- The video discusses what to do when an investor says no to investing in your startup
- YC Group Partners advise founders to believe the rejection but not the reasons given
- Founders often place too much importance on the opinion of investors and believe they know more about their own startup than they do
- Investors may have a passing understanding of the startup's industry, but founders are the true experts
- Investors often give reasons for rejection that may not be the real underlying issues with the startup
- Founders should not rely on investors for product insights and should be confident in their own expertise
- Consistent feedback from multiple investors may be worth considering, but founders should not internalize rejection and should continue pitching to gather more data points
- The video also discusses the importance of being able to lead and run a large organization as a factor in investor decision-making.

- The success of fundraising depends on the founder's organization and enthusiasm.
- Investors look for patterns of success and rank founders based on their potential.
- Clear communication and credibility are important factors in investor decisions.
- Founders can improve their chances by showing progress and gaining more customers.
- It is common for investors to change their minds if they see positive developments.
- Founders should believe in themselves and not be discouraged by rejection.

Step inside the Group Partner Lounge to hear Y Combinator Group Partners Harj Taggar, Michael Seibel and Brad Flora discuss how you should handle rejection from investors and why you should "believe the no, not the why."

Apply to Y Combinator: https://www.ycombinator.com/apply/
Work at a startup: https://www.ycombinator.com/jobs

Chapters (Powered by https://bit.ly/chapterme-yc) -
00:00 - Introduction
00:42 - What to do when an investor says no?
01:44 - What is going through the founders' heads
05:36 - Lie the founder's tell themselves
07:15 - What to do when founders hear the same why a lot?
09:17 - What are the real why's?
13:18 - Advice after demo day
13:54 - Takeaway





#ycombinator #startups #investors #money

Investor spends 2 minutes writing the email and then later hears that you've pivoted your entire company because of it.

Hello, this is Michael with Harge and Brad.

Welcome to Inside the Group Partner Lounge.

So as YC Group Partners, we find ourselves repeating the same, often seemingly obvious advice to founders over and over again.

Before COVID, we'd often gather together in the partner lounge at the YC office to try to figure out why this was the case and how we can help startups figure it out faster.

Today, we're gonna talk about what to do when an investor says no to investing in your startup.

Our saying at YC is, believe the no, don't believe the why.

Yeah, so to set this up, 1 thing we end up doing a lot is pumping belief back into founders who have had their confidence shaken by these investor rejections.

And it always surprises us because from our perspective, the founders are the experts on their product, the market, like everything they're doing.

And yet they can have everything sort of shaken by investor who spent 30 minutes with them.

And so we want to figure out what's going on.

And it's funny, because oftentimes that 30 minutes is like over Zoom, while like on Slack, doing email, right?

Like, maybe not the most engaged 30 minutes.

So Brad, what do you think the lies that founders are telling themselves?

Like when a founders gets a rejection from an investor, the polite investor who bothers to write why, what do you think is going through a founders head?

Well, the first thing going through the founder's head is this investor is an expert and they are telling me the truth in this follow-up email that they sent me.

I follow them on Twitter and they tweet about my market all the time.

They worked at a company in this market sometime in their past.

They work at Fancy Fund X, therefore they know everything about what I'm doing.

And whatever they told me in that rejection email, that must be the reason and the problem with my startup.

I mean, how many YC applications do we read and what percent of the time do we raise our hand and say, oh yes, I know everything about this space.

I mean, investors may have a passing understanding of what you're doing, but almost by definition, if you're doing a startup, there's something new and novel about it.

And you are the expert, not the investor.

And so whatever the reasons they're giving are not like canon.

And they almost always know much less than you.

Like, you know, a little bit of knowledge can be dangerous.

It's like, I think investors end up knowing just enough to be dangerous.

And it's a job where you're often selling.

So you're very confident in sort of how you articulate your opinions.

But like, yeah, you don't actually get the deep insights because you're not like in it, building the thing.

