When I decline an opportunity to invest in a start-up, I always try to give feedback to the founders. It tends to be short and to be point, but it's important to do that rather than just say "No". Sometimes I say "No" rather reluctantly which makes it vital for me to explain my decision both to myself and to the founders. Perhaps it is also useful to share some trends, which may help start-ups pitch better and understand what a typical decline actually means.
1. It's too early.
This is a reason, which comes up a lot. Sometimes I say "too early" to a business which is already revenue-generating but if you are a brand making £300K a year having been around for 8 years, your size may be a reflection of a poor product-customer fit. I cannot invest to scale a business which is not destined to grow.
2. I cannot tell who will be the winner in this market.
I look at a lot of consumer-facing businesses and some have impressive founders, technology and even traction. However, if it is a competitive market segment where customer acquisition is a function of marketing spend rather than visible points of difference such as barriers to entry, strong brand, superior product, loyal customers etc. then I have no way of telling whether it's my horse which will win the race. It's investor's nightmare to be pumping money into competing marketing budgets. Want a good example? Consider direct-to-consumer mattress businesses Casper, Simba, Eve and every Tom, Dick and Harry. They will drive down any hope for making a profit by their aggressive marketing spend.
3. I don't have the confidence in the founder.
This may sound like an obvious one but since most of my deal flow consists of female-led businesses, it's a tricky point to consider. Women are sometimes underselling themselves so I'm not looking for overabundant confidence in the founders I meet. Instead, I look for experience, track record, willingness to listen, ability to learn quickly, management skills and grit. Sometimes I come across businesses with good products but when I speak to the founder(s), I doubt their ability to execute their plan. Once I spoke to the founders running a skincare business who said: "Once we become big, we will obviously need to hire a more experienced CEO to manage the business as we don't have the experience." In reality, it's probably much harder to raise a start-up from the ground up than to run a fast-growing, cash-generative beauty brand. Their words have put me off. No one wants founders with a defeatist attitude.
4. I know nothing about the industry.
Last week I was sitting at a pitch clinic listening to a presentation by a business which aims to disrupt the TV industry. I happen to know quite a bit about the TV market having worked in the industry for three years, so I was both entirely on board when presented with the "disruption" plan AND I also knew that it would be nearly impossible to execute it. This is why I tend to decline opportunities in HealthTech (unless they are B2C) or GovTech or specialist business services. Quite simply I don't have any industry insights, and if the business encounters problems down the line, I'd be kicking myself for investing an in industry I was unfamiliar with.
5. It's boring.
I think this is what clever people call lack of investor-founder fit. If I'm yawning while I'm reading your deck then no matter how clever your solution is, I won't engage with it. I won't promote it as an investor because I wouldn't be proud of it. When things go wrong as they often do, I will be too annoyed with myself for having to understand the intricacies of accounting software market to be able to help you effectively.
There are plenty of other reasons which can be industry-specific or relate to the business model. What may not appeal to me in the UK may well appear attractive in India. I have even passed on oversubscribed opportunities before, and I had good reasons for that.
I saw other investors develop some kind of score system to rate an investment opportunity and perhaps it is helpful to them. For me, a score card would only help validate the answer I already know and sometimes it's not even 100% objective.
As a final point, it helps to remember than investing in one company means necessarily forfeiting an investment in another startup that comes along next. It's about an opportunity cost - my good old economics degree is making itself useful.