Most of the companies we turn down are good companies. Some have real traction, some have clients that larger competitors would envy, and some have teams we would happily work with. We pass on them anyway, and a few of them go on to do well.
The reason is easier to explain from the other direction. A yes from us needs five conditions to hold at the same time, and the no is everything else. This piece sets out those conditions and what it costs us to hold to them.
| Condition | What we need to see | Why its absence is a no |
|---|---|---|
| Market | We understand how the market works and where it is heading | Trajectory, competition and growth cannot be judged |
| Team | We know the people, their relationships and how they decide | Hard moments are decided by character |
| Timing | We and our co-investors have capacity for the deal | A deal we cannot support properly belongs elsewhere |
| Geography | We can be on the ground where the company operates | Distance turns a known model into an unknown company |
| Numbers | The quantitative case holds up under scrutiny | Conviction without evidence is a guess |
We Understand the Market
An investment case is an equation with several variables, and the market is one of the largest. A company can bring traction, key clients and a strong team, but if we do not understand the market it operates in, that variable stays unknown and the equation cannot be solved, however good the other inputs look.
When we do understand the market, much more becomes visible. We can judge the company's likely trajectory, who it will compete with and how, how sentiment in the sector is moving, where the growth potential lies and which geographies it should expand into next. It also means we can support the company beyond capital, with judgment and introductions that only make sense to someone who knows the territory.
We have written elsewhere about a seed round we passed on for exactly this reason. Nobody at the table understood the demand, and no amount of analysis could have replaced that understanding.
We Know the Team
We want to know the whole team where that is feasible, and at the very least its key members: the culture they have built, what drives them, and the character and personality of the people who lead them. Management is where we start, but the people one level below often tell us more about how the company runs day to day.
Some of the questions we ask are uncomfortable. How did the founders come to work together, and are they family or old friends? Can management take a hard executive decision when it cuts against one of those relationships? Do they know their own limitations, and are they the right people for the next phase of the company? Is the salary distribution fair?
We ask these questions during due diligence because that is where a relationship beyond the transaction begins. If the answers do not align with how we think a company should be run, we say no, however attractive the rest of the case.
The Timing Works
Some of our refusals have nothing to do with the company. We invest our own money alongside our co-investors in every deal, so our capacity is finite, and if a company arrives shortly after we have completed a round, the appetite for further deployment among our co-investors and ourselves may simply be low. A company needs some luck in when it reaches us, and we would rather say so openly than invent another reason.
We Can Be There
Geography matters even when we understand the business model. Some countries sit culturally and economically outside our sphere of expertise, and the way a company hires, sells and negotiates there can differ more than any business plan admits. If we cannot get people on the ground, the unknown becomes too large for us to price.
Where the Numbers Fit
The quantitative evidence has to check out, and a company whose numbers do not hold up under scrutiny goes no further. At the early stage, though, the financials mostly describe the past of a company that is about to change, while the market and the team decide its future. When we weigh the conditions against each other, gut feeling, team and market count for more than the financials.
What This Costs Us
The obvious cost is the companies we miss, and we accept it. A less obvious one is narrowing: markets we understand are by definition familiar to us, and familiarity can lead an investor toward the same opportunities everyone else is looking at. Our answer is to keep extending what we understand through the people in our network, while accepting that some excellent companies will always sit outside it.
Gut feeling deserves scrutiny of its own, because it is where bias hides most easily. The gut feeling we trust is the one formed by knowing the market and spending time with the team, and it is checked against the numbers. When the two disagree, we look harder before deciding anything.
Some founders find our questions about relationships and salaries intrusive, and we understand why. We ask them because those relationships decide what happens in a company's hardest moments, and we would rather discuss them before any money moves than discover them afterwards.
Everything Else
A company can fail one of these conditions and still be an excellent company, and many of the companies we have passed on are. When we say no, we are saying that we are the wrong investor for that company at that moment. When we say yes, every condition has held, and we believe we can be useful to the company for as long as we are invested in it.