TL;DR:

• 🦵Kicking the can is when a VC tells you: “we would love to invest, but we want to see you a bit more developed first”
• 😡It’s the most frustrating when what they’re telling you they want to see, is the exact reason you’re raising today (chicken-and-egg scenario)
• 🩺You need to diagnose the issue. Is it Portfolio Fit? Is it Valuation? Or is it something you did or didn’t do?
• ✅Once properly diagnosed, you can take action to get past the issue and/or make sure it doesn’t happen next time! (you’ve gotta actually read to find out what to do, LOL!)

Here’s the setup…

VC: “We need to see more progress (on the thing you’re actually raising for) - but then we might invest!”

This is a situation that comes up for many founders raising capital, in particular those founders who are raising their first VC money:

“We like you, but we want to see you prove out (your next milestone) before we would be comfortable investing.”

If you’ve never heard these words or some version of them, then consider yourself lucky because most founders will hear them at some point.

Incidentally, it is so common that one co-founder of an excellent consumer business (~$5M semi-recurring topline, 800% ROAS and incredible growth and following) raising their Series A expressed this exact frustration while I was drafting this article.

Here is a conundrum we face: We think there's a strong possibility that investors will be stuck on waiting to invest until we prove out our [incremental recurring-revenue tech innovation]. Basically, "come back after you've done that."  We actually just had that happen to us last week with a prospective VC. How can we solve that? Do we…

A) shift gears and downplay our tech innovation - and in that case, will our core semi-recurring business be enough to get investment in this Series A? or…

B) focus more on the future-future to give a longer-term view of the tech we are building, so we remove the sense of “build the next step before we invest?”

To see the forest for the trees, we need to first zoom out.

The real crux of the problem is that the Series A is primarily designed to prove out the exact incremental recurring-revenue tech innovation that the investor said, “Come back after you’ve done that.”

Basically, you’re getting chicken-and-egged.

You need the money to build the tech, but on its face they are saying “build the tech first, and then we’ll give you the money.”

Frustrating, right?

It's super-painful for many.

We call it kicking the can down the road.

There are four main reasons for investors kicking the can on you:

1. It's an easy out, and they actually don't love you. Some investors just intentionally kick the can on you, because it's an "easy out" and they don't want to tell you the real reason they don't want to invest.
2. They like you, but your valuation is too high and they kick the can as a negotiation tactic. Focusing on "all the assumptions you haven't yet proven" is a tactic some investors use to get a better valuation. They have to be very delicate in application so that they keep the deal but get the best price out of you. It's not nice to be on the receiving end of this. It is a valid strategy - but in the same way that the fakeout underarm tennis serve is a valid strategy. But unlike in tennis, kicking the can as part of an investor’s Modus Operandi on deal negotiation (meaning, those who intentionally, ever-so-gently kick the can on every deal as a matter of practice) effectively represents capraise brinksmanship, and abusing a perceived position of power (“I have the money, you want it, so I’m going to squeeze you”). Big picture, it is not a good look - assuming you would go forward, this person is now a partner in your business, and they started off the relationship by breaking you down. Is that the sort of shareholder you want? Not one for me, certainly. Thankfully, this is not a tactic most VCs employ, because those who want to stay in business know that it’s a reputation-driven game, word gets around fast and the best deals go to investors who don’t play games like this.
3. They actually prefer investing in later-stage businesses. You may have misjudged this particular investor's appetite to invest at your particular stage (meaning, they say they like Series A, but really they do a lot more Series B).1
4. You actually do have some significant hurdles, and they truly would like to invest but you haven't shown them well enough why they have to invest today. #4 really hurts, especially when your stats say "we actually fit perfectly in your sweet-spot target range" according to every other metric you have (revenue, ARR, ROAS, customer base, profitability, etc). And even more so if the investor who tried to can-kick you was a true perfect-fit investor (meaning, they have capital and are readily investing it, in your industry, in companies your size at your stage of growth, and it's not a question of valuation).

First, you need to diagnose the problem. There are a few key areas that can prompt can-kicking: Portfolio Fit, Valuation, and You.

