitched.

The systemic bias I faced while pitching was absolutely real. But it’s also true that having a cofounder would have improved my odds of success. Without the ability to recruit, startups can’t succeed, period. What is a cofounder if not your first recruit? By focusing on one truth, I missed the other and didn’t learn a lesson that would have helped me a lot.

Rejection is a form of judgment, and by virtue of its negativity, it can be a hard pill to swallow, particularly when you face a lot of it. As a founder, my main goal was to get my business off the ground. When I took rejection personally, I was depriving myself of the opportunity to learn something about my business that could help me down the line.

These days, I look at thousands of startups through my work with the Female Founders Alliance, evaluating hundreds of them for admission to our accelerator. For most of those founders, I sit on the other side of rejection—with our limited time and funding, we often have to say “no” way more than we say “yes.” So with the benefit of time, experience, perspective, and a thicker skin, I started compiling the reasons behind rejection, so that founders might be able to turn a hurtful moment into business success. Here’s my list of reasons why investors pass on startups and the lessons those rejections can teach.

1. Fundamental problems with your business.

Are you solving a real problem? Are you targeting the right audience for that problem? Does your product actually solve it? Is the problem painful enough that customers will replace existing and habitual solutions?

Sometimes founders fall in love with an idea and rush to build it before really verifying that others feel the same way. This is an area where investor feedback is most helpful, as every company needs to check all of these boxes to have any chance of success. Use investor feedback to critically evaluate your product-market fit, and then go find additional evidence that you’ve got it. This evidence—in the form of real customers signing up for your product even if it’s in the form of a wait-list—will set your business up for success.

2. Venture capital isn’t the right type of capital.

Are you targeting a large specific addressable market—$2 billion in annual revenue or more? Is that market saturated? Are barriers to entry high? Do your business model and your margins scale? Can you defend your position against competitors? Are you planning to sell your company or go public down the line?

Venture capitalists have very specific growth and exit targets for the companies they invest in, and certain conditions—such as the ones above—must be met for them to be interested. VC is not the right type of capital for every type of business. So if this is where your rejection falls, take heart: It isn’t actually a bad thing. Your business might be better suited for traditional business loans, partner investments, or grants. Better yet, you might go after the single most valuable type of early startup capital: real revenue from real customers. Trust me. It rocks.

If you have conviction about your fit for venture capital and you’re still facing rejection from VCs, you may need to reconsider your market and your business model entirely. It’s also an area where fine-tuning your pitch (see #3 below) can help substantially.

3. Your ability to persuade.

Oftentimes, the problem is not the company itself or the market dynamics. The problem is that you’re failing to explain it all in a way that meaningfully persuades the investor. What good is checking all the boxes if you can’t convince anyone that they’re checked? To be a successful founder, you need to be a persuasive storyteller.

To solve this problem, start by putting yourself in the investor’s shoes. Why should they do this? Why you? Why them? Why now? Build a pitch that demonstrates substance, generates excitement, and suggests urgency in order to bring investors on board.

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Once you learn this skill, it becomes a superpower. Persuasive storytelling will help you close every single deal down the line, be it investors, partnerships, new customers, in-demand hires, or potential acquirers.

4. Concerns about the founding team.

Sometimes investors simply don’t think you have it in you to succeed. They may justify this with pattern matching or lack of evidence if you’re a first-time founder. Their judgment will be clouded with personal experience and riddled by all kinds of bias. And they will rarely own up to this—it’s hard to tell someone that you don’t believe in them.

In the short term, there is very little you can do about it. Unless someone at the VC firm is so sure about you that they’re willing to pound the table at the partner meeting and forcefully advocate on your behalf, it’s simply not going to happen.

So what is there to learn when people don’t believe in you? You learn how to believe in yourself without relying on external validation. You learn how to fall and get back on your feet. You learn how to keep going even when it’s hard, even when the odds are stacked against you. These are not fun lessons to learn. But they are the most powerful lessons of all.

VCs frequently make mistakes in both directions: They often get it wrong when they say no, and they often get it wrong when they say yes. In my analysis of reasons behind rejection, I talk of investors as though they were always rational. In reality, that’s not always true. Their job is to make bold bets, not to follow a checklist.

It’s striking to me how much outside observers—and even some founders—think of getting venture capital as the goal, and fundraising as the means to achieving that goal. Of course, they’re wrong. The real goal is to launch a business that creates value for you, your team, your customers, and your stakeholders. Venture capital is a means, one of many possible paths to achieving the ultimate goal.

That’s why great founders know that their job isn’t to please all investors—it’s to build a great business. And the process of fundraising isn’t just about money. It’s a fire test for every part of your business, too. Great founders defy the odds not by avoiding rejection altogether, but by taking rejection and turning it into fuel.


Leslie Feinzaig is the founder and CEO of the Female Founders Alliance, a national network with 20,000 founders, investors, partners, and supporters that collaborate to help women and nonbinary startup leaders succeed.

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ABOUT THE AUTHOR

Katharine Schwab is the deputy editor of Fast Company's technology section. Email her at kschwab@fastcompany.com and follow her on Twitter @kschwabable More


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