As an entrepreneur, you should always be ready to “fail upward.” In other words, you need to know how to recover from temporary setbacks and refocus your attention on a successful business exit. Many startup founders have failed to generate interest in their venture at first—only to strike it big later on.
Funding is crucial for early-stage startups, and thus founders often see investors and venture capital firms as the “gatekeepers” to their success. As such, investor rejection can be intimidating and demoralizing for startup founders, especially those just starting out.
The good news is that there are lots of investors out there, and a single “no” doesn’t spell doom for your business. The best thing you can do, both for yourself and for your startup, is to handle rejection gracefully and to use it as motivation. Below, we’ll offer a guide to surviving investor rejection.
How do you respond to an investor rejection?
Let’s be honest: no matter who you are, investor rejection is hard. Although you might be utterly confident in your business plan, potential investors may see things differently. Here are just a few reasons investors don’t fund startups:
- Your business needs more growth, customers, or traction.
- The investor is unfamiliar with your company’s industry or segment.
- Your company’s value proposition isn’t strong enough.
- There are too many competitors in the space.
- The investor has already funded one of your competitors.
- Your financial metrics (e.g. cash flow, revenue per customer, growth rate, etc.) aren’t convincing enough.
- Your business idea or product is highly novel or risky.
If you’ve been rejected by a VC firm or investor, it can’t hurt to ask for feedback on your pitch or business plan. Some investors might politely decline, while others are more than willing to offer some advice (which you’re free to consider or discard).
Regardless, the best way to respond to investor rejection is with a polite message thanking them for their time. Even if you haven’t found a new source of funding, it’s never a bad idea to invest in your network as a startup founder.
Depending on the reasons for rejection and the feedback you received, you may want to refine your business strategy before you pitch to the next investor. Spend time learning how to approach a VC. This will teach you the valuable skill of perseverance when many decline your offer to meet. Honing your pitch deck and making the right connections is important for all entrepreneurs. It’s especially true for certain groups like female founders who often face greater challenges and subconscious bias in the fundraising process.
How do you reject an investor?
What if the shoe’s on the other foot, and you’re wondering how to reject a potential investor? For example, maybe the investor is asking for too large of an equity stake in your business, or maybe you’ve since received a better offer.
No matter the reason, it’s important not to burn bridges. Instead, politely decline and be as honest as possible about why the offer isn’t a good match for your business. You might even find that some investors are more willing than you expected to renegotiate terms.
If there’s a true dealbreaker, however, then the best thing to do is to simply thank investors for their time and wish them well. You might also offer to refer them to other startups who are a better fit for their interests. Above all, you should avoid burning bridges or “ghosting” them by leaving the offer hanging. It’s impolite and the startup community is smaller than you think.
What is a fair percentage for an investor?
Suppose none of the above advice is relevant. An investor wants to offer funding, and you’re more than happy to accept. Once you’ve found the right investors for your startup, what equity percentage should you give them?
The amount of equity investors receive will depend on the size of their financial contribution and your business valuation. If an investor contributes $100,000, for example, and you value your startup at $1 million, then a fair equity stake would be 10 percent.
In addition, you’ll likely want to place a cap of 20 to 30 percent on the total equity that you distribute to investors. This will leave enough equity for the founders to maintain majority control. It will also leave equity for the startup’s early employees.