Why do founders often over-trust investor rejection feedback?

Founders sometimes believe investors are infallible experts who know their market better. They might follow investors on social media or note their past company experience, leading them to accept rejection 'whys' too readily.

Are investors always experts on a startup's market?

No, founders are typically the true experts on their product and market because they are deeply immersed in it. Investors may have a passing understanding, but often know less than the founder, especially for novel or niche ventures.

What are the 'real' reasons investors might reject a startup?

Beyond stated reasons, investors may be looking for founders who can build and lead a large organization, pattern-match to previous successes, or simply stack-rank founders against others they are considering. These are often not articulated directly.

When should founders pay attention to consistent investor feedback?

If a founder receives the same 'why' from numerous investors (15-25+), it might be a data point worth considering. However, it should still be assessed critically and not taken at face value without further investigation.

Can founders change an investor's mind after an initial 'no'?

While words may not change an investor's mind, actions and demonstrable progress can. Continuously updating investors on positive business developments, like closing new customers, can lead them to reconsider their initial decision.

What is the most important takeaway for founders facing rejection?

Maintain confidence and focus on changing the facts of your business through progress rather than solely on refining your pitch. Demonstrating growth is a stronger signal to investors than any modification to your deck or words.

Key Moments

Investors Said No, Now What?

Y Combinator

Science & Technology5 min read16 min video

Apr 29, 2022|54,474 views|1,265|65

YC Y Combinator yt:cc=on

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Key Moments

TL;DR

Investors give vague rejection reasons, but founders should believe the 'no' and not the 'why,' as the entrepreneur is the true expert on their business.

Key Insights

Founders often believe investors are experts and their rejection reasons are definitive truths, when in reality, founders are the domain experts.

Investors have a high failure rate (90% of investments are bad decisions), suggesting many investment decisions are inherently flawed.

If a founder significantly pivots their company based on a single investor's feedback, it signals a lack of conviction to that investor.

Consistent rejection reasons from multiple investors (23 out of 25 meetings) should be considered a data point, but still require critical assessment by the founder.

Investors primarily engage in pattern matching to past successes and stack ranking current pitches, leading to rejections if a founder doesn't fit a known pattern or ranks lower than others.

The most powerful signal to investors is tangible progress – closing new customers or demonstrating growth – rather than just changing pitch deck wording.

You are the expert, not the investor

Y Combinator Group Partners emphasize a core piece of advice for founders: when an investor says no, believe the 'no' but don't necessarily believe the 'why.' Founders often have their confidence shaken by investor rejections, even though they are the ones thinking about their product and market day in and day out. Investors, on the other hand, might spend only a brief, often distracted, 30 minutes with a startup. The assumption by founders that an investor, due to external credentials or Twitter presence, is the ultimate authority on their specific venture is misplaced. Investors may have a passing understanding, but founders are the true experts on novel and unique aspects of their business. The rejection 'why' is often formulated with just enough knowledge to be 'dangerous,' not definitive. This is echoed by the industry's high failure rate, where 90% of investments turn out to be poor decisions, highlighting the fallibility of investor judgment.

The danger of acting on investor feedback

A significant trap founders fall into is altering their company's direction based on an investor's critique. If an investor spends minutes writing a rejection and then learns the founder has pivoted their entire company because of it, this is not a strong signal of founder conviction. Blindly following an investor’s 'why' suggests a founder lacks independent belief or strategic clarity. While investors may offer reasons, these are not immutable truths. Founders should be wary of changing their business fundamentally based on a singular opinion, as it can undermine their own expertise and vision in the eyes of potential funders. Instead of an investor changing their mind based on words, they are more likely to reconsider if the founder demonstrates concrete progress and a stronger business.

Deconstructing investor motivations: Pattern matching and stack ranking

The underlying reasons for investor rejection often boil down to two primary factors: pattern matching and stack ranking. Investors frequently look for founders who fit patterns of previous successful investments. They ask themselves: 'Do you remind me of founders I've had success with in the past?' Equally important is stack ranking: 'Among all the founders pitching me right now, where do you rank?' Rejection occurs if a founder doesn't match a successful pattern or ranks lower than other competing pitches. This reality means that reasons like 'your market is too small' might be a superficial explanation masking a deeper issue, such as a lack of perceived leadership potential, unclear communication, or conflicting financial data. Investors are reluctant to articulate these more uncomfortable truths, preferring to offer simpler, often less accurate, justifications.

When consistent 'whys' merit consideration

While individual rejection reasons should be taken with a grain of salt, a consistent theme across multiple investor meetings can serve as a valuable data point. If a founder pitches dozens of investors and encounters the same feedback repeatedly – for example, concerns about market size, unit economics, or spending on advertising – it warrants deeper introspection. However, the advice remains not to blindly accept these consistent 'whys' at face value. Founders should critically assess whether these points represent genuine risks to their startup. The key is to listen, dig into the feedback, and consider if it aligns with their own understanding of the business, rather than internalizing it as gospel.

The 'real' reasons investors might pass

Beyond market or product critiques, investors also evaluate the founder's potential to build and lead a large organization. If, during a conversation, an investor struggles to envision the founder as a capable leader – if they appear disorganized, uninspired, or unwilling to aspire to that level of leadership – this can be a significant reason for rejection. Investors are not just betting on an idea; they are betting on the team's capacity for execution and growth. While founders might think fundraising is about perfecting their pitch deck, the investor's assessment often includes the founder's raw potential and leadership trajectory. This is why demonstrating confidence, clear communication, and a vision for scaling is crucial.

Progress speaks louder than words

The most effective way to overcome investor rejection and signal a strong business is through tangible progress. Instead of trying to verbally convince an investor they misunderstood, founders should focus on changing the facts of their business. This means closing new customers, achieving growth milestones, or demonstrating positive traction in the market. When investors see continued progress, it acts as a far more compelling signal than any adjustment to a pitch deck or rhetoric. This principle underpins Y Combinator's success; by allowing multiple applications and observing genuine progress over time, they can identify and invest in promising companies that might have been initially overlooked.

Maintaining momentum with rejected investors

Founders are advised to keep a list of investors who provided constructive feedback, even if they ultimately said no. Regularly updating these investors on the company's progress – perhaps on a monthly basis – can be surprisingly effective. Over time, as the startup achieves positive milestones, these same investors may reconsider their initial decision and reach out. This approach bypasses the need to 'convince' them with words, instead demonstrating commitment, resilience, and growth through actions and results, ultimately changing the investor's perception based on new evidence.

Mentioned in This Episode

●Software & Apps

●Companies

●Organizations

Common Questions

YC advises founders to 'believe the no' but not necessarily 'believe the why'. This means acknowledging the rejection but critically assessing the reasons given, rather than internalizing them as absolute truths about the company's flaws.

Topics

Mindset & Self-Improvement Business & Entrepreneurship Founder Resilience Startup Advice Venture Capital Investor Relations Startup Funding Fundraising Strategy

Mentioned in this video

Companies

Uber

Ride-sharing company whose drivers are mentioned as an example of potential users that founders could engage with to inform investors.

Twitter

Social media platform where some founders might follow investors and see them discussing specific markets.

Organizations

Startup accelerator program that provides advice and funding to early-stage startups. They emphasize believing the 'no' from investors but not necessarily the 'why'.