The real reasons people invest in startups aren’t always what you’d think.
I was giving a talk about fundraising to a group of entrepreneurs when one of them posed a surprisingly tricky question:
“What’s your most memorable fundraising moment?” she asked.
I had to pause and think. Was it the first time I ever got a “yes” from an investor? Was it the time an angel investor wrote me a check for $50k on the spot? Was it the time I embarrassed myself trying to pitch my dream VC in an actual elevator?
As I considered my answer, the experience that kept popping into my head was probably one of the less remarkable moments in my fundraising journey, but it was oddly memorable, so it’s the moment I decided to share. Here’s the story I told them…
I was pitching a mid-tier VC. I’d previously raised a $1m+ seed round for the same company, and I 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 of wanting to explore a deal, so I decided to push for the next step.
“Sounds like this all makes lots of sense for both of us,” I said as our meeting was nearing an end. “We’re in your sweet spot in terms of deal size, we’ve got the traction you’re looking for, this is a hot space you’ve been trying to invest in, and your background and experiences could clearly bring tons of immediate value to what we’re doing. 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’m investing in you.”
“What?” I said, surprised. My paydar rarely misfires so dramatically. I was sure he was interested, and I said as much. “But why not?” I continued. “Everything you told me makes it seem like we’re exactly the company you’re looking for.”
“The company definitely is,” he said. “But the problem isn’t the company. It’s 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 it was. “That’s the problem,” he continued. “I can’t invest in a first-time founder.”
“Why not?” I pressed.
“It’s a core part of my investment strategy,” he explained. “I only invest in founders who’ve raised at least a million dollars and had their companies fail.”
“Wait a minute,” I said, wanting to clarify what I’d just heard. “Are you telling me you only invest in failed founders?”
“I wouldn’t say failed founders,” he responded. “The founder could have also IPO’d a company and had a huge exit. What I’m looking for, though, are people who, at some point in their careers, had the experience of launching a company that was on the path toward being successful only to have the wheels come off. Since you haven’t experienced that yet, I can’t invest in you. I’m sorry.”
I was so surprised by his response that I didn’t say much else. Instead, I gathered my things, shook his hand, and left.
“That all happened maybe 10-ish years ago,” I told the group of students I was speaking with once I’d finished recounting the same story I just shared for all of you, “and I still think about it often. I guess that makes it one of my most memorable fundraising experiences even though 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 on her. “Why do you think you always remember that moment?” she asked. “What was so special about it?”
I shrugged. “I guess, in retrospect, I wish I’d asked more questions,” I told her. “I should have tried to better understand his logic and how his experiences have shown him the value of that particular strategy.”
“Do you think it’s a good strategy?” she asked.
“I kind of do,” I admitted, somewhat sheepishly. “I mean, at the time I couldn’t believe that’s how he made his investment decisions. But, in retrospect, I don’t think it was a bad strategy.”
“Why not?” she wondered.
“The company I was pitching ultimately failed,” I replied. “I trudged along for another couple years trying to raise more money but never did and eventually shut it down. And, yeah, that experience sucked. But, if I’m being honest, I learned so much from failing with that company that I became a much, much, much better entrepreneur because of it. In other words, I was almost certainly a safer founder to invest in after I’d failed, so, from an investor’s standpoint, I can see the logic.”
To be fair, in my answer to her I should have added that I don’t have the data to know whether focusing on previously failed founders is a sound investment strategy, but that’s also not the main reason the moment was so memorable for me. Instead, getting rejected because I hadn’t failed enough helped me learn to better appreciate my failures.
As someone who’s had both successes and failures in the startup world, I personally recognize that I usually learn more from my failures. I suspect, if we’re 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 isn’t an end. It’s a beginning. Our failures are what turn us into better entrepreneurs.
