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What To Do When You Are In A Circular Discussion With A VC

Q: I am part of a tech start-up that’s in a slight conundrum.  In order to place our product in its market, we’ve had to provide it to customers free of charge.  Now, the majority of our revenue model is based on advertisement fee’s and service fee’s collected after the product has already been placed, so normally such a move would not be a problem; however we are finding it hard to raise the money to produce and install our first product. 

To date we’ve raised money from angel investors.  When we approve VCs, we get the same reply, "let’s first see a market reaction, and then we can talk about investment."  But, without VC money, we can hardly demonstrate a proper market reaction.

Should we concentrate on finding more angels, or should we look harder into the VC option?

A: (Brad) Concentrate on finding more angels.  You are in a classical circular discussion with the VCs you are talking to.  Without knowing the details, my guess is the VCs you are talking to are basically saying no to you, without saying no directly.  You can waste a lot of time continuing to go in circles with them, or you can focus your time and energy on getting enough angel money to get to the next step of your business.

It is equally important that you re-evaluate exactly what you are trying to accomplish with the angel money.  Assuming you believe you’ll ultimately need more capital for your business, at some point you will use up your sources of angel money, or you’ll get to a place where you need a larger capital infusion that angel investors won’t be able to provide.  Given the feedback you are currently getting from VCs, you should rethink the approach you are taking to enter the market to demonstrate the elusive "market reaction" the VCs are looking for.  If you feel like you’ve developed a good relationship with at least one of the VC firms, see if you can enlist them to give you direct feedback on what they’d need to see (other than the generic "market reaction") to take you more seriously.

October 29th, 2008 by     Categories: Fundraising    
  • http://www.altgate.com/ Furqan Nazeeri

    Good one.

    It could be a “no” as you indicate, but it's most likely a “not now” or perhaps a “maybe.” I've seen a few VCs be explicit about this, but most give this somewhat circular argument or another similar one (I wrote about these a while ago.)

    Raising money is like dating…you have to read the body language and other non-verbal clues because folks rarely say what they are really thinking.

  • Frank Ronchetti

    Furquan is right. Often VCs will give you one reason for not investing, when the real reason is something else. It could be that they can't follow your logic of needing money to produce your first product after you said that your first product is already on the market. Or they just won't fund somebody who can't spell “fees” or who doesn't have enough attention to detail to proofread and change “approve VCs” to “approach VCs.”

  • Donna Murdoch

    This is pretty common. I agree with Brad that if there is one firm you have a good relationships with, why not ask their direct opinion? What you are seeing though, my opinion only, is classic “watch in case something good happens” behavior by the VC. They are interested enough to watch in case something good happens (great contract, a co-investor they like). No reason not to continue discussions or burn bridges but would definitely move on as if you heard “no”. Especially in this market.