VC Rejection Email Breakdown

A newsletter subscriber, who is a founder/CEO, sent me an idea for a post on helping interpret and break down VC rejection emails.

I was intrigued by the idea, and so I asked the founder for several of their VC rejection emails. I break down one of the founder’s email in this post.

In this breakdown, I…

1. Call out the Positive

2. Interpret the Negative

3. Provide three personalized recommendations to the founder

Let me know your feedback and what else you’d want to hear or know about from VC rejection emails!

VC Rejection Email:

“After much back and forth with the team, we ultimately landed on the conclusion that ABC Company is not a fit for us. In full transparency, we're passing as we were unable to build conviction around the long-term defensibility and competitive environment.While the team were big fans of your product (tackling a clear whitespace with a novel solution), your evident product-market fit and exciting end-state vision for the business, we were concerned about long-form defensibility and the future state competitive landscape. Although we appreciated ABC Company's well-defined wedge and first-movers advantage, the team struggled with i) the likelihood of copycat products emerging as you scale, ii) the end-customer education that ABC Company (amongst others) will be required to invest in (given that it is a new sub-category), and iii) in the long-run, how the distribution of copycat products may begin to saturate acquisition channels, possibly making customer acquisition more expensive (caveat: you clearly have strong margins).

With this said, the team was thoroughly impressed by your thoughtful approach to this opportunity and your ability to execute to date - it's clear that you demonstrate what we refer to as strong "founder-market fit".

Calling Out the Positives:

In my initial read through of this email, I could sense the tension that this investor is experiencing. The email comes across as if the investor is hesitant to write a rejection email, because my impression is that the investor has grown to respect the founder through their conversations and analysis.

You can see this as the investor gives high compliments. The assessment of being “thoroughly impressed by [the] thoughtful approach and the ability to execute,” is not casually-given comment.

I also want to underscore the fact that the investor believes the founder is on the right track on their market entry strategy.

I specifically call out the “well-defined wedge” phrase. I do not know the startup nor founder well enough to know the details of what this “wedge” actually is. (For my additional thoughts on a market wedge/niche market, see this article.)

Lastly, the phrase “founder/market fit” is not casually given either. There are a low percentage of startups that I speak to fit into this category and yet nearly every investment that we make needs to have “founder/market fit.” The investor calling this out puts this founder and startup in the upper echelon of deal flow opportunities that the investor has seen.

Now, what overrides the decision is not specific to the founder but rather the market dynamics that the investor forecasts or assumes will take place.

Let’s breakdown that part. \

Interpreting the Negative:

The investor is noting the fact that the market seems to be largely “problem unaware.”

There are five different types of problem awareness. I’ve heard this from several sources, but this list below is taken from this article from Justin Welsh.

• Problem Unaware: I don’t know I have a problem.

• Problem Aware: I’m aware I have a problem. How do I fix it?

• Solution Aware: I’m aware there are solutions, but not yours.

• Product Aware: I’m aware of your product. Why are you the best?

• Most aware: I want your product. Make me an offer I can’t refuse.

In Problem Aware markets and Solution Aware markets, there are potential buyers actively entering buying cycles, actively looking for solutions and ready to buy. The startup, then, needs to show up with a pitch.

In Problem Unaware markets, the majority of potential customers are not actively entering buying cycles - they are not ready to buy right now. Thus, Problem Unaware markets require one additional step. They first have to be educated about the problem that exists before they can be sold to.

Importantly, Problem Unaware markets tend to infer a bit of a longer time frame to win by the mere fact that before a sales pitch, there is an extra step. There needs to be education.

Thus, many investors prefer to fund startups in markets where there is existing pent-up demand, i.e. awareness of the problem, as it’s quicker to capture a market where customers are entering buying cycles than if the startup needs to dislodge old assumptions in order to catalyze the buying cycle. 

While investing in startups where markets are problem unaware, and Tundra Angels has done it before, there needs to be a clearly understood and believable strategy on how the startup will educate the market at scale.

Here, the investor is indirectly saying that the startup currently has little to no plan to be defensible.

Startups need to understand that it’s not “if” a competitor comes, it’s “when.” Regarding competition, my line of questioning is always tilted toward, “How will this startup keep customers locked in or keep competitors locked out?” 

The investor earlier does call out a first-mover advantage in the market. And yet…

First-mover advantage is NOT the same thing as defensibility. 

Investors know that a first-mover advantage is helpful to start. Yet, if the opportunity begins to show promise, a first-mover advantage inadvertently draws attention and spotlights a given market to others - especially if there is a good opportunity at hand.

My family and I recently visited some friends in Fairbanks, Alaska. Around Fairbanks, there are several goldmines nestled at the foot of the valleys around the outskirts of the city.

When the gold rush began in 1896 it was quite literally a rush for opportunity from multitudes around the world. The promise of gold and the riches it would bring was impossible to keep quiet, and a new opportunity was spotlighted for the entire world. It’s the same with startups and their markets.

It matters very little if you discovered the proverbial goldmine of a market. What matters is how you lock up the opportunity. 

I agree and yet and vehemently think this is a short-sighted statement.

I am not familiar with the acquisition channels that the startup is employing but based on the comment, I am assuming it is largely paid media via Google Adwords or social media advertising.

The investor is concerned that as copycat startups arrive, they will use the same channels as ABC Company to acquire customers, making ABC Company less differentiated as well as saturating the channels so that it becomes more expensive to acquire customers, thus killing ABC Company’s pricing power and eventually driving the market to focus on the price, and not value, when making buying decisions.

The investor makes a flawed assumption, however, that the current acquisition channels are the only ones that the startup will use in the future.

Gabriel Weinberg and Justin Mares write about this point in their book, Traction.

“Most founders consider using only traction channels with which they’re already familiar, or those they think they should be using because of their type of product or company. This means that far too many startups focus on the same channels and ignore other promising ways to get traction. In fact, often the most underutilized channels in an industry are the most promising ones.” 

This investors response that does account for the startup moving to discover other acquisition channels in the future nor does it account for a growth hack, which I am recommending that it pursue (more on this below).

My Recommendations to This Founder:

1) Develop a strategy on how you will educate the market at scale.

What is the message that you will use to educate them?

How will you educate them at scale?

Investors sometimes don’t prefer Problem Unaware markets because it requires lots of time and effort to educate, let alone sell.

You should consider developing a powerful and yet highly scalable way that you can educate the market, or at least the most influential actors in that market, very quickly.

2) Get clarity on how you will remain defensible.

Wrong Answer: “Our product will be better,” “We have a better team,” “We have more VC funding…”

One of my favorite articles that has framed how I think about defensibility is this article by NFX. They cover that digital defensibility has four components:

1. Network Effects

2. Scale

3. Branding

4. Embedding

✅ Typically, defensibility relates to some product distribution advantage - meaning that this startup wins by getting the product in the hands of users much quicker than the competitors. ✅

3) Build a Growth Hack

Often times the startups that win, retain pricing power, and become defensible are those that have harnessed a completely novel customer acquisition channel that no one has ever done before. I cover growth hacks in more detail in this article.

In the end, I’m encouraged by this investor’s response. It should also be encouraging to this founder that they are on the right track with their market entry.

Developing out these three counters is a critical part. Investors want to see that you are a good investment now, but more importantly, you’ll be the investment that wins in that market 3-5 years from now too.