By Jack Fuller, Business Development, LSN
Let’s face it, much of the time a fundraising executive spends courting potential investors leads to rejections. If the opposite were true, our writers and researchers here at LSN would have much less to talk about, and CEOs of biotech and medtechs would be able to spend a good deal more time on bringing a product to market. However, most savvy entrepreneurs understand that fundraising is a numbers game, and eventually their perseverance will pay off in the form of an allocation. However, few entrepreneurs spend enough time thinking about the investors that have said “no.” However, they are often not all saying the same thing, so paying attention to these rejections can be a helpful guide in improving your fundraising efforts going forward.
Let’s look at a typical scenario and break down what could actually be behind a negative response:
The Scenario: Let’s assume the investor appeared to be a good fit based on your research, and showed enough interest to listen to an initial pitch either in person or over the phone. Things seemed to go quite well, but after the initial conversation, the investor simply replies they have “considered the opportunity but have decided to pass.”
An ambiguous response like this will require you to reach out to the person to pinpoint the exact reason for passing. Several factors may be at play, so let’s take a look at what may have happened.
Possibility 1: You were speaking with a gatekeeper and were disqualified before being passed on to a decision maker.
Understanding whom you are speaking with in the firm is of utmost importance. Many times associates and junior deal sourcing individuals have less flexibility in how they evaluate opportunities as compared to senior partners. These gatekeepers often act as filters and operate within certain boundaries to manage the deal flow going to the senior staff. They will often want to see certain materials such as a well-crafted pitch deck and executive summary that hits certain key points. However, their rejection may not mean you aren’t a fit in the decision maker’s eyes. If you think this may be the case, a polite and concise email directly to the decision maker may be an effective strategy. However, you should be very confident that you are in fact a fit, otherwise you may be pushing the recipient’s patience.
Possibility 2: Strong interest was expressed, however several aspects of the company did not match with the firm’s investment mandate.
Often the reason a dialogue with an investor fails is due to an identified mismatch between the company and the investor’s mandate. The mandates of investors can range from ultra-specific to highly opportunistic. Many objections can be traced to several high level points: phase of development, indication, technology, management team, and capital structure requirements. While this may be a stumbling point for many discussions, it can also be used to your advantage if understood properly.
Before approaching each investor these mandate components must be identified and properly emphasized. For example, you identify an investor looking for biotech companies specifically in Pre-clinical and phase 1 of development with a special focus on neurological disorders. You then find out they are technology agnostic and will evaluate small molecules and biologics equally. The emphasis in the initial discussions should then be placed on the indication and phase of development rather than the type of technology.
Possibility 3: They were never seeking to invest in the first place
It’s surprisingly common, but the truth is many investors look at deals even when they don’t intend to invest. They could be out of deployable funds, but want an ear to the marketplace or they could just be interested in doing some more research in a sector they are looking to invest in. These can be conversations that go on for a long time, because the investor genuinely wants to learn more. However, they end disappointingly, so don’t be afraid to be straightforward from the getgo – Ask whether or not they are actively seeking investments in your space and how many placements they seek to make over the next few quarters. This will keep expectations accurate and let you know if it’s worth spending your time on.
The reality is that fundraising is a numbers game, and inevitably, there will be a certain percentage of rejections (even with a targeted campaign). However, it can be extremely valuable to take some time to look at all of your investor conversations to see what you can learn. Understanding why you may not have been a fit for one particular investor will give you a leg up with future investors. Moreover, taking the time to examine rejections could potentially reveal some missed opportunities that could be rekindled with the proper approach.
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