Just why investors have like a 90% failure rate, right?

I think we see this in practice too because we will see founders who will pitch to investors, get no's, apply to YC, get into YC, and those same investors will say now I want to invest in your company and nothing has changed.

No fundamental thing has changed in that company, yet the investor changes their mind.

That doesn't sound like the opinion of an expert, right?

So you get this rejection and you think, well, I'll go back to them.

I'll convince them that they're wrong, that they misunderstood something.

And if I say the right thing in the follow up email, or I can somehow get them on another call and address their concern, everything will change.

The words themselves don't mean a whole lot.

It's a reason, but it doesn't mean it's the reason.

And it's not always up for actual debate.

Do you guys ever have this situation too, where it's like, a founder comes back, you say, oh yeah, like the investor said that if we were in like this market instead of this market, we'd like, you know, they'd be a lot more excited.

So we think we're going to go after that.

And you're thinking, I wish I could explain to you how this is going to make you less attractive.

Because it gets to the heart of investors also are aware they're not experts.

So if a founder actually actions on your feedback in a material way, it makes you less than like you're a good investor.

I think it makes you less than likely to wanna invest.

You don't wanna invest in someone who is relying on you for product insights.

Right, yeah, I mean, let's play this out harsh.

I think the other lie the founders tell themselves is that the glaringly bad thing about my company isn't the reason why this investor didn't invest.

It's the reason that they wrote on the piece of paper.

So it wasn't that I don't have a technical co-founder.

It wasn't that like I've got negative margins and I'm about to run out of money.

It wasn't that I'm building like a non-software product and like this investor likes to invest in software.

It wasn't that like every time I pitched this company to this investor, I haven't grown, I haven't launched.

And it's like it's probably 1 of those other things Like it's or at least, hey, check those other things.

Like if you're checking a lot of those boxes, you should believe the why even less.

Maybe investors have a bigger, broader view about the market in an abstract way.

They can talk about big picture census data or something.

But you should always be able to inform them with anecdotes from real users.

Anytime someone says, well, I don't know, don't like 60% of us consumers not want to purchase blah, blah, blah.

Usually we have to say, well, actually, like I've been spending the last month with like, Uber drivers and actually like they have, like, they're like loving our product because of like these reasons.

Like it's like, and that's when I get worried.

If a founder can't come back, if I feel like I better understand the user than the founder does, that's a bad sign.

What about Brad, and we get these a lot in YC Demo Day because founders pitching a lot of company, I mean founders pitching a lot of investors, what about when the founders hearing the exact same thing, like it's the same why over and over again?

We have founders that line up dozens and dozens of meetings, and they go and rip through 25 of them, and they come back, and it turns out, 23 of them all gave the exact same reason.

They might have said, this market's too small, or you're spending too much on advertising.

I don't see how your unit economics work.

When everyone says the same thing, the takeaway still isn't believe that, it's think about it, it's assess it, like dig into it.

Is this actually 1 of the things that you're wary of with your own startup?

Still don't take it at face value, but you should listen to it.

You know, we tell founders to take notes and jot down how the meeting went, what they can do better next time.

And sure, you should write the reason down, don't forget it.

But our advice is not to internalize it and kind of absorb it into your mindset for the company.

You should know about it, but not soak it in.

I think this is the algorithm that I run when founders are fundraising.

It's like the first thing, the first time they tell me there's a rejection and a why, I ignore it completely.

If they've gotten like 15, 20, 25 rejections, I then ask, are the whys consistent?

And only if then the whys are consistent, do I even think this is a data point to be considered at all.

Like at all, amongst all the other data points.

And the important thing to point out here is that the only way to get this kind of signal is to pitch a lot of investors.

So you get this, you get this rejection the first time, the second time, and you keep going, right?

I might argue that the really brave and honest investors might give you some of these whys.

These are whys that maybe you should pay attention to if you're getting them.

