22 Reasons Your Investor Might Have Passed On You (According To 4 Leading VCs)
As a founder, you’re probably accustomed to steeling yourself against a litany of naysayers and cynics who don’t get your vision. But no matter how thick a skin you develop, it’s never fun to be told ‘no,’ especially after you’ve spent significant time with an investor exploring a potential deal.
The salve you need to soothe the sting? It comes from extracting learnings from adverse situations. According to Angela Duckworth, author of Grit: The Power of Passion and Perseverance, the key to resilience is learning “to interpret failure and adversity as necessities of learning.”
But what about the times when investors are cryptic or laconic about why they really passed? “A good VC will be straightforward with founders on why they pass,” says Kaitlyn Henry, Vice President at OpenView. “But there are a few reasons where even the most candid VCs will be less transparent about what they’re really thinking.”
How do you learn from these situations?
We sat down with four investors from three different firms—Itxaso Del Palacio from Notion VC; Brandon Bryant from Harlem Capital Partners; and Sanjiv Kalevar and Kaitlyn Henry from OpenView—to find out.
1. Your customer references are sinking the ship
“Reference calls can be very eye-opening,” says Itxaso. “I passed on one company I really liked because when I started doing reference calls with customers, they were not very positive at all.” To make matters worse, the customers revealed that instead of paying for a seat for each team member, they bought one login and shared it amongst 10 people. This spelled trouble for the pricing model and scalability of the business, and ultimately Itxaso had to pass.
“It was really funny that the founder had made those introductions,” she says. “Did he just not know?”
Sanjiv has had a similar experience: “We loved the thesis, the company, and the founders. However, when we started doing our market diligence, the first three customers we chatted with said they would be churning in the next 12 months,” says Sanjiv. “Not a good sign!”
Takeaway: Be careful who you introduce your investors to. Do your due diligence and make sure those customers will represent you in a positive light.
2. Your metrics are unclear or misleading
“I passed on one company where we were really excited to invest in, but then the verbal metrics did not match up with the reality,” recalls Sanjiv. “In particular, the company lumped services—which made up half their revenue—into MRR, so we could not get to the company’s ask on valuation.”
Takeaway: Be as transparent and clear on the numbers as possible. Resist the temptation to present numbers in such a way that they seem more impressive than they actually are—this will only delay the inevitable.
3. They’ve been burned before
“For better or for worse, VCs rely on pattern recognition to make quick decisions,” says Kaitlyn. “If they made an investment in an adjacent space that went poorly, they might choose to swear off the space entirely.”
“Good VCs try to learn from their failures and apply lessons from bad outcomes to future investments, but they will still be extra cautious and put you under a higher level of scrutiny, which, more often than not, leads to passing.” she continues. “This same dynamic can be true when companies outside of the VC’s portfolio don’t do as well as expected.”
Takeaway: Frankly, there’s not much you can do about this one, other than take it with grace and keep on trucking.
4. You come across as un-coachable
“When you’re an expert and you’re starting a company, there are times where you’ll definitely know more than a VC,” says Brandon. “But when a VC shares ideas in their purview to help guide you, it should at least be taken as food for thought.”
“You don’t have to use all of it,” he continues. “But if you give off the impression that you’re not flexible or coachable, that creates challenges.”
Takeaway: Own the areas where you’re an expert, but cultivate humility especially in areas where others have deeper experience. Pause when you receive feedback to consider it fully instead of automatically shutting it down.
5. You’re annoying investors with inefficient process
For Itxaso, few things grate on her as much as when investors ruin their chance at a strong first impression. For example, some founders will send metrics as a PDF instead of an Excel spreadsheet with formulas and calculations visible. “Why would you even do that?” she asks in disbelief. “I take the time to go to the data room and the numbers are in PDF or hard-coded. Then I need to ask them for more information.”
“When I don’t get the raw data, I always think that the founders might be hiding something,” says Itxaso. “And it’s really inefficient because we need to go back and ask for them to resend in Excel.”
Another turnoff for her is sending links not designed to be downloaded. “Many founders send tracking links that we can’t download. So we can’t share the info with our teams and we can’t do calculations on them either,” she says.
“We see thousands of deals a month. The easier it is for us to review the information provided, the higher the chance we’ll get involved in the deal. I wish founders would take that more into account,” says Itxaso.
Takeaway: Think of every investor interaction from their perspective. The less friction in their experience, the more positive of an impression you’ll leave.
6. Your team lacks diversity
“I’ve stopped pursuing investments in teams where there’s an emerging pattern around lack of diversity,” says Kaitlyn.
“It’s hard to gauge that early on because recruiting your first 5-10 hires inherently means leaning on your network, so the sample size is relatively small,” she continues. “But I’ve seen businesses get to 100 employees and still have incredibly homogenous teams. At that point, I become concerned it’s a culture issue that the startup will have difficulty overcoming as they scale.”
Takeaway: Make it a priority from day one to build a diverse team.
7. You’re trying to close the deal too quick or too far out
An automatic ‘no’ for Sanjiv? “First meeting is today, and we need a term sheet in 24 hours.”
