VC Cliche of the Week

If there is a VC cliche I say the most it has to be, "we are passing".

For those who are unfamiliar with the VC vernacular, this means we are turning down an investment opportunity that was shown to us.

The stats are well known. VCs pass on 99% of the oppprtunities they are shown.

Since each of us sees at least 10 new opportunities a week, that means we each have to pass on about two deals a day.  That’s a lot of passing happening.

There are variations on the term passing.  I’ve said, "we are taking a pass".  I’ve said, "we’ve decided to pass".  I’ve said "it’s going to be a pass".  I’ve said, "we passed on that deal".

We also use other words, like turn down, decline, and no thank you.  But pass for some reason is the most common word for saying no.

I don’t know the origin of the term.  It seems like an odd word to use for no in many ways. 

In Wikipedia, the verb pass has several meanings:

in sports it means giving control of the play object to someone else
When driving it means to overtake a slower car
It means to die, as in pass away
And it means giving up one’s turn or chance at something

Clearly it’s the latter meaning that spwaned the use of pass in the act of saying no in the venture capital business.

But for the entrepreneur, it may be the third meaning, dying, that best describes the experience.

It is never easy to say no.  Many times, when its a quick no and there hasn’t been much work on the opportunity, the pass isn’t such a hard converstation.  And that’s the situation most of the time.

But when you’ve spent a lot of time working on something and come away from all of that work with a no, then you are talking about a different conversation with the entrepreneur.

I believe that the VC owes the entrepreneur an honest, complete, and interactive discussion of the reasons for the pass whenever both have done a significant amount of work on an investment transaction between the two.

There are a lot of reasons that VCs have gotten a bad reputation with entrepreneurs, but the pass is probably near the top.  Entrepreneurs understand that VCs are going to pass, but they expect a level of professionalism in the process of passing that is often not there.  A quick email saying no thanks after months of work is not a great way to build a reputation after all.

So I think these two rules are critical when saying no:

1 – Say no quickly to the things you know you aren’t going to do

2 – Don’t take an opportunity into diligence unless you are willing to spend enough time to truly  undersand it, and if you don’t invest, make sure you are willing to spend time explaining why.

It won’t make it any easier on the entrepreneur who is trying to find someone to invest in his business that you are passing, but they might learn something from the discussion, and in the end you will gain their respect.

And in this age where VCs and their money are a dime a dozen and great entrepreneurs are rare, respect from entrepreneurs is critical to success in the VC business.

So pass with care.