I think a big 1 is you sit across from the person and in the course of the conversation, you think, I have a really hard time seeing this person building and running and leading a large organization.

And that's a huge question that's on the table at every stage of investing, especially early on.

And if the person just doesn't seem organized or fired up.

You know, we've all met people that run big organizations and they are very impressive, unique individuals.

And if that doesn't seem like you in the meeting, You know, that's a big reason.

Or let me say that slightly, let me extend that.

If it doesn't seem like you're aspiring to become 1 of those people, right?

Like you don't have to be that person today, but if it doesn't even seem like that's on your agenda.

And believe it or not, folks, we run into that a lot.

A lot of people think that fundraising is about things other than raising money to build a really big company.

Yeah, I kind of think what's going on in the raw truth is investors are doing 2 things.

You're there, that pattern matching to previous successes and answering the question like do you do you pattern match to founders I've had success with in the past?

And then their stack ranking, like of all the founders I've worked with, and are currently pitching me, like where do you rank?

And the truth is, you get a no because either you don't pattern match, or like, you might pattern match and you don't stack rank.

Like you might be like, yeah, you remind me of the kind of founders I've done well with, but like, actually, you're just not as good as the other ones I'm talking to right now.

And that's kind of the blunt thing that's going on, but no 1 ever wants to say that.

Well, and it's interesting because oftentimes with the stack ranking thing, it can be as simple as that like, oh, you have the credentials, but you're not communicating clearly.

Like I don't really understand what you're saying.

Which is like, wow, it's a hard 1, right?

It's like shit, like, or I don't believe your numbers.

Like you gave me conflicting numbers and you cast some doubt.

I feel like for those it's so tricky because it's like, man, I could like your space.

I could think that you've got good credentials, but like, you undermine yourself.

Also to give investors some credit, maybe ourselves, we're rejecting companies from YC, like the founders change as well.

Like you might reject a company when the founders haven't actually gone out and spoke to any users or they're like 2 weeks into it, and they might not impress you with anything.

But then a month of like real work, they come back and the same founders can just seem different.

Like they've got real insights, They see more, their confidence has grown.

And it's sort of like you're hearing a different pitch.

And so I think in those reasons, it's actually fair for investors to change.

Like we do, we certainly like reject a company and then they come back and you're like, oh, wow, okay, like now I'm having a completely different conversation with a different person.

I would be very interested in here if there's any other fund that funds people that it rejected.

60% of the companies that do YC, were rejected at some point in the past.

Like I would be shocked if there's any fund that does that, or any school, or any selective institution that looks back at a failed applicant and says, like, let's give them another try.

Yeah, because 1 of the pieces of advice I repeat after Demo Day is over, over and over again, is keep a list of the investors that said no, like, who seemed reasonable about it.

And like, just keep sending them updates, keep sending them an update every month.

And shockingly, if things start going well, those same investors will reach out, like change your mind.

I've seen this happen over and over again for YC companies.

Like they just assume that once someone said no, it's a no forever.

And yeah, you can't convince them to change their mind with words, but you can with actions.

Well, I think and that's probably the best takeaway here, right?

In some fundamental way, instead of, you know, losing your confidence, stop fundraising, like massively change your product based on some reject email or whatever.

If you actually just change the facts of your business, right, like make progress, more often than not, the investor will look at that prognos as a much better signal than any modification you made to your deck or any modification you made to the words in your pitch.

And that's probably the secret behind YC is that with multiple applications, we can see progress.

And wow, it's like progress is exciting to invest in progress.

And what this looks like often is the founder says, what do I say to this investor to get them to change their mind.

And we say, tell them about the 10 new customers you just closed.

And it takes a second for that to land realizing that they need to go get 10 more customers and then tell them about it and not just write something different back to the investor.

So with that, to wrap up, in fundraising season, the most common thing we say over and over again is believe the no, don't believe the why.

The founders throughout fundraising, as long as you keep confident and realize there's more investors out there.