How to resolve Series A VC Portfolio Fit issue

Portfolio Fit is extremely important. In order to get past Investment Committee, at least a baseline Portfolio Fit must be established (otherwise, how do we justify to our LPs that we, a tech fund, invested in a railroad business?). While some funds may be more flexible in their criteria than others, there are a couple of potential sub-issues to explore here, including but not limited to:

1. (Not to be discounted) Business Stage & Revenue / Profitability Benchmarks: Do they regularly invest in businesses that are at your stage, and/or revenue or profitability benchmarks?
2. Industry: do they regularly invest in your industry / subsector?
3. Revenue Model: do they invest in businesses with revenue models like yours?
4. Desired Check Size & Offer: not everyone wants to take your whole round, and equally well not every firm wants to act as a Lead Investor
5. Geography: are you just too far away for them to keep an eye on you / meaningfully contribute extra value?

You cannot simply assume that because XYZ Capital says they’re a tech fund that focuses on Series A / Series B investments, that you’re going to be a perfect fit for their portfolio strategy. It’s basically the same situation as in the movies, when the couple gets engaged, then one of them says, “But wait, what are you talking about? I don’t want kids!”

If you haven’t explicity asked questions and gotten, at minimum, a loose confirmation that your business doesn’t have any glaring Portfolio Fit issues, then you really must openly discuss Portfolio Fit - and sooner rather than later. When you’re the one to focus on fit more than money and speak confidently about who you are, where you’re at, and what you’re looking for, then the other party will either A) start “selling themself” to you, B) be more flexible to you on fit, or C) tell you there’s just not a great fit (and most likely, why) and you both part on good terms without wasting anyone’s time.

In three out of three scenarios, you’re in power because you’re the one who prioritized the relationship fit above money.

How to identify a Series A Valuation issue

Assuming you’ve established Portfolio Fit, this is the next logical issue area.

If you’ve proposed terms, you might have come in too hot on your pre-money.

Assuming you've already presented terms, ask a permutation of:

"Hypothetically, say I came back to you in six months with [1,000 active subscribers / 30 blue-chip B2B clients / whatever represents meaningful progress toward the specified can-kick issue], but the valuation was $25M higher. Would you invest then?"

That should help you figure out whether it's a valuation issue, or truly a stage-of-development issue (see Portfolio Fit above). If the answer is an emphatic YES, then it's probably the latter.

But if it’s a valuation issue, then listen closely to what that VC has to say regarding comparable transactions - and especially in the context of “what the next round will look like.” Few professional investors want to take advantage of a company’s valuation to the point that raising your next round (i.e. in 18-24 months) will be an uphill battle.

Bottom line: if a true perfect-fit VC investor is telling you in no uncertain terms with highly-defensible comparables that your valuation is too high, they may be right!

Be open to suggestions and discussion, but don’t yield to “just anybody.”

Bridging the gap: If you negotiate valuation, reduce gracefully and with purpose

When considering negotiating a reduction in your valuation, you’ll want to ask yourself a number of questions:

• Has this investor expressed an interest in leading the round? Understand that while you may certainly take a non-lead investor’s input into consideration, you really only want to be negotiating with the lead investor, because all other investors will effectively “take” the terms you agree with the lead. Assuming they are a perfect-fit candidate for lead investor…
• Are we really a great relationship fit? It’s not just about you being a good fit for their portfolio. Do you jive with this team? Do you want this type of person on your board and/or giving you guidance as you grow? Some founders ask, “Would I like to have a beer with this person on the weekend” as a test of relationship fit.
• Are there justifiable reasons I can/should lower the valuation? Look for the intangibles that you can point to as major value-adds - both short-term and long-term - and dive into them. For example, say you’re an insurtech business, and it would make an enormous difference in your topline if the VC Partner made a few phone calls to her Top-10 contacts at major insurers that could result in wonderfully-profitable B2B deals for you. The ideal profile of a value-add: Relatively little time spent by your investor, game-changing impact for your business. Bring your shortlist of Top X Non-financial Asks to the table, explore these openly with your prospective investor as a deal-building exercise, and you might be surprised as to the great incremental value they can bring to the table. For example, consider this potential value-add: “I intend to shop this around to all the other VCs who regularly co-invest with us, and see if we can fill up the round with their commitments.” So basically, you get warm intros to a handful of others who know and have made money with this firm, who regularly cut checks and will likely piggyback on this investor’s Due Diligence, and can result in a significantly shorter path to a close. How much would it be worth to you, to be able to get off the capraise trail and back to growing your business with that kind of firepower in your corner?

