Investors won’t give you the real reason they are passing on your startup

VCs pass on startups due to doubts about the founders, not the idea itself.

: Tom Blomfield of Y Combinator reveals that investors often pass on startups because they're not convinced by the founders, not necessarily the business idea. He emphasizes understanding the Power Law of VC returns and the critical role of market size in attracting investment. Blomfield also advises founders to be wary of misleading investor feedback and to conduct thorough diligence on potential investors.

Tom Blomfield, a group partner at Y Combinator and founder of Monzo Bank, shared insights at TechCrunch Early Stage in Boston, stating that the real reason investors pass on startups is due to a lack of conviction in the founders themselves, rather than the business idea or model. Blomfield underscored the importance of founders understanding the Power Law of Venture Capital, which dictates that a small number of investments generate the majority of returns. This means that for VC firms, only those startups that have the potential for exponential growth are worth investing in, making the perceived potential and ambition of the founders crucial.

Blomfield also discussed the importance of a startup's Total Addressable Market (TAM) in attracting venture capital, advising founders to realistically and compellingly present their market potential to investors. Moreover, he highlighted strategies for creating leverage and competition among investors to secure better investment terms, such as participating in accelerator programs like Y Combinator, which can manufacture high-pressure situations conducive to successful fundraising. Furthermore, Blomfield touched on the differences between angel investors and VCs, noting that angels might invest based on personal conviction rather than purely on financial metrics.

In addition to investor dynamics, Blomfield warned founders about the potential pitfalls of misleading feedback from investors, who may cite various reasons for passing on an investment that doesn't reflect their true reservations. He emphasized the necessity of due diligence on potential investors, recommending speaking to founders in both successful and less successful companies within an investor’s portfolio to gauge how supportive and constructive the investor truly is during challenging times.