Speaker 0: Investor spends 2 minutes writing the email and then later hears that you've pivoted your entire company because of it. Not a huge signal of conviction.

Speaker 1: Hello, this is Michael with Harge and Brad. Welcome to Inside the Group Partner Lounge.

Speaker 2: So as YC Group Partners, we find ourselves repeating the same, often seemingly obvious advice to founders over and over again.

Speaker 0: Before COVID, we'd often gather together in the partner lounge at the YC office to try to figure out why this was the case and how we can help startups figure it out faster.

Speaker 1: Today, we're gonna talk about what to do when an investor says no to investing in your startup. Our saying at YC is, believe the no, don't believe the why.

Speaker 2: Yeah, so to set this up, 1 thing we end up doing a lot is pumping belief back into founders who have had their confidence shaken by these investor rejections. And it always surprises us because from our perspective, the founders are the experts on their product, the market, like everything they're doing. They think about it day in and day out. And yet they can have everything sort of shaken by investor who spent 30 minutes with them. And so we want to figure out what's going on.

Speaker 1: And it's funny, because oftentimes that 30 minutes is like over Zoom, while like on Slack, doing email, right? Like, maybe not the most engaged 30 minutes. Exactly. So Brad, what do you think the lies that founders are telling themselves? Like when a founders gets a rejection from an investor, the polite investor who bothers to write why, what do you think is going through a founders head?

Speaker 0: Well, the first thing going through the founder's head is this investor is an expert and they are telling me the truth in this follow-up email that they sent me. I follow them on Twitter and they tweet about my market all the time. They worked at a company in this market sometime in their past. They work at Fancy Fund X, therefore they know everything about what I'm doing. And whatever they told me in that rejection email, that must be the reason and the problem with my startup.

Speaker 1: Which is so sad. I mean, how many YC applications do we read and what percent of the time do we raise our hand and say, oh yes, I know everything about this space. I'm qualified to judge this idea. It's like, I think under 1% of the time.

Speaker 0: Yes, yeah. It basically never happens. I mean, investors may have a passing understanding of what you're doing, but almost by definition, if you're doing a startup, there's something new and novel about it. And you are the expert, not the investor. And so whatever the reasons they're giving are not like canon.

They don't know any more than you do. And they almost always know much less than you.

Speaker 2: It's like that saying, right? It's like, what is it? Like, you know, a little bit of knowledge can be dangerous. It's like, I think investors end up knowing just enough to be dangerous. And it's a job where you're often selling.

So you're very confident in sort of how you articulate your opinions. But like, yeah, you don't actually get the deep insights because you're not like in it, building the thing. Just why investors have like a 90% failure rate, right? Like most investments are bad decisions.

Speaker 1: I think we see this in practice too because we will see founders who will pitch to investors, get no's, apply to YC, get into YC, and those same investors will say now I want to invest in your company and nothing has changed. No fundamental thing has changed in that company, yet the investor changes their mind. That doesn't sound like the opinion of an expert, right? Like...

Speaker 0: Sounds like a herd animal.

Speaker 1: It sounds like a herd.

Speaker 0: So you get this rejection and you think, well, I'll go back to them. I'll convince them that they're wrong, that they misunderstood something. And if I say the right thing in the follow up email, or I can somehow get them on another call and address their concern, everything will change. The words themselves don't mean a whole lot. It's a reason, but it doesn't mean it's the reason.

And it's not always up for actual debate. It's never up for debate, really.

Speaker 2: Do you guys ever have this situation too, where it's like, a founder comes back, you say, oh yeah, like the investor said that if we were in like this market instead of this market, we'd like, you know, they'd be a lot more excited. So we think we're going to go after that. And you're thinking, I wish I could explain to you how this is going to make you less attractive. Because it gets to the heart of investors also are aware they're not experts. So if a founder actually actions on your feedback in a material way, it makes you less than like you're a good investor.

