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Why Doesn't a VC Say 'Yes' or 'No'?

This article is more than 10 years old.

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It's always interesting to talk to a newbie entrepreneur. They'll say something like, "I talked to this VC the other day and he was really excited about my company."

But this often means nothing. You really shouldn't get excited until a venture capitalist writes a check and it is cashed in your corporate bank account.

As should be no surprise, this usually doesn't happen easily. The problem is that many newbie entrepreneurs don't know what red flags to look for.

One of the big ones is understanding the natural hierarchy of VCs. Yes, there's a pecking order -- and it's a good bet you're talking to someone on the bottom rung.

VCs will have titles like director, principal, associate or research analyst. For the most part, they play supporting roles, such as with due diligence, research, working on cap tables and scouting for deal flow.

They almost never will say "yes" or "no." They want to at least keep the conversation going and make sure your company is not the next Facebook or Twitter that gets away.

Now, if you start talking to a managing director or a general partner, you are making progress. To use a favorite phrase from former President George W. Bush, these folks are the "deciders."

Still, there's another red flag to look out for. Consider that there are two types of VCs: leads and followers. The leads will manage a deal and bring followers on board. In other words, if you are talking to a MD or GP at a lead firm, things are looking good.

Almost.

There is an exception -- that is, a VC firm might actually be out of cash! This seems like a strange concept for a VC, but it actually is quite common. If a firm has not raised a fund in five or six years, it probably cannot do any new deals. One way to find out is to check out its website and find the press release for the latest fund.

Oh, and there's something else: The VC industry periodically goes through funding freezes. This often is the case when there is a slowdown in liquidity events, like acquisitions and IPOs. Interestingly enough, there are signs we might be facing this situation now (for more on this, check out my recent post). This is despite the variety of recent high-profile IPOs like Groupon (Nasdaq:GRPN), LinkedIn (NYSE:LNKD), Zillow (Nasdaq:Z), Zynga (Nasdaq:ZNGA) and Pandora (NYSE:P).

Now, I'm not saying that you should stop talking to certain VCs. It's always good to network and try out your pitch. But for the most part, be careful, don't expect much and realize most encounters will simply end up being good learning experiences.

Tom Taulli runs the InvestorPlace blog IPOPlaybook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of "The Complete M&A Handbook," “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli.