"He told us he was going to fund us," shouts the happy entrepreneur into my ear. I'm sure he dialed me as soon as he got into the car.
"He's not going to fund you," I say calmly, "The VCs always say that. It doesn't mean anything."
A lot of entrepreneurs have a hard time telling when an investor is interested. This is because most investors avoid saying no. Sometimes, this is because it's awkward to tell an entrepreneur, "I'm not investing because I don't believe in your team." Sometimes it's because nobody wants to say, "I'm just not feeling it," even though star VCs like Fred Wilson and Paul Graham freely admit that gut instinct is a major if not primary decision-making criteria.
Yet the most common reason to avoid saying no is simple--option value. The great Bill Sahlman taught me that the venture capital model works like poker. You don't really know what kind of hand you have, and you only find out as you turn over your cards.
The goal of an investor is to turn over as many cards as possible before investing. No sense committing funds, only to discover that you're betting Ace-high nothing.
This is why it's in every investor's interest to delay investment as long as possible without A) losing the deal, or B) having to pay a much higher price.
Once you say no to an investment, you stop getting to turn over cards. The result is that many VCs will make vaguely encouraging noises, and wait to see what happens. "We're really interested in what you're doing" is a common one, as is "Keep us in the loop."
This isn't because they're trying to drive entrepreneurs mad; it's because of the incentives that affect them.
The worst is when the combination of disingenuous VC and naive entrepreneur come together. That's when you get exchanges like the one I referenced at the beginning of this post. The VC goes too far in expressing interest, and the entrepreneur goes too far in interpreting it. The result is a sad misunderstanding.
Needless to say, in 9 times out of 10, that kind of call does not result in funding by that VC.
Investorspeak is practically meaningless when it comes to signaling funding. Yet it's not actually that difficult to tell if an investor is interested or not.
The #1 way to tell if an investor is interested is that he/she invests money in your company.
The #2 way to tell if an investor is interested is that he/she invests time in your company.
#1, while accurate, isn't much of a leading indicator. But #2 is actually useful.
The reason time works as a signal is that VCs are just as time-limited as they are money-limited.
Investors are staggeringly busy. Perhaps they don't work the insane hours that entrepreneurs do, but any investor's day is literally stuffed with meetings. The average VC is going to see hundreds of deals per week, and actually meet with 10-50 entrepreneurs (the pace ranges from "leisurely" to "McClure-esque").
Now consider that it might take a month for an investor to make a decision. So if an investor meets 25 entrepreneurs per week, and takes four weeks to decide, at any given time, he/she is actively considering 100 deals. If you assume that a VC has 50 minutes per day outside of meetings and other business to devote to follow-ups, then the *average* startup ought to get 30 seconds per day of follow-up, or about 15 minutes per month.
If an investor spends hours and hours either meeting or doing due diligence on your deal, that's way more than the average follow-up a startup receives, and is a good sign that he/she wants to invest.
* Note that you have to distinguish between the investor doing work, and the investor *making you* do work. Some investors stall for time by giving you rock-fetching exercises. A great example is asking for customer references. Asking for customer references takes 10 seconds. That means nothing. But if you check with those references, and they tell you that the VC spent an hour on the phone with each of them, that means a lot.
(Thought sparked by this blog post from Elad Gil.)