I think it makes you less than likely to wanna invest. You don't wanna invest in someone who is relying on you for product insights.

Speaker 0: Right, yeah, I mean, let's play this out harsh. Investor spends 2 minutes writing the email and then later hears that you've pivoted your entire company because of it. Right? Not a huge signal of conviction.

Speaker 1: Not a huge signal. I think the other lie the founders tell themselves is that the glaringly bad thing about my company isn't the reason why this investor didn't invest. It's the reason that they wrote on the piece of paper. So it wasn't that I don't have a technical co-founder. It wasn't that like I've got negative margins and I'm about to run out of money.

It wasn't that I'm building like a non-software product and like this investor likes to invest in software. It wasn't that like every time I pitched this company to this investor, I haven't grown, I haven't launched. It's not those things. The investor said my market's too small. I bet it's my market's too small.

And it's like it's probably 1 of those other things Like it's or at least, hey, check those other things. Like if you're checking a lot of those boxes, you should believe the why even less.

Speaker 2: Maybe investors have a bigger, broader view about the market in an abstract way. They can talk about big picture census data or something. But you should always be able to inform them with anecdotes from real users. Anytime someone says, well, I don't know, don't like 60% of us consumers not want to purchase blah, blah, blah. Usually we have to say, well, actually, like I've been spending the last month with like, Uber drivers and actually like they have, like, they're like loving our product because of like these reasons.

Like it's like, and that's when I get worried. If a founder can't come back, if I feel like I better understand the user than the founder does, that's a bad sign.

Speaker 1: What about Brad, and we get these a lot in YC Demo Day because founders pitching a lot of company, I mean founders pitching a lot of investors, what about when the founders hearing the exact same thing, like it's the same why over and over again?

Speaker 0: Yeah, we see that a lot. We have founders that line up dozens and dozens of meetings, and they go and rip through 25 of them, and they come back, and it turns out, 23 of them all gave the exact same reason. They might have said, this market's too small, or you're spending too much on advertising. I don't see how your unit economics work. When everyone says the same thing, the takeaway still isn't believe that, it's think about it, it's assess it, like dig into it.

Do you think that's a problem? Is this actually 1 of the things that you're wary of with your own startup? Still don't take it at face value, but you should listen to it. You know, we tell founders to take notes and jot down how the meeting went, what they can do better next time. And sure, you should write the reason down, don't forget it.

But our advice is not to internalize it and kind of absorb it into your mindset for the company. You should know about it, but not soak it in.

Speaker 1: I think this is the algorithm that I run when founders are fundraising. It's like the first thing, the first time they tell me there's a rejection and a why, I ignore it completely. If they've gotten like 15, 20, 25 rejections, I then ask, are the whys consistent? And only if then the whys are consistent, do I even think this is a data point to be considered at all. Like at all, amongst all the other data points.

Speaker 0: And the important thing to point out here is that the only way to get this kind of signal is to pitch a lot of investors. Right. So you get this, you get this rejection the first time, the second time, and you keep going, right? You keep pitching investors. 1 or 2 of these doesn't get it done.

So Let's talk about the other side.

Speaker 1: What are the real whys? I might argue that the really brave and honest investors might give you some of these whys. These are whys that maybe you should pay attention to if you're getting them. What do you think? What are on your lists of the real whys?

Speaker 0: I think a big 1 is you sit across from the person and in the course of the conversation, you think, I have a really hard time seeing this person building and running and leading a large organization. And that's a huge question that's on the table at every stage of investing, especially early on. And if the person just doesn't seem organized or fired up. You know, we've all met people that run big organizations and they are very impressive, unique individuals. And if that doesn't seem like you in the meeting, You know, that's a big reason.

Speaker 1: Or let me say that slightly, let me extend that. If it doesn't seem like you're aspiring to become 1 of those people, right? Like you don't have to be that person today, but if it doesn't even seem like that's on your agenda.

