Inside the Group Partner Lounge: Investors said no, now what?

Hello. This is Michael with Harge and Brad. Welcome to inside the group partner lounge. So as YC Group partners, we find ourselves repeating the.

often seemingly obvious advice to founders over and over again. Before COVID, we'd often gather together in the partner lounge at the YC office to try to figure out why this was the case and how we can help startups figure it out faster. Today, we're gonna talk about.

what to do when an investor says no to investing in your startup. Our saying at YC is believe the no, don't believe the why.

Yeah. So to set this up, you one thing we end up doing a lot is pumping belief back into founders who have had their confidence shaken by these investor rejections. And it always surprises us because from our perspective, the founders are the experts on their product, the market, like everything they're doing.

They think about it day in and day out, and yet they can have everything sort of shaken by investor who spent thirty minutes with them. And so.

we wanna figure out what's going on. And it's funny because oftentimes that thirty minutes is, like, over Zoom while, like, on Slack doing email. Right? Like, maybe not the most engaged to thirty minutes.

Exactly.

So, Brad, what do you think the lies that founders are telling themselves? Like, when when a founder's got gets a rejection from an investor, the polite investor who bothers to write why,.

what do you think is going through a founder's head? Well, the first thing going through the founder's head is this investor is an expert, and they are telling me the truth in this follow-up email that they sent me. They're they I I I follow them on Twitter, and they tweet about my market all the time. They worked at a company in this market sometime in their past. They work at Fancy Fund x.

Therefore, they know everything about what I'm doing. And whatever they told me in that rejection email, it that that must be the reason and the problem with my startup. Which is so sad.

I mean, how many y c applications do we read and what percent of the time do we raise our hand and say, oh, yes. I know everything about this space. I'm I'm qualified to judge this idea. It's like, I think under 1% of the time. Yes. Yeah. It it it.

basically never happens. I mean, investors may have a passing understanding of what you're doing, but almost by definition, if you're doing a startup, there's something new and novel about it, and you are the expert, not the investor. And so whatever the reasons they're giving are not, like, canon. They don't know any more than you do, and and they almost always know much less than you.

It's like that saying. Right? It's like, oh, what is it? Like, you know, not a little bit of knowledge can be dangerous. It's like, I think investors end up knowing just enough to be dangerous. And it's a job where you're often selling, so you're very confident in sort of how you articulate your opinions.

But, like, yeah, you don't actually get the deep insights because you're not, like, in it building the thing. Just why investors have, like, a 90% failure rate. Right? Like, most investments are bad decisions.

I think we see this in practice too because we will see founders who will pitch to investors, get knows, apply to YC, get into YC, and those same investors will say, now I wanna invest in your company, and nothing has changed. No fundamental thing has changed in that company, yet the investor changes their mind. That doesn't sound like the opinion of an expert. Right?

No. It sounds like a herd animal.

It sounds like a herd.

So you get this rejection and you think, well, I'll go back to them. I'll convince them that they're wrong, that they misunderstood something. And if I say the right thing in the follow-up email, or I can somehow get them on another call and and address their concern, everything will change. The words themselves don't mean a whole lot. It it's it's.

it's a it's a it's a reason, but it doesn't mean it's the reason. And it's not always up for actual debate. It's it's never up for debate, really. You guys ever have this situation too where it's like, yeah, a founder comes back and say, oh, yeah.

Like, the investor said that if we were in, like, this market instead of this market, we'd like know, they'd be a lot more excited, so we think we're gonna, you know, go after that. And you're thinking, I wish I could explain to you how this is gonna make you less attractive. Like, the fact, like because it's yeah. It gets to the heart of, like, investors also are aware they're not experts.

So if a founder actually, actions on your feedback in sort of, like, a material way, like, it makes you less than likely you're a good investor. I think it makes you less than likely to wanna invest. You don't wanna invest in someone who is relying on you for product insights.

Right. Yeah. I mean, let's let's play this out hard. Investor spends two minutes writing the email and then later hears that you've pivoted your entire company because of it. Right? Not a huge signal of conviction. Not a huge signal.

No. I think the other lie the founders tell themselves is that the glaringly bad thing about my company isn't the reason why this investor didn't invest. It's the reason that they wrote on the piece of paper. So it wasn't that I don't have a technical cofounder. It wasn't that, like, I've got negative margins. They're about to run out of money.

It wasn't that I'm building, like, a non software product and like this investor likes to invest in software. It wasn't that like every time I pitch this company to this investor, I haven't grown, I haven't launched. It's not those things. The investor said my market's too small. I bet it's my market's too small. And it's like, it's probably one of those other things.

Like, it's or at least, hey, check those other things. Like, if you're checking a lot of those boxes, you should believe the y even less.

Maybe investors have a bigger, broader view about the market in, like, an abstract way. Like, they have like, they can talk about, you know, like, big picture census data or something. But, like, you should always be able to sort of inform them with anecdotes from, like, real users. Like, anytime someone says, well, I don't know. Don't, like, 60% of US consumers not wanna purchase blah blah blah.

You usually, I've said, well, actually, like, I've been spending the last month with, like, Uber drivers, and they're actually, like, they have like, they're, like, loving our product because of, like, these reasons. Like, it's like like and that's when I get worried. If if if a founder can't come back if if I feel like I better understand the user than the founder does, that's a bad sign.

What about Brad?

And we get these a lot in YC demo day because founders pitching a lot of company. I mean, founders pitching a lot of investors. What about when the founder's hearing the exact same thing? Like, it's the same why over and over again. Yeah. We see that a lot. We have founders that line up dozens and dozens of meetings,.

and they go and, you know, rip through 25 of them. And they come back, and it turns out 23 of them all gave the exact same reason. They might have said, this market's too small or you're spending too much on advertising. I I don't see how your unit economics work. When when everyone says the same thing, the takeaway still isn't believe that. It's think about it. It's assess it, like dig into it.

