If VCs Turned You Down

We’re at the dusk of 2009, a gruesome year for most businesses. It has been an especially harrowing one for those entrepreneurs on the funding trail. This post is specifically meant for those entrepreneurs who have tried but not succeeded in raising venture money this year.

There are numerous reasons why VCs turn down early stage investment opportunities. This year, the foremost among those has been that they are afraid that if they put in the Series A right now, in 12-18 months, the Series B may not be easy to raise since the macro environment remains horrible amidst 10%+ unemployment and a general atmosphere of freeze all round. They assume that the B round may turn out to be a flat or a down round, which is a risk they are unwilling to take. This, by the way, has nothing – absolutely nothing – to do with your particular venture. So, do not take this rejection personally.

Instead, look for ways to get to your first million in revenue by working closely with your customers. Preserve your equity. And if your venture fits the VC model, you can, most likely raise money in 18 months at a much better valuation.

Now, there are ventures that get rejected by VCs because they do NOT fit the VC model. Most often, the TAM is too small for a venture style return possibility. Sometimes, there are barriers to adoption that cause investors to pause. Then of course, there are issues about management team, technology defensibility, competitive overcrowding, etc.

No matter what those reasons are, it would be a good idea for you to understand the reasons for your lack of success in raising venture money, and then determine whether it is a good use of your time to chase after investors, or would it be better to focus on building the business with the assumption that funding would NOT be available.

Remember on thing: even if VCs reject you, you can still build a multi-million dollar business and enjoy its success. You just have to do it differently than you had perhaps originally imagined. You won’t have big salaries, and you won’t have a lot of marketing dollars sloshing around. But a tightly managed, bootstrapped venture often has much higher sustainability, as well as significantly greater returns for its founders, so don’t get disheartened by the rejection of VCs.

May be, just may be, 2010 will bring you better focus on your customers and significantly greater revenue, now that you have checked out the VC market and figured out that venture money is not an option.

When one door closes, many others tend to open.

[If you want to discuss your business strategy with me at one of my roundtables, please feel free to sign up. We will have weekly roundtables starting January.]