/ Guest post / Understanding reasons for VC rejections – Why are you different?

Understanding reasons for VC rejections – Why are you different?

Approximately 1 to 2 percent of relevant deal flow for a VC firm will become a portfolio company. Hence, rejecting entrepreneurs is something a VC professional will have to do as part of his job. As most people have an intrinsic urge to be liked, I believe most VCs want to be honest about their rejections. However, the honest opinion isn’t always appreciated. For that sake, let us clarify reasons VCs reject.

One the things a VC is really interested in is: Why you are different?

For some companies this is an easy one, but most companies have difficulties formulating a concise answer. Being able to formulate why you are different often automatically creates a reason to invest in a company: why it is difficult to do what you do? This reason is often a very compelling reason to invest, as it makes a company scarce and scarcity has value.

So what reasons are most common for companies to be different? And how strong are these reasons? Here are just a few:

1.First mover

First mover companies are essentially companies that found a new proposition and are inherently different. A VC who invests in a first mover company either thinks the company can generate a large competitive advantage by moving first or that the company can become the market leader by moving first. However, being different by moving first is not a strong differentiator.

2.Technological innovation

Companies who differentiate on a technological level are attempting to do something different. Often a VC who invests in a company that has some technological innovation takes some part of the risk and hopes the innovation can really make a large impact. Being different with a technological innovation bears a lot of risk, but is a very strong differentiator.

3.Top feature

By having a single top feature companies deliberately try to be different than the competition. A VC who invests in a company with a single top feature believes in this differentiating feature and believes that in a competitive market this feature will make the company the market leader. Differentiating by a single top feature can be beneficial for the short term, but is not a strong differentiator in the long term.

4.Management experience

Some companies are founded as a result of a person or management team who have specific knowledge and are different due to that reason. Often VCs have a long term relationship with these kind of management teams, as it is difficult to assess what makes the team specific. Being a specific management team is a strong sustainable differentiator.

Companies who can clearly state what their differentiating points are have a higher chance of keeping the conversation with a VC going, and lower the chance of being rejected.

Mathijs de WitThis guestpost is written by Mathijs de Wit, investment manager at Newion Investments. It originally appeared on the blog of VeeCee, a platform for Dutch VCs.

Photo by Pieter van Marion (creative commons via Flickr)

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