Unfortunately, you can't always explain why a venture capitalist chooses to invest in one startup and not in another. Despite what some will claim, there is no magic formula that entrepreneurs can follow to assure them funding 100% of the time; these are just guidelines to follow to increase your chances, but in the end, a VC's decision is not always about the quality of the company, idea or founders. It's like in a relationship when one party breaks it off by saying, "It's not you, it's me," only for VCs they actually mean it most of the time.
DFJ Gotham Ventures investor Mark Davis, who blogs over at Venture Made Transparent wrote Tuesday about how sometimes, even when looking at a great company with a promising future, VCs (himself included) still say no. The reason? Well, for VCs, investing in a startup is a lot more than just determining whether it will have a prosperous future.
Ultimately, VCs are looking for a financial return on their investment, and while potentially successful startups can mean quick bucks for entrepreneurs, the VC may not stand to benefit as much from investing as they would like. It sounds mean and nasty, but VCs don't exist to simply shell out cash to worthy companies; they have been tasked with taking a venture fund and investing in companies that will provide high returns.
That being said, there are a lot of different VCs out there with lots of different goals in mind, so those looking for higher returns are less likely to invest in a company with a mildly promising future. If a VC turns you down, it could be simply that they are looking for something different than what you are offering.
"When a VC passes on a company that seems poised to succeed, he may do so because the company is not a fit with the VC's thesis," writes Davis. "The company might be based in a geography or sector in which the VC doesn't invest [or] the company is not likely to scale sufficiently to meet a VC's investment requirements."
So before you trash your pitch deck and slam your head against the wall, take time to consider the fact that all VCs have varying motivations and your company might be perfect for a different investor. I would assume any decent VC would tell you why he has declined investing, but if for some reason they don't, make sure you don't leave the meeting without getting some feedback and constructive criticism from them.