Do you think that's a problem? Is this actually one of the things that you're wary of with your own startup? Still don't take it at face value, but you should listen to it. You know, we tell founders to take notes and jot down how the meeting went, what they can do better next time. And sure, you should write the reason down. Don't forget it.

But our advice is not to internalize it and kind of absorb it into your, you know, your mindset for the company. Should know about it, but not soak it in.

I think this is the algorithm that I run when founders are fundraising. It's like the first thing the first time they tell me there's a rejection and a why, I ignore it completely. If they've gotten, like, fifteen, twenty, 20 five rejections, I then ask, are the whys consistent?

And only if then the whys are consistent do I even think this is a data point to be considered at all, like, at all, amongst all the other data points. And the important thing to point out here is that.

the only way to get this kind of signal is to pitch a lot of investors. Right? So you get this you get this rejection the first time, the second time, and you keep going. Right? You keep pitching investors. One or two of these doesn't get it done. So let's talk about the other side.

What are the real whys? Like, I might argue that, like, the really brave and honest investors might give you some of these whys. These are whys that maybe you should pay attention to if you're getting them. So what do you think? What's in the first what what are on your lists of of the the real whys?

I think a big one is you sit across from the person. And in the course of the conversation, you think, I have a really hard time seeing this person building and running and leading a large organization. And that's a huge question that's on the table at every stage of investing, especially early on.

And if the person just doesn't seem organized or fired up you know, we've all met people that run big organizations, and they are very impressive, unique individuals. And if that doesn't seem like you in the meeting, you know, that's a big reason.

Or or let me say that slightly let me extend that. If it doesn't seem like you're aspiring to become one of those people Right? Like, you don't have to be that person today, but if it doesn't even seem like that's on your agenda. Yeah. And believe it or not, folks, we run into that a lot and investors do in general.

A lot of people think that fundraising is about things other than raising money to build a really big company,.

and it's not. Yeah. I kinda think what's going on in the raw truth is investors are doing two things. Your that that pattern matching to previous successes and answering the question like, do you do you pattern match to founders I've had success with in the past? And then they're stack ranking. Like, of all the founders I've worked with and are currently pitching me, like, where do you rank?

And the truth is you get a no because either you don't pattern match or, like, you might pattern match and you don't stack rank. Like, you might be like, hey. Yeah. You remind me of the kind of founders I've done well with, but, like, actually, you're just not as good as the other ones I'm talking to right now. And that's kind of the blunt thing that's going on, but no one ever wants to say that.

No one ever wants to say that. Well and it's interesting because oftentimes with the stack ranking thing, it can be as simple as that, like, oh, you have the credentials, but you're not communicating clearly. Yeah. Like, I don't really understand what you're saying. Yeah. Which is like, wow. It's a it's a hard one. Right?

It's like, shit. Like or I don't believe your numbers. Like, you you you gave me conflicting numbers and and you you cast some doubt. I I feel like for those, it's so tricky because it's like, man, I I could like your space. I could think that you've got good credentials, but, like, ugh, you undermined yourself.

Those are tough. Also, to give investors some credit, maybe ourselves, we're rejecting companies from YC. Like, the the founders change as well.

Like, you might reject a company when the founders haven't actually gone out and spoke to any users or they're, like, two weeks into it, And they might not impress you with anything, but then a month of, like, real work, they come back and the same founders can just seem different. Like, they've got real insights. They see more their confidence has grown.

Like, and it's sort of like you're you're hearing a different pitch. And so I think in those reasons, it's actually fair for investors changing. Like, we do. We certainly, like, reject a company, and then they come back. You're like, oh, wow. Okay. Like, not like, I'm having a completely different conversation with a different person. Like, totally wanna invest.

In fact, I think that separates YC. I I would I'd be very interested in here if there's any other fund that funds people that it rejected six like, 60% of the companies that do YC were rejected at some point in the past.

Like, I would be shocked if there's any fund that does that or any school or any selective institution that looks back at a failed applicant and says, like, let's give them another try.

Yeah. Because one one of the pieces of advice I repeat after demo days over over and over again is keep a list of the investors that said no. Like, if and who seem reasonable about it. And, like Yes. Just keep like, keep sending them updates. Keep sending an update every month. And, shockingly, if things start going well, those same investors will reach out, like, change your mind.

Like, I've seen this happen over and over again for YC companies. But it's not natural for a founder. Like, they just assume that once someone said no, it's a no forever. And, yeah, you can't convince them to change their mind with words, but you can with actions.

Well, I think and that's probably the best takeaway here. Right?

In some fundamental way, instead of, you know, losing your confidence, stop fundraising, like, massively change your product based on some reject email or whatever, if you actually just change the facts of your business, right, like, make progress, more often than not, the investor will look at that progress as a much better signal than any modification you made to your deck or any modification you made to the words in your pitch.

Like, that progress is signal. And that's probably the secret behind YC is that with multiple applications, we can see progress. And, wow, it's like progress you is exciting to invest in progress.

And and what this looks like often is the the founder says, what do I say to this investor to get them to change their mind? And we say, tell them about the 10 new customers you just closed. And it takes a second for that to land realizing that they need to go get 10 more customers and then tell them about it and not just write something different back to the investor.

But they have to change the facts. So with that,.

to wrap up, in fundraising season, the most common thing we say over and over again is believe the no. Don't believe the why. The founders throughout fundraising, as long as you keep confident and realize there's more investors out there, there's always more investors out there, and you stay confident, you're doing yourself a service. Traps. Don't fall into these traps. Alright.

Brad, Harge, great to see you. See you, guys.

Bye.