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.

Comments

[Joe White]

Fred: Nice post. As an entrepreneur who has been on the receiving side of a "pass" (and luckily some "yes" as well), I have always interpreted the word to mean "no...but..." In other words, "no," "but" we reserve the right to come back later if the company/market, etc., becomes hot. I'd much rather receive a "no, we are not interested," then I could reciprocate at the appropriate time. Of course, I could just say "pass" if they ever call back!

[Colin]

If I am not mistaken, "pass" is used in Bridge (the card game) to signal that you are not taking any action in "this round". I think it may also be used in other card games.

Thanks for your relevant posts. As a new reader, I am enjoying them.

[Dave!]

I think it's fair to do a quick no, if there isn't a relationship established. But if there is, I think just a little feedback as to why you're passing would be greatly appreciated--helps cool the sting, and more importantly, preserves a good relationship while possibly helping the entrepreneur improve their pitch/plan. Sounds reasonable to me...

[Mike Orren]

I'd add to this discussion that often the kindest thing a VC can do is pass -- quickly and professionally. I've noted a syndrome, particularly in the genteel South whereby many folks don't want to "say no." A "maybe" with some vague objections that sends the entrepreneur off on a lot of unproductive work and skews their view of the prospect pool is the worst thing that you can get.

It's very much like teaching salespeople to "go for the no." Maybes, especially when they're not sincere, are murder.

[Ken Berger]

Love this cliche series... yes this is easily the most common one. The 'pass' seems most obviously to imply the passing of the oppty along to someone else. You can just hear the 'passer' saying, "Of course your company is so obviously great that there surely must be many other suitors queued up. By our regretfully turning down this deal, it will effectively get PASSED on to the next eagerly waiting VC. I'm SURE we'll kick ourselves later." But given the stats mentioned, they know damn well the much more accurate and helpful phrase would be something closer to "The deal is not for us, and here's why...".

Many VC's won't deliver the advice the entrep needs to hear, simply because they feel they are not in the education business, and that they wouldn't be time-efficient if they spend any more time necessary with the 99% no's instead of the 1% yes'es. But the whole process would be better served if they did.

[Bill A]

Great post, Fred! This is good advice across all types of business relationships. While we want to get to "yes" with our clients, customers and partners, I believe we also need to understand when, why and how to say "no". I like your idea that the communication about passing on a transaction should be somewhat commensurate with the investment made in the transaction. Integrity matters.

[Charlie Kemper]

Great post. But, I'm not sure I see how this is a "cliche" but I do concur with the second half of your post. It's about clear & regular communication of decisions and focus. This is a fundamental good practice in all business. It's important to let customers, suppliers, investors, advisors, employees, etc know where you stand on issues and its critical that information is disseminated professionally. Full disclosure, that's the way to go.