In an ideal world, the answer to all of the above is Yes, and there are specific things that you can get agreed in writing that substantiate a discount to your desired valuation. If only it were so easy!

In practice, most will not agree to put “the intangible value-adds” in writing in an LOI or Subscription Agreement. Many times, you’ll be going on faith, and unfortunately not all VC investors come good on promises of value-add intangibles. But as an old Russian proverb instructs:

Доверяй, но проверяй.

Trust, but verify.

Reducing valuation on the basis of value-adds without contractual agreement comes back to doing your due diligence on the firm’s reputation, speaking with alumni founders about their experience, and basically finding out whether the investors did what they said they’d do.

In the absence of value-adds, you still have a number of “hard tools” you can use to bridge the valuation gap, including a performance-based ratchet or a separate share class to mitigate valuation/voting-control issues.2

Is it you: Have you not stacked the deck correctly?

Stacking the deck means setting yourself up for the win before you even get in the room. It goes far beyond just giving a good pitch. Stacking the deck involves:

• Seeding the Tip Jar. No one should ever be “first money in.” If you came to the table empty-handed, expect to leave the same way. But if you showed up to a $10M raise with a $3.5M debt package termsheet, $2.5M in HNWI soft commitments and another $1M in existing-shareholder re-ups, then that’s a totally different scenario. Even if you don’t really want to take on debt, you have shown you know how to raise capital, and that the money is basically there if you want it. You’re in demand, and it’s not a question of “how much do you want to invest;” rather, it’s a statement of “we only have about $XM worth of headroom left.”
• Creating true urgency, and being congruent throughout the entire deal. A simple example here. Founder #1 says, “I’m conscious that our team has a hard stop in 30 minutes, and we want to respect your time too, so shall we dive right in,” gives a dynamite pitch in 6 minutes, knocks 19 minutes of Q&A out of the park, and uses the last 5 minutes to agree concrete next steps while sticking to that hard stop. Contrast that with Founder #2, who starts with 5 minutes of blah-blah chitchat, casually traipses into the pitch, gets interrupted several times by the VC, loses train of thought, and ends up with an unknown amount of Q&A that goes down several rabbit holes, and the 30-minute meeting goes overtime by 45 minutes. Who is more likely to close a deal?
• Getting an intro by a reputable intermediary. Every time you get an introduction into a VC (whether by an LP, founder alum, other VC, or advisor), you should be thanking that person profusely for lending you their reputation. And then, you should be…
• Doing your job by delivering an excellent pitch. We’ve talked about this many times before in some of my other posts, but essentially your job is to pitch well, run a streamlined process, and show you’re able to sell both investors on your company and customers on your products.

Not stacking the deck correctly is most likely a “you” issue. You didn’t take control of the situation and engineer it in your favor, or maybe you did initially, but you got too comfortable (for example, you said “We have a hard stop” and then you didn’t stick to it). I’d love to tell you otherwise, but stacking the deck correctly is almost always something that you can only fix with your next prospective investor.

But the good news is that you can still combat the can-kick.

Bonus: How to stop Series A can-kickers

The main can-kicking issue most founders will see is the Revenue trap, so we’ll focus our example on that, for a real-life Consumer-industry business who:

• 😍Had thousands of customers who love their products and a great, engaged following
• 📈Had great KPIs
• 📱Had an existing well-developed app, with great user retention but no subscription offering yet (that’s what the raise was for)
• 🦵Got can-kicked by a VC on the subject of “We want to see your app more developed and generating revenue”

Here are a few practical strategies we suggested to help stop can-kickers:

1. Leverage the community, and get yourself some quick-and-dirty proof (and sales along the way). For example, send a survey to a sample of customers/users asking them if