Growing Your Business: Understanding what a venture capitalist’s ‘no’ means

In metro markets like Boston, it is said that a venture investor looks at 100 deals, spends time on 10 and commits capital to one — pretty bleak odds if you’re an entrepreneur looking for capital.

In part, it’s a supply-and-demand thing — more demand for early-stage venture capital than supply.

Supply-demand aside, there are plenty of reasons investors pass on what appear (at least to entrepreneurs) to be good opportunities:

• Relative appeal: The investor is too busy working on other prospective deals that light his/her fire more than yours. On the one hand, this is the by-product of the capital gap — more deals than dollars means that the bar is very high to get funded given many other compelling options. On the other, it has to do with risk mitigation. There are deals with more significant risks than others. The higher the risk elements relative to a given upside as perceived by the investor, the more likely they continue to look to the next deal for a more compelling risk-reward equation.

• Fit: Investors have preferences and biases toward sectors and business models that they like better than others. Fit also has to do with the partnership. Investment funds are made up of a team of individuals who tend to work on consensus, meaning that if one partner really hates an opportunity, it’s unlikely to get supported even if the deal’s champion loves it.

• Management, management, management: As location is to real estate, so management is to startups. Investors look for experienced, and complete, management teams that have relevant experience in growing a business in a given sector. If the team’s experience is lacking in the right kind of experience, many investors will pass rather than take a chance on a first-time team or lead executive.

It’s the economy

In the context of the current down economy, many investors withdraw from new opportunities for a couple of good reasons:

• They want to preserve their capital for follow-on investment in their current committed investments

• Investors who back ventures whose prospective customers are corporations are rightly concerned about the negative impact of a slow economy on certain corporate buying decisions. Advertising-based businesses are also likely to be out of favor, as advertising spending correlates closely to the economy.

But some businesses and business models are more recession-immune than others.

For example, a fund that I manage has a mix of technology and consumer products, which see less volatility in a down economy.

Even in good economies, entrepreneurs often find that it takes several “no’s” to get to a “yes” from the venture market. In today’s economy, you can assume more “no’s” to get to that “yes,” assuming you’ve got the right business model for the current and projected environment.

These are the most challenging times that I and my peers in the VC business have seen in our careers. The negative side for entrepreneurs is greater difficulty in securing equity capital on favorable terms. On the positive side, down economies present opportunities to exploit larger companies’ contraction, allowing small ventures to get a foothold where they might otherwise be more challenged.

Look at your business and business model and adapt it to speak to the current market environment and you’ll increase your odds of both surviving and potentially getting financing to keep your engine running.

Michael Gurau is managing general partner of Clear Venture Partners, an early-stage New England venture capital fund-in-formation targeting secondary cities. He can be reached at