Brandon echoes this sentiment: “There are said rules and unsaid rules around fundraising. A strong founder comes in with a feasible timeline—anywhere between one to three weeks. A founder who wants to close in the next two months is too wide-spanning. That’s a yellow flag and a potential warning. So is a founder who wants to close within the next few days.”
Takeaway: Find the sweet spot for timing your deals. Don’t let deals drag on forever, but don’t stress out investors with too short a window either.
8. You’re name-dropping too much
“I enjoy founders keeping tight lips about who’s around the table,” says Brandon. “If you start to just name-drop a ton of investors, it can come off as more sales-y than an indication of how much interest there is for the deal.”
“Funnily enough, when you won’t share who’s around the table and you do have potential leads, it puts more fire underneath a VC to get things done because you don’t know who else could be around the table. If this founder’s really enterprising and captivating, it’s time for you to giddy up,” he says.
Takeaway: Keep who else you’re talking to close to your chest.
9. The problem you solve isn’t big enough to overcome people’s inherent aversion to change
“Customers and prospects are lazy,” says Itxaso. If implementing your product would take a massive overhaul and involve a lot of change management, you’d better be damn sure customers think it’s worth all that effort.
“It’s a major red flag when I call a prospect and say, ‘Hey folks, would you use this?’ and they reply, ‘No, it’s very interesting, but we don’t want to change what we’re currently using.’”
Takeaway: Do extensive research to make sure you’re solving customer pains that hurt enough to motivate change. It’s all about nailing product-market fit.
10. Your differentiator is unconvincing
A big turn-off for Sanjiv: “Surface-level reasons why the company will win. Common ones include better UI/UX, or the product being easier to use.”
Takeaway: Dig deep on product-market fit to offer a truly differentiated product—then highlight this in your pitch.
11. The VC doesn’t know enough about your space
“If it’s a market I don’t know much about, or if I don’t have the time or interest to dig into it, then I can’t pursue the deal,” says Sanjiv.
“Given how fast deals move these days, it’s not uncommon to have only a handful of days to do diligence on an opportunity,” says Kaitlyn. “If I haven’t made (or even evaluated) an investment in your space before, that’s not a lot of time to get up to speed on the history and nuances of the market, which is a crucial part of understanding a company’s potential.”
“I don’t think most VCs like admitting that they’re passing on an opportunity simply because they don’t understand the market yet, but it happens more often than most folks let on,” says Kaitlyn.
“This is why I think it’s important for founders to ask investors about their experience in or thesis on a space early on.”
Brandon fully agrees: “If you’re outside of our firm’s space, we just may not be able to get back up to speed as quickly as we want to,” he says. “Nor should you as a founder prioritize someone who isn’t knowledgeable and excited about your space.”
Takeaway: Prioritize VCs who have a familiarity with your space, or at the very least, adjacent spaces.
12. You are not aiming to build a unicorn
A deal-breaker for Itxaso: “You don’t have big enough ambition,” she says. “It’s an automatic ‘no’ if I feel that you’re building a feature, not a company.”
“If you’re targeting a market that isn’t big enough or if you tell me that you’ll sell the business to the first buyer who comes through the door for $150M, that’s not enough for an investor to make any money out of it.”
Takeaway: Have a BHAG (big hairy audacious goal).
13. Your personalities don’t mesh
“It’s easier to get a divorce than it is to break up with your founder,” says Sanjiv. “You’re embarking on a journey together that could last 5-10 years or more, so you’ve got to be certain that you’ll get along.”
“It doesn’t mean you’ll agree on everything. In fact, I can almost guarantee you will not,” he says. “But having common values and understanding is essential.”
Takeaway: Fit is mutual. Make sure you seek out investors who you really click with.
14. You don’t know your numbers or your pitch inside and out
“Sharpness of a founder is just something you can gauge in the first five to ten questions,” says Brandon. “Sometimes there are folks who seem a little too green, or they don’t know all their numbers off the top of their head.”
“The best intro calls are extremely streamlined,” he explains. “What you’re supposed to do as a founder is help me understand the problem, the solution, why you are the best person to handle this, and why right now.”
“We don’t ask those straight up. The onus of the founder is to hit on all those points.”
“We can’t know everything about every space because VCs are generalists by nature,” he says. “Strong founders lead us to drink water.”
Takeaway: Know your numbers and your pitch inside and out. Build a compelling case that covers everything founders want to know—before they have to ask.
15. Your pricing model doesn’t set you up for scale
Itxaso recently passed on a company that sells a sales enablement tool and charges per salesperson. The problem? A salesperson might have 1000 people using the tool—just in the pipeline as prospects—and the company captured zero value from that. “You need to charge them for the value they are getting for these 1000 people that they have versus just for their seats. That would be truly setting yourself up for scale.”
Takeaway: Consider your pricing model carefully to make sure you’re leaving yourself room to grow.
