Originally published in The Entrepreneur's Handbook on Medium
Fundraising is hard, especially for first-time founders. You have to learn a new language and skill set in addition to your day job (the not-so-minor task of getting a startup off the ground). Suddenly, you have to be conversant in valuations, SAFEs, fund theses, dilution, cap table math, term sheets, and allocations.
And if that wasn’t tough enough, nobody tells you that you’re tiptoeing around metaphorical landmines in the form of statements that investors hate to hear during fundraising.
These are “instant disqualifiers” — things that almost always make us pass in our heads the moment we hear them. We may sit through the rest of your pitch, but we’re mentally checked out. Instant disqualifiers are more than red flags; red flags point you in the direction of “no” but don’t guarantee it. For example, here’s a list of founder-related red flags for angel investors.
All investors have their preferences, of course, but I’ve noticed some instant disqualifiers that seem pretty universal. The idea to make a list arose from a conversation I had with two of my fellow investors on The Pitch Show, Charles Hudson and Michael Hyatt. We’d just come out of a pitch where a founder had said something that made us all disengage in our heads immediately (he said his big vision for the company was to get acquired in a couple years 😬).
We were talking about it in the green room after, and some of the producers for the show were surprised that a statement that seemed as innocent as “we want to get acquired” would cause all of us to recoil. We each threw out a few other phrases we never want to hear and overlapped on almost all of them.
So founders, listen up: don’t say or do these things if you don’t want to throw a colossal wrench in your chance of getting a term sheet. Of course, this list is filtered through my personal biases around things I really don’t like to hear; I’m not saying it’s 100% applicable to other investors. I’m all for speaking your mind and not censoring yourself, and authenticity is critical when meeting investors, but you should know the risk you face with these specific statements that investors are hard-wired to hate. My intent in sharing this list is to protect you from blowing up an otherwise fruitful investor interaction.
Obviously, note that avoiding these things doesn’t guarantee you an investment. Investors often see 100+ companies before writing one check. We’re looking for a magical fit and feeling (and as a founder, you should be as discerning too).
“We don’t have any competition.”
Not true. You do, so either 1), you don’t know about your competitors, which shows you’re unprepared on your market research; or 2), you’re overly confident in dismissing those companies because you think yours is better, which is the market’s decision to make, not yours.
It is extremely rare — outside of true frontier companies that are thinking 5–10 years ahead and creating new categories or spinning out lab-developed science — that a company doesn’t have any competition.
Absurdly high valuation
A way-too-high valuation shows an investor any number of bad things about you and your company: 1, you don’t understand how the market is pricing companies like yours today; 2, you’re surrounded by crappy advisors giving you crappy advice; 3, you know you’re pricing too high but you think you can pull one over on the investors.
Absurdly low valuation
Not quite as bad as the absurdly high valuation, but almost. It shows an investor that you either don’t know what you’re worth, or that you aren’t worth much. Sure, you’d be giving investors a good deal, but they don’t want to take advantage of someone who’s naive.
For a stunning example of both the absurdly high and low valuation playing out in real-time, listen to this episode of The Pitch Show where the founders came out asking for a $30M valuation, then dropped to $3M within five minutes. We still talk about this (👋🏻 Josh Muccio).
“Our end goal is to get acquired.”
Or put another way, “We are going to flip this in a few years.”
The most likely outcome for any startup is failure. The most likely “success,” depending on how you define it, is an acquisition. But even though investors know that many startups are likely to end in an acquisition, we still don’t want founders to aim for that from the beginning. It signals that the founder isn’t in it for the long term.
Investors tend to believe that founders need to aim incredibly high — like building a big, long-lasting pillar company, or getting to an IPO — in order to land decently — with an acquisition. Aiming for an acquisition from the outset feels like you’re limiting your company’s future, and of course investing is all about the outsized opportunities. It’s like that phrase, “Shoot for the moon: even if you miss, you’ll land among the stars.” Which is technically crap, because the stars are much further out in space than the moon is. But I digress.
