Someone asked a question about this on TheFunded and here’s (my expanded) response. First, let me say that the reason VCs come across as entirely pessimistic is because most companies that come in to pitch in reality don’t measure up to their claims. Their objections are an imperfect process for testing the claims. It’s tough on both sides. So anyway, here is my list of the top 10 VC objections and some tips on how to overcome them:
10. We think your market is too small (or will take forever to mature). Dealing with this feedback from a VC has mostly to do with understanding the constraints of venture capital. You can either broaden what you consider your target market, explain why you see the market as bigger than they do or go talk to a VC with a smaller fund.
9. You are too early stage. This could be real feedback or it could be a platitude. VCs usually develop a comfort zone with a particular stage of company, but all but the most adventurous shy away from companies where the product is not yet in the market. Many VCs like to see some revenue and depending upon the industry they may want to see close to $1MM in revenue for early stage deals. Of course, as tastefully as possible, you should attempt to “puff up your feathers” to seem more mature than you may be. Letters of Interest from prospects are great, but client contracts are better. In the end, responding to this one is tough, because you are where you are. Best thing to do if confronted with this is find out where their comfort zone is and potentially come back when you reach that (I’ve actually seen that result in funding). The best way to do this is to be explicit about what you’re going to accomplish in the next 6-9 months (and them remind them you pulled it off, which will hopefully be the case).
8. The valuation is too high. This usually means the VC thinks your company is okay and they might consider investing if you were giving it away at a couple million pre. It also can be used as a platitude. Sometimes it’s a reference to companies that have raised a lot of money and have to do a flat or down round because they’re running behind plan/expectations. The trick here is to turn the question around by asking, “What valuation do you think is just right?” When you’re raising money, any interest is good interest so don’t dismiss any offer because it’s too low.
7. You are too late stage. This is really a variant of #8. Any early stage VC would love to own 20% of your late-stage business. This typically happens in Series B rounds or Series A rounds where the CEO/founders have an existing track record of success. One way to get an investor close to their “20%-hurdle” but still maintain a high pre-money valuation is to offer early liquidity to founders or other early investors so you might try responding to this objection by offering some secondary.
6. Google/Microsoft/Yahoo/AOL is already (or about to or could) do this. This is a push back on competitive landscape and your relative positioning. The key to thwarting this objection is to have more market knowledge than the VC you’re talking to (which is an uphill battle given the information flow they get). Don’t bash the competition and use this to demonstrate your ability to execute. For example, you should have a response like, “Well I actually spoke with Rich Miller at Google and he said…”
5. We think your projections are unrealistic (or alternatively: you have no business model). If you haven’t spent enough time preparing your financial model, you can get caught flat-footed. Best thing to do on a financial model is to be very conservative. You want the VC commenting, “Oh, I think you’ll get customers faster than that.” There are also a lot of comparables out there so no need to reinvent the wheel.
4. We’d like to see more market traction before moving forward. This is typically a blow-off or a legitimate variant of #9. A close cousin of this one is when the VC says, “we’re interested, but we need to know who else is interested to know if we’re really interested.” If you get that response, you’re wasting your time…just get up a leave.
3. Company is a “feature” or “product” but not a business. This is really a variant of #10. Best thing to do is to try and step back and take a broader view of the opportunity and what it could be.
2. You have to ask yourself…what about India and China? I’ve only gotten this objection once. It’s a dumb question so it’s hard to give advice on how to respond. Maybe just make a reference to snoman.
1. B- or C-level team. Actually, Most VCs won’t tell you this and instead you get one of the other platitudes. That makes it one of the hardest objections to respond to. I think the best way to overcome this is not to say that you have an A-level team (if in fact you don’t) but rather to say something along the lines of, “here’s our staffing plan for success…”
Overall, the best policy is honesty and candor. In fact, your best bet is to address these objections before they come up. And if, for example, a VC asks if the market may be too small you can respond, “you are probably right, but here’s what would have to be true if that were not the case…” You want to turn it away from a “in-order-for-me-to-be-right-you-have-to-be-wrong” conversation.