Home Entrepreneurs A Venture Capitalist Told Me How He Decides Which Startups to Fund, and I Couldn’t Believe It | by Aaron Dinin, PhD | Oct, 2022

A Venture Capitalist Told Me How He Decides Which Startups to Fund, and I Couldn’t Believe It | by Aaron Dinin, PhD | Oct, 2022

by Ozva Admin

The real reasons people invest in startups aren’t always what you’d think.

Photo by sammy sander in unsplash

I was giving a talk on fundraising to a group of entrepreneurs when one of them posed a surprisingly tricky question:

“What is your most memorable fundraising moment?” she asked.

I had to pause and think. Was this the first time you received a “yes” from an investor? Was it the time that an angel investor wrote me a check for $50k on the spot? Was it the moment when I embarrassed myself trying to introduce my dream VC in a real elevator?

As I considered my answer, the experience that kept popping into my head was probably one of the least remarkable moments in my fundraising journey, but it was oddly memorable, so it’s the moment I decided to share. This is the story I told you…

I was pitching a mid-tier VC. I had previously raised a seed round of over $1 million for the same company, and was working on my Series A. The VC and I seemed to be “vibing” (for lack of a better word), and he was giving all the signs . wanting to explore a deal, so I decided to push for the next step.

“Looks like this all makes a lot of sense to both of us,” I said as our meeting drew to a close. “We’re in his sweet spot in terms of deal size, we’ve got the traction he’s looking for, this is an attractive space he’s been trying to invest in, and his background and experiences could clearly bring tons of immediate value to what we’re working on.” making. What are the next steps to move forward with a potential investment?”

The VC laughed. “Oh, God, no,” he said, “there’s no way I’d invest in you.”

“What?” I said, surprised. Me pay it rarely fails so dramatically. I was sure he was interested, and I said so. “But why not?” I continued. “Everything you’ve told me makes it sound like we’re exactly the company you’re looking for.”

“The company definitely is,” he said. “But the problem is not the company. Are you.”

“Me?” I asked, trying not to sound as offended as I was. “What’s wrong with me?”

“This is your first venture-backed company, right?” I shook my head to acknowledge that it was. “That’s the problem,” he continued. “I can’t invest in a first-time founder.”

“Why not?” I pressed.

“It is a fundamental part of my investment strategy,” he explained. “I only invest in founders who have raised at least a million dollars and their companies failed.”

“Wait a minute,” I said, wanting to clarify what I had just heard. “Are you telling me you only invest in failed founders?”

“I wouldn’t say failed founders,” he replied. “The founder could also have made an initial public offering of a company and had a great exit. What I am looking for, however, are people who, at some point in their careers, have had the experience of launching a company that was on the road to success only to have its wheels come off. Since you haven’t experienced that yet, I can’t invest in you. I am sorry.”

I was so surprised by his answer that I didn’t say much more. Instead, I gathered up my things, shook his hand, and left.

“That all happened maybe 10 years ago,” I told the group of students I was talking to once I finished telling them the same story I just shared, “and I still think about it often. I guess that makes it one of my most memorable fundraising experiences, although I realize it’s not particularly interesting.”

The girl who originally asked me to share my most memorable fundraising moment raised her hand again and I called her over. “Why do you think you always remember that moment?” she asked. “What was so special about it?”

I shrugged. “I guess in hindsight I wish I had asked more questions,” I told him. “You should have tried to better understand his logic and how his experiences have shown him the value of that particular strategy.”

“Do you think that is a good strategy?” she asked.

“In a way I do,” I admitted, somewhat sheepishly. “I mean, at the time I couldn’t believe that this was how I made his investment decisions. But looking back, I don’t think it was a bad strategy.”

“Why not?” she wondered.

“The company I was launching ultimately failed,” I replied. “I trudged around for a couple more years trying to raise more money but never did and eventually closed it down. And, yes, that experience sucks. But, if I’m being honest, I learned so much from failing at that company that I became a very, very, much better businessman for that. In other words, he was almost certainly a safer founder to invest in after he had failed, so from an investor standpoint I can see the logic.”

To be fair, I should have added in my answer that I don’t have the data to know if targeting founders who have previously failed is a good investment strategy, but that’s also not the main reason the moment was so memorable to me. Instead, being rejected because I hadn’t failed enough helped me learn to better appreciate my failures.

As someone who has had both successes and failures in the startup world, I personally admit that I usually learn the most from my failures. I suspect that if we are all honest with ourselves, the same is true for most of you reading this.

What this tells me, and why my most memorable fundraising moment was when a VC told me he only invests in failed entrepreneurs, is that failure is not the end. It’s a start. Our failures are what make us better entrepreneurs.

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