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What’s going on when investors say “no, but we want to track”?

When you, as an entrepreneur, are in discussions with an investor and they tell you their decision is that its not a good fit right now but they want to stay close and track the company, what is really going on? Should you call on them periodically and give them updates? Should you wait until they call back? Are there milestones you should hit before making the next connection? Are they passing on you and probably don’t want to think about this opportunity again?

Two events made me stop and think about this. (1) I recently said this to a company myself, and (2) an entrepreneur friend of mine heard this from an investor, he kept calling upon the investor periodically, and suddenly the investor stopped responding to his emails/calls.

I think investors say this to entrepreneurs more often than they would admit, and half the time don’t realize that they might be leaving entrepreneurs, especially first-time entrepreneurs, guessing what is going on. In my opinion, there are at least two reasons why investors say this. And I believe investors should provided more clarity around this comment to the entrepreneurs than many currently do.

1. In many industries, investors have key metrics in mind that they think provide an adequate picture of how a company might be performing. These metrics may include absolute number and/or growth in eye-balls, downloads, members, paying members, customers, revenue etc (for software/internet type companies) or cost, performance, reliability/durability etc (for more engineering/hardware type companies). When investors come to understand certain metrics as key performance indicators of traction or sustained product improvement, they want to see real numbers before making an investment. And not just a snapshot but a trend. Mark Suster wrote a nice article describing his investment in lines not dots, and that analogy holds true for more hard engineering/hardware/materials type businesses as well. When investors are not satisfied with the data, i.e. either not enough of it is as yet available, or its a mixed bag without clear sustained trend,s then they are likely to tell entrepreneurs that they want to track and keep an eye on those metrics. Unfortunately many investors don’t fully describe this reasoning to the entrepreneurs. Maybe they are not so confident that their metrics are the right ones in the first place! But I wish they did so the entrepreneurs would know when their company might actually become interesting to that investor again. It would save a lot of time and polite no thank yous on either side.

2. While some seed investing today seems to be getting done in rapid fire mode, I have come to believe that investors should really only invest when they have built a strong personal conviction around a potential investment opportunity, even when it is a small check to write. In general this is true for individual investors as well as in partnerships. It is hard to lean forward, bang on the table, and commit personal time to helping the start-up going forward unless a high degree of personal conviction is reached. And in early stage investing that I focus on, often that conviction is neither determined via the metrics I stated above or a well-written business plan. Often that conviction is based on feelings about the space in which the enterprise is going to be built, or the quality of the entrepreneur(s). Since both these measures are so qualitative, it is often hard to describe to the entrepreneur the unease that an investor might feel around an investment opportunity. One easy way out is to punt the issue and call it a “track”. This is not fair to the entrepreneur but happens often enough that it should be called out as seriously bad practice. Just say no, help them in any way you can in the time you can volunteer, and move on.

If you are an entrepreneur and you hear that from an investor, including me, please do ask back which one of the two reasons above led to that decision. It will help make future communications more efficient and effective.