However, if an investor asks you, “what do you think the most likely acquisition outcomes are,” you need to be prepared with an answer. You should know which established companies today may want to buy your startup in the future, assuming that you accomplish what you’ve planned. But this is a reactive answer to a VC’s question and not a proactive strategy for the ultimate outcome of the company.
Rambling, unfocused pitch email
Look, we all get nervous speaking in front of others. Stutters, dry mouths, and mental blanks happen. But when you’re writing, you’ve got the time and safety to choose your words carefully. Your message should be clear. Thus if your first interaction with an investor is via a rambling, incoherent email, we’re done. It tells us that you lack several skills that we view as critical to being a good founder: communication, emotional intelligence, persuasiveness, judgment, and self-regulation.
I’ve seen investments happen despite an ugly pitch deck (rarely), but I’ve never seen them happen despite a poorly written first email.
Tips for a good first pitch email:
Get a warm intro from someone the investor knows. If you can’t do that, reference the investor’s interests, portfolio, or anything else that shows you care.
Keep it to one paragraph, maybe two if they’re short. Brevity wins over investors, both in writing and in person. As my Accomplice partner TJ Mahony put it, “if they say at any point in the conversation, ‘This is going to be a little long in the tooth, but bear with me,’” it’s almost always headed somewhere bad.
Grammar and spelling matter. With Grammarly, you’ve got no excuse.
Send either email copy by itself or add a (very brief) slide deck. Don’t ever send a business plan or a one-pager. Nobody outside of business school or 1990 uses or reads those.
Your deck doesn’t need to be beautiful, but it helps a lot. If it’s ugly, it tells us that you don’t value good design. Avoid hokey stock photos with smiling business people.
Creating false urgency around a fundraise
Founders are often coached to run a process with their fundraise and pit investors against each other to create urgency. Although this tactic can work, creating false urgency where none exists will backfire. Put another way, it’s smart to engage with all your investors at the same time so that, ideally, you can get term sheets around the same time and create competition. But saying you have a term sheet in hand when you don’t is not okay.
One example I experienced: two founders who had been relaxed and easygoing throughout our interactions suddenly told me they had multiple term sheets out of nowhere and I needed to act fast or miss out on the deal forever. It wasn’t an obviously strong company and the timing and urgency felt off. I called them on it, saying I’d really liked our meetings up until this point, but I felt like they were getting advice to create pressure where it didn’t truly exist and I was passing. Two days later they admitted that one of their existing investors told them to fabricate having term sheets.
This tactic doesn’t draw good investors in; it makes us remove ourselves.
Any substantive lie
Puffery happens during fundraising, especially during the first pitch where you’re trying to hook investors to bite. But there’s a difference between puffing up your story and lying. Lying means we’re out. The founder/investor relationship often spans decades and is based on trust. Violating that trust is a sure way to lose investors’ interest.
Technology company with no technical founders
It sounds crazy, but it happens way more than you might expect. If you’re building a technical business, you’d better have at least one technical founder, or at least a high-level exec already hired who’s on top of engineering. Three business people with zero technical skills aren’t going to build the next Google. And no, outsourcing your product development to an agency does not count.
The founders aren’t full time
Not everyone has the financial stability to be able to quit their jobs and bootstrap a company. But by the time you’re pitching VCs for their commitment, you’d better be committed, too. And nothing says “I’m not committed” like having one foot in a startup and the other out the door at your old employer, not to mention the potential IP risks that come from developing a company while working somewhere else.
When founders plan to hire a salesperson before they have customers
This one came from Mike Viscuso, who’s not only an investor at Accomplice but the CTO and co-founder of Carbon Black, which went public and sold to VMWare for $2.1B in 2019. Let’s just say that Mike knows a thing or two about building and selling software and creating massive companies, and he tunes out when he hears this. I see this most often with founders who were salespeople in the past; it’s like they’re overly eager to build out a company function that they know and understand without regard for what makes sense (i.e., staffing a team to sell something that doesn’t exist).
Investors, what other instant disqualifiers do you have? Tweet me (@SarahADowney) or email me at sarah(at)accomplice(dot)co 👊