16. You’re the wrong stage or market for the firm
“I’ve had to turn down deals that are too early or too late,” says Brandon. “We typically do early seed, post-product at least, maybe not post-revenue. Then series A and later are probably a little bit too late for us.”
“Markets are another big one,” he continues. “I would say 70% of what we invest in is enterprise or B2B. The other 30% is consumer tech. We don’t invest in direct-to-consumer or deeply technical products. We typically stick to industries related to enterprise software, future of work, HR tech, e-commerce tools, FinTech, and wellness apps.” If it’s outside of his wheelhouse, Brandon will have to pass.
Takeaway: Do your research and make sure you’re only spending time with firms that are suited to your stage.
17. You’re swimming in a red ocean
“I’ll often pass on companies if they’re operating in an intimidatingly competitive market,” says Itxaso. “It’s pretty hard to succeed in a ‘red ocean’ that is dominated by big players, specifically if your business is fairly new.”
Takeaway: Make sure you’re selling a truly differentiated product. Seek blue oceans.
18. You don’t understand the “unspoken rules” like fundraising ranges
“There’s an unspoken rule around valuation,” says Brandon. “You need to understand the conventions of fundraising.”
“If you’re in a seed round trying to raise $20 million, that is not the size of a seed round. Seed round is $1-$3 million,” he says. “There’s some things where people are potentially just not as well-versed.”
“Or if someone says, ‘We’re raising $2 million on a 10 post and they don’t have a lead investor, then who set that valuation?’”
Takeaway: Meet investors early, and ask them for an informational call so you can go through pros and cons, pitch deck reviews, and pitch practice.
19. There’s a competitive offering in the fund’s portfolio
Here’s one to stay mindful of but not get discouraged by. “Prior to Notion, I worked for Microsoft Ventures, where sometimes I had to pass because the offering might conflict with something we had internally,” explains Itxaso. “It doesn’t matter if the company that’s raising is better than anything that you can build internally. You’re obligated to pass on those.”
Takeaway: Don’t spend time with investors beholden to a competitive offering.
20. Your diligence checks don’t clear
“We were talking to a technical founder in the productivity tool space for months,” recalls Brandon. “As we started to dig into the business, we fell head over heels.”
“But when we started to ask about metrics and KPIs, they couldn’t give us the full picture of monthly active users. That was concerning.”
“Then we began our diligence–reference checks, legal checks, and technical tests—and many new concerns popped up. You have to think that where there is smoke, there is fire. We had to actually pass on the deal.”
“That’s always tough. You spend three to four weeks sitting down with somebody, texting them, calling them, introducing them to your team, being introduced to their team, and talking through tough conversations, getting excited about the vision. It’s a blow to have the deal fall through at this stage.”
Takeaway: Red-team your own due diligence. Have a friend acting as an investor actually make those calls to customers and your bank, and act on what you find.
21. Your product’s time-to-value is too long
“A warning bell sounds for me if there’s a big difference between ARR (annual recurring revenue) and cARR (committed annual recurring revenue),” says Itxaso. “The committed ARR shows what they have in bookings, but it doesn’t represent what is the revenue they have. Often, it means the customers have not deployed and integrated the system. The commitment is not worth much without the ARR.”
Takeaway: Ask yourself how long it takes for customers to see value out of your product. It might be worth it to prioritize a shorter time-to-value.
22. You’re not tailoring your pitch to the specific investor sitting in front of you
“I think founders should ask first, ‘What are the main areas you want to learn about in the time that we have?’” says Itxaso. “Some founders are very tech-focused and they can talk about tech for hours; others are very financially-driven and they just go through financials without even explaining the unique selling proposition (USP) of their product. So it’s very important to know the areas that the investors in front of you want to talk about.”
“Send the presentation in advance and let investors check it out,” implores Itxaso. “Ask them if they want you to go through the presentation, because sometimes they are like, ‘I’ve seen it. And I’ve seen 20 of these companies already. I just want to go through questions.’”
Takeaway: Ask more questions in the beginning about the areas your investor really wants to learn about and focus your time there.
Parting wisdom: What VCs wish founders would do more
Ultimately, the decision VCs make to invest or pass is multifaceted and complex, involving a ton of factors—both seen and unseen. By reflecting on the above list of little-known reasons investors pass, you can craft your pitch to avoid these red flags.
Now that you know what not to do, we thought we’d leave you with some parting advice for what you can do to make investors’ ears perk up. We asked each of them, “What do you wish more founders would do when they pitch to you?” Here’s what they said:
“We see thousands of deals a month, so the easier you make it for us to learn about you, the better,” says Itxaso.
“There’s no magic formula for what makes a good investment. Don’t try to check every box. Just focus on the two to three characteristics that are most compelling and unique,” says Kaitlyn.
“Build long-term relationships, even before you start fundraising. And go deep with fewer VCs versus wide with many,” says Sanjiv.
“Ask investors at the beginning of the process about how they evaluate companies. This will be invaluable for creating a winning pitch,” says Brandon.
There you have it—right from the mouths of VCs. Now it’s time to go take another pass at that pitch deck, so the next VC who reads it doesn’t pass.