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March 29, 2005

How VCs should say "No", and how entrepreneurs should take them

Bill Burnham,Managing Director at Celsius Capital, has a nice 3-part blog post on the choices and dangers VCs face while saying "No" to funding pitches from entreprenreurs. "Saying “no” to any entrepreneur is not fun and creates enemies. It’s like telling someone their baby is ugly or their child is stupid. At best they will walk away puzzled at your inability to “get it”, at worst they will berate for your stupidly and declare a permanent pox on your house."

His parting advice to VCs:
1. Being honest. It’s tempting to use a convenient excuse, but you and the entrepreneur are both better off if you are upfront and honest. Yeah, you risk alienating some entrepreneurs but if they don’t respect you’re attempt to be honest then they you probably wouldn’t have worked well together anyway.

2. Being specific. To the extent that you can be specific, you owe entrepreneurs the real reasons for why you are saying “no”. Not only is this the right, professional thing to do, but it will also help force you to make sure you are making the right decision.

3. Being quick. A fast “no” is much better than a long draw out “no”, both for the entrepreneur and for you.
And, for entrepreneurs:

Thanks, this has been helpful. Let’s talk if we raise another round.
If properly done, my experience is that the majority of entrepreneurs will react this way to a “no”. For starters, entrepreneurs are generally good salespeople and they realize that if one customer has an objection, similar customers are likely to have the same objection. Thus the more feedback they can get on their funding pitch, even if it’s negative, the better off they are. In addition, if the entrepreneur feels that the feedback they get is thoughtful they usually appreciate that someone took the time to seriously think about their business. Finally, most entrepreneurs, like VCs, never want to preclude the possibility of a future investment so they do what they can to leave the door open in the future.

Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.