Passing on deals that meet our criteria

When we at AV determine that a specific investment opportunity isn’t a fit for us we try our best to give immediate and detailed feedback to the entrepreneur why.  The vast majority of the time, our reason for passing is that the opportunity sits outside of our focus – which at the highest level is that we invest $500K – $3M in post-revenue b-2-b software and healthcare IT companies that are most often located in the upper midwest.

When this happens, the conversation is pretty straightforward, the entrepreneur gets it right away and we try our hardest to be helpful in other ways such as introducing them to other investors.

But lately I feel like I have been having an increased number of hard conversations with entrepreneurs that approach us about investing in their business that on the surface meets our criteria, but we end up passing and they have a hard time understanding our rationale.

Looking back at these recent examples, they were all a similar profile: each company was either a b-2-b software or healthcare IT company, had material revenue traction ($2M – $3M), was hovering around profitability and was looking to raise $1M – $2M.  On the surface its seems great, but when we learn more we realize that it has taken the company 5 years and $5M of investment to get to this point.  

While building any sort of business of that scale is no doubt respectable, it is just really hard for us to understand why $1M or $2M from AV is going to suddenly change the growth trajectory of the company to that of a business that can generate venture like returns.  We often ask questions like: What will you do differently with this new capital to change the trajectory of your business from what has been accomplished in the past? What is happening in your market right now to think now is the right time to take on more capital?  but we fail to get responses that increase our comfort level.

It’s a situation that totally bums me out as when we end up passing on opportunities like this we are basically telling the entrepreneur that we think their business is good, but we don’t think the return will be great enough to warrant our time or capital.  I’ve found that conversations with entrepreneurs where I have to give feedback like this is hands-down my least favorite part of the deal evaluation process.

For entrepreneurs wanting to raise capital that have businesses that resemble what I described above, I’d suggest you think through the two main questions I outlined.

For those that we’ve passed on that fit this profile, I really do hope you bust through, grow like crazy and prove me wrong.

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