When to say "No" to a prospective investor

The compounding cost of saying "yes" to the wrong thing

Welcome Entrepreneurs. I’m so glad you’re here.

On Deck Scale 2 is now in full gear, and between helping to build that and a full client load of my own, I’m finding myself about as busy as I’d like to be. I feel fortunate that the expansion of Inside-Out has come so quickly and the growth has felt so easeful. Nevertheless, it’s also been a bit of a forcing function for me to rejigger a few of my practices to accommodate.

The first change I made was to confine my writing practice, which had been pretty loosey goosey, to a set hour each morning. The rigor of that routine alone was transformative, and has enabled me to find a flow state each morning since the change.

The second significant change is that Inside-Out is hiring! We’re looking for an Operations Generalist with a bent for marketing (PT to start) to help me build I-O from the ground up. If you’re interested in helping build the next generation of life-giving companies, I hope you’ll reach out and introduce yourself. More details or apply here (or reach out via Twitter or LinkedIn).

Let’s get to this week’s essay: a story about the compounding cost of saying “yes” to an investor when you really mean “no.”

(By the way, if you were forwarded this email by someone you trust, go ahead and subscribe here to join our fast growing group of purpose-driven entrepreneurs).

When to say no to a prospective investor

"Let's talk about what your app is going to look like and when it's going to be ready," the Investor said.

We were in Ann Arbor, at our third meeting with an out of state investor we hoped would lead our series-A. It was early in the fundraising process, but he’d leaned into the raise more than anyone else we’d pitched. I'd just walked him through our latest deck in preparation for an upcoming meeting with his partners, and his feedback surprised me.

"An app?" I asked, stalling for time. "Okay." My mind went to a meeting our team had had months ago, during which we’d discussed the possibility of transitioning our web platform to an app. We’d dismissed it, reasoning that the existing web platform was better suited to our market. We had no plans for an app, but that was at least something. Maybe it would work.

I explained what we'd scoped back then, hoping the bare sketch of an idea plucked from the dustbin would satisfy him.

"That makes a lot of sense, and it's obviously a critical piece of your business," he said after I'd finished. "We need to get it done this year. And we need to add a slide about the app to your deck. That will show really well to my partners."

I thought about the $3-million we'd been discussing. Enough to scale our company across the country. Far more money than I'd ever seen. Maybe we’d gotten it wrong when we'd discussed the app. This was the first time I'd built a company; maybe he knew something I didn't. In any case, adding an app to our roadmap couldn't be more than $100,000 of that investment anyway. At worst we'd be $2.9-million in the green.

"Absolutely," I said. 

Two weeks later, we signed a term sheet with the Investor. Our first board meeting post-close, with a sales team to scale up and a slew of web products our customers had been clamoring for, I found myself spending two-thirds of our time discussing detailed plans for an app that I didn't quite believe would work. Even worse, after the meeting I had to convince our team to divert resources from the features our customers wanted, toward an app we’d all agreed wouldn’t work. I tried at first to frame it as an important strategic move, but they saw through my spin immediately. Regardless, $2.9m in effective investment with only a $100,000 distraction seemed to us all like the right move (amazing the degree to which framing impacts decision making).

So we diverted resources. We pushed back a couple important web initiatives and spent hours of our sales leader’s time scoping features. Our board meetings focused on the app as well, enough so that by the time we released it, on time and on budget three months later, I’d almost convinced myself it might work. 

It flopped.  

I explained the results to the board: minimal traction, only vaguely positive reviews from users. I explained how focusing on the app was costing us growth on our core product. The Investor got mad. Blamed our execution. Demanded that we double down. 

Again it seemed like he must have known something we didn’t. In the face of the daily ambiguity I faced in building our company, the certainty with which he spoke was intoxicating. 

With reservations, we doubled down. We dedicated half our engineering team to the mobile app for another six months. We released all the features we thought had a shot at driving user engagement. Meanwhile, we ignored feature requests from users of our core product, and our support and engineering teams got frustrated.

Despite our additional investment, the app stayed flopped.

By that point, slightly under a year after raising $3m, we needed to raise additional capital. Fortunately, while our product tug-of-warred itself into a stalemate, our sales efforts had scaled like a rocket, and very quickly we’d become the largest player in the market. I put together a new deck around this traction (with one conspicuous mobile-related omission that, funny enough, was never mentioned) and did a practice pitch to our board. 

The Investor said the pitch was garbage, and demanded that we pitch our company as a social media play, instead of using the B2B2C strategy we’d planned. I resisted, but he said he knew the investors who would lead the round with the biggest checks, and would make introductions, but only if we pitched it the way he wanted.

As I write this now, it feels foolish to say that I fell for it again. The authoritarian delivery masking nothing of substance. But such is the power of unexamined trauma.

I rewrote our pitch. He made introductions to the people who he said would invest. They passed. 

We pivoted to targeting an internal round, which would significantly dilute the management team's equity. The Investor said we needed to spend $200,000 hiring a new Head of Product. Resolved this time to follow the path I knew was right, I said that was a waste of our limited capital and wouldn’t solve our real problem; that he and I needed to get on the same page first. He said that he wouldn’t invest unless we agreed to hire the role in 90 days. 

It was the wrong move, I knew. But somehow the cost of doing the right thing had ballooned to “literally running out of cash”…

Why to say no early

Raising venture capital is often compared to a very large enterprise sales process (crossed with the worst of high school dating, but that's a separate post). As a founder (salesperson) you showcase your company (your product) to prospective investors (buyers). But there's one big difference:

In enterprise sales, the sale is the finish line, whereas in raising VC it's just the starting line.