Speaker 0: Yeah. And believe it or not, folks, we run into that a lot. And investors do in general. A lot of people think that fundraising is about things other than raising money to build a really big company. And it's not.

Speaker 2: Yeah, I kind of think what's going on in the raw truth is investors are doing 2 things. You're there, that pattern matching to previous successes and answering the question like do you do you pattern match to founders I've had success with in the past? And then their stack ranking, like of all the founders I've worked with, and are currently pitching me, like where do you rank? And the truth is, you get a no because either you don't pattern match, or like, you might pattern match and you don't stack rank. Like you might be like, yeah, you remind me of the kind of founders I've done well with, but like, actually, you're just not as good as the other ones I'm talking to right now.

And that's kind of the blunt thing that's going on, but no 1 ever wants to say that.

Speaker 1: No 1 ever wants to say that. Well, and it's interesting because oftentimes with the stack ranking thing, it can be as simple as that like, oh, you have the credentials, but you're not communicating clearly. Like I don't really understand what you're saying. Which is like, wow, it's a hard 1, right? It's like shit, like, or I don't believe your numbers.

Like you gave me conflicting numbers and you cast some doubt. I feel like for those it's so tricky because it's like, man, I could like your space. I could think that you've got good credentials, but like, you undermine yourself. Those are tough.

Speaker 2: Also to give investors some credit, maybe ourselves, we're rejecting companies from YC, like the founders change as well. Like you might reject a company when the founders haven't actually gone out and spoke to any users or they're like 2 weeks into it, and they might not impress you with anything. But then a month of like real work, they come back and the same founders can just seem different. Like they've got real insights, They see more, their confidence has grown. And it's sort of like you're hearing a different pitch.

And so I think in those reasons, it's actually fair for investors to change. Like we do, we certainly like reject a company and then they come back and you're like, oh, wow, okay, like now I'm having a completely different conversation with a different person. I totally want to invest.

Speaker 1: In fact, I think that separates YC. I would be very interested in here if there's any other fund that funds people that it rejected. 60% of the companies that do YC, were rejected at some point in the past. Like I would be shocked if there's any fund that does that, or any school, or any selective institution that looks back at a failed applicant and says, like, let's give them another try.

Speaker 2: Yeah, because 1 of the pieces of advice I repeat after Demo Day is over, over and over again, is keep a list of the investors that said no, like, who seemed reasonable about it. And like, just keep sending them updates, keep sending them an update every month. And shockingly, if things start going well, those same investors will reach out, like change your mind. I've seen this happen over and over again for YC companies. It's not natural for a founder.

Like they just assume that once someone said no, it's a no forever. And yeah, you can't convince them to change their mind with words, but you can with actions.

Speaker 1: Well, I think and that's probably the best takeaway here, right? In some fundamental way, instead of, you know, losing your confidence, stop fundraising, like massively change your product based on some reject email or whatever. If you actually just change the facts of your business, right, like make progress, more often than not, the investor will look at that prognos as a much better signal than any modification you made to your deck or any modification you made to the words in your pitch. Like that progress is signal. And that's probably the secret behind YC is that with multiple applications, we can see progress.

And wow, it's like progress is exciting to invest in progress.

Speaker 0: And what this looks like often is the founder says, what do I say to this investor to get them to change their mind. And we say, tell them about the 10 new customers you just closed. And it takes a second for that to land realizing that they need to go get 10 more customers and then tell them about it and not just write something different back to the investor. But they have to change the facts.

Speaker 1: So with that, to wrap up, in fundraising season, the most common thing we say over and over again is believe the no, don't believe the why. The founders throughout fundraising, as long as you keep confident and realize there's more investors out there. There's always more investors out there. And you stay confident. You're doing yourself a service.

Don't fall into these traps. Don't fall into these traps. All right, Brad, Harj, great to see you.

Speaker 2: See

Speaker 1: You

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Investors Said No, Now What?