This post will tell you a story from my youth that draws parallels to a feature of venture capital that has far-reaching consequences for startup founders. You will learn about my grades in school, how I dressed, and why all of it matters to pre-traction startups founders. Finally, you might see why VCs have not yet thrown terms sheets at you.
Two peculiar things happened to me when I turned sixteen. First, I got good at inline skating. Two, my grades in Danish started plummeting. At this point, you have made the connection. My grades started plummeting because I spent too much time at the skate park. But that is not what happened.
Until I turned sixteen, I was doing great in school. Danish especially. The library was my favorite place, and the Advanced Learner’s Dictionary was my favorite book. I got high on discovering unorthodox words to add to my growing vocabulary. My teacher acknowledged my love for Danish and it felt good.
One day, my friend got a pair of inline skates. They look like no skates I had seen before. They were called ‘Sabotage’ and looked like something special forces would wear if they rollerbladed into combat. I immediately asked my parents to buy me these skates.
From that day, I was inline skating. Stairs, rails, and ramps became my playground. However, my love for Danish persisted. In fact, it grew, and I started writing poetry, lyrics, and short stories. I had just exchanged my four days a week playing football with four days of inline skating.
At the same time, I enrolled in a new educational institution. What we call ‘gymnasium’ in Denmark (somewhat comparable to high school in the US). In contrast to my elementary school, the atmosphere at my new educational institution was traditional, academic, and conservative. And so was my new Danish teacher.
Unbeknownst to me, my new hobby would severely impact my new Danish teacher’s perception of my abilities. Obviously, the fact that I jumped large stair sets without protective gear had nothing to do with it. The problem was my appearance, although unaware of it at the time.
To gain inspiration for new tricks, I started watching American skate videos. These videos portrayed renegade youth with tattoos, baggy pants, and careless attitudes. Much of the footage includes youngsters fleeing from security guards and smoking weed. You get the vibe. Naturally, I started assimilating to what I saw.
Unfortunately, it turned out that my new attire of baggy pants, wife-beater, and a large tattoo did not match my teacher’s idea of an academically interested person. I am sure my application of gangster-rap-inspired hand gestures did not help.
Consequently, my new teacher gave me mediocre grades. I failed to understand why but I decided to prove that I was better than he gave me credit for. But no matter how much effort I exerted, I kept receiving mediocre grades. This was puzzling to me and to many of my fellow students, who knew me to be deeply intellectual.
At the final exam, an external evaluator would grade us. Before taking the exam, I told my teacher that he had been wrong about me for the past three years and that I would get a top grade from the evaluator. I did. My teacher acknowledged nothing. It felt strange.
Why some VCs are like my high school teacher
At Accelerace, we help startup founders. We provide the first cheque and help them raise follow-up funding. What I witness, sometimes eerily reminds me of my high school experience. If VC interest and valuations were grades, the best students do not always earn the highest grades.
During our acceleration programs, we get to know our teams intimately. We see who truly finds product-market-fit and who does not. We see what teams work well together and who do not. We see what teams obtain true momentum and who just obtain vanity trophies.
However, our intimate understanding of the quality of our startups rarely aligns with the interest shown by VCs. For a long time, this was puzzling to me. But I have started to see what is going on. And if you managed to endure the first part of this blog post (that you initially feared went nowhere), you see it too.
The fact is that some of our companies find it utterly difficult soliciting term sheets from VCs. That is despite these companies having all the elements required to make a venture-style return. On the other hand, we sometimes get surprised by the terms sheet offered to teams with much more dubious prospects.
When considering these cases, one thing becomes apparent. The founders that have a tough time obtaining term sheets from VCs simply do not appear VC investable. Much like a wannabe renegade skater at an academic institution.
But what does it mean to look VC investable?
VCs evaluate a spectrum of things when evaluating a startup. But regardless of the aspect, they are evaluating, it always happens during pitch-style conversations with the founder. The keyword is pitch-style because in this case the mode of data-transfer matters. When all the information is transferred through pitch-style conversation, this extremely specific type of conversational skill matters more than you can imagine. And the aspect of this skill set that matters the most is being convincing.
Most VCs work like this: An associate will initiate the first conversation with a founder. If the associate believes that she can convince an investment manager to meet the founder, the associate will pursue the deal. Then the investment manager will meet with the founder, and if the investment manager believes that she can convince the partners, the investment manager will pursue the deal.
If only one of these people does not believe they can convince the next person, this person will let it rest. You have no idea how often VCs have told me in private that they really like a startup, but do not think they can convince their colleagues.
When fundraising, the founder’s job is to convince someone that they can convince someone, that they can convince someone. That is a lot of convincing. And because some of the convincing are lost during this conviction funnel due to the many handovers, the amount of convincing must be handsome.
To my observation, the startups who get term sheets thrown at them are often the startups where the founders are extremely convincing. Not necessarily the startups who have the best product-market-fit. This might seem unfair. And it is. But that is the current reality.
Consequently, being convincing matters. And many founders are just not convincing enough. Often the lack of “convincingness” is because these founders are really smart. And really smart people know that nothing is certain. They know that everything rests on assumptions and that few things rarely go as planned. Consequently, these founders are mitigating when asked questions and avoid cherry-picking data to support their conclusions.
But being convincing might require founders to appear a little less smart.
Being convincing to a VC means educating them why strong and unstoppable forces in the world create the perfect storm for your startup. It is to preach that the problem you are solving is among humanity’s biggest and most pressing issues. It is to assure them that you have found a “magical” way to obtain customers in a rapid fashion that knows no limits besides the money at your disposal. It is to make them imagine a new product category that will carry your brand as synonymous naming. It is to paint a picture of your experience as having earned you world class-skills that make you the best team on the planet to execute this business. And all this convincing must survive the handover between several people over the course of several weeks and still maintain its “convincingness.”
The fact that “convincingness” plays such a determining role in who receives VC interest is a pity. Because it means that some incredibly smart people have a tough time getting VC funding. At the same time, it gives meaning to institutions such as Accelerace and others who help founders navigate a world where “convincingness” matters more than it should.
And that is an immutable fact.