When a founder pitches her company to investors, and when those investors inevitably raise objections, it's tempting to pacify them by any means necessary. To give them what they want to close the deal, and let that end justify whatever means necessary.

If you can reach agreement through a more careful explanation of your strategy, then great. But if overcoming an investor objection requires you to change your company into the one they want to invest in, remember that the strategy the investor buys is the one you'll be stuck executing for the next year or ten. No matter how much you have yet to learn about building a company, remember that your strategy is the result of your having been immersed in a niche market for years, while due to the constraints of his job your investor's perspective is mostly likely informed by a few Google searches in the fifteen minutes between his last pitch meeting and this one.

In other words, consider carefully if closing this particular investor is worth executing for the next few years on the wrong strategy. If not, politely pass, and find one of the amazing investors out there who want to invest in the right one. 

The compounding cost of saying yes to the wrong thing


That one little answer, so easy to justify in the name of closing a deal and growing my company, became harder and harder to correct with each passing board meeting. What was initially only a 3% investment expanded into an albatross that cost the company focus and created a significant relational tax in the boardroom.

It took three years and more than a few loud, sweaty conversations to get the company back to the strategy I’d started with. We were fortunate to survive the transition. While the Investor and I never fully saw eye to eye (in hindsight it’s probable we were incompatible to begin with, which also could have been much more easily handled had I been up front about what I wanted before we got married), the strained-yet-productive phase of our relationship started the moment I, in the face of direct orders, finally said “no.”

The easiest path to closing the deal with the investor in front of you might be telling him what he wants to hear. But remember that closing the deal is only the beginning. And how you respond to this first objection sets the foundation for one of the most important relationships in the next decade of your life.

(HT: Julie Mosow, Tom White, Adam Cotterill, Stacey King Gordon and Foster for editing)

Liked this article? I’d be honored if you’d share with others who might find it valuable. 


Who is Ryan Vaughn? 

I’m an executive coach for startup founders, a role in which I get to help high-performing founders design a more conscious life and expand into extraordinary leaders. I’m a 3x Founder/CEO who’s raised $20m+ in VC and built a market-changing company, as well as two other companies that taught me things. I’m an avid writer, meditator (decade+ practice), reader, athlete, father, husband, amateur physicist, student of leadership, and adventurer. I’m also none of those things. But I am glad that you’re here.  If that’s not enough, here’s a more detailed bio.


One: Not your friends. Not your enemies. Not your boss. (Ed Batista)

Here’s the article I wish I’d read while navigating the challenges above. An analysis of how founders can misconstrue their relationship with their board in unproductive ways. They’re not your friends. Not your enemies. Not your boss.

Unfortunately at the time my stoic, Midwestern self wasn’t ready to admit that I needed help. That the issue wasn’t with the situation; that I myself needed to be better.


Two: Brains might sync as people interact — and that would upend consciousness (Discover Magazine)

Not much to add to the title here. Suffice it to say that this is unsurprising news to those of us who’ve paid attention to what happens to split-brain patients (patients who have been lobotomized, typically to halt the progress of epilepsy) asked what they want to be when they grow up.

“One of these patients (referred to as PS) provided perhaps the first compelling evidence suggesting that dual minds could exist in split-brain patients. This patient had the ability to read with both hemispheres but could only speak with the left (115120). Although the right hemisphere could not speak, it could respond verbally to visual questions in the left visual field by using his left hand to select Scrabble letters. To the question, “Who are you?,” the left hand spelled his name, “Paul.” Also, to the question of his desired occupation, the left hand spelled “race car driver.” This was of particular interest since the left hemisphere said “draftsman” to the verbally stated question. Despite not being able to communicate, the two hemispheres shared personal identity (Paul) yet had different life ambitions.”

If there are at least two consciousnesses in each of our brains linked by a connectome, seems inevitable (to me) that our brains can somehow be linked into a single, multi-person consciousness.


Three: Consolations: the solace, nourishment & underlying meaning of everyday words (David Whyte)

If you’re hip to startup Poet Laureate David Whyte, you have probably already bought this book. If not, here are excerpts from two excellent essays:


Ambition is a word that lacks any real ambition. Ambition is frozen desire, the current of a vocational life immobilized and over-concretized to set, unforgiving goals. Ambition abstracts us from the underlying elemental nature of the creative conversation while providing us the cover of a target that has become false through over description, overfamiliarity or too much understanding.


It is always hard to believe that the courageous step is so close to us, that it is closer than we ever could imagine, that in fact, we already know what it is, and that the step is simpler, more radical than we had thought: which is why we so often prefer the story to be more elaborate, our identities clouded by fear, the horizon safely in the distance, the essay longer than it needs to be and the answer safely in the realm of impossibility...

I’ve been savoring each page of this beauty on audiobook on my morning drives to basketball.


Four: Have you ever noticed that all movie posters look the same? (Gizmodo)

This is pretty cool. The lean startup methodology shows up in entertainment as well, and has apparently figured out what sells the most tickets (turns out the answer is: eyeballs, and people walking on a beach underneath big heads in the clouds).


Five: Sabbath Sundays and Slow Mondays (Great Not Big)

A friend and mentor of mine, and founder and former CEO of one of the Midwest’s leading software consultancies, did a public examination of the practices he’s implemented to create a sustainable approach to leadership. I’m on record with the importance of practices myself, but I like Carl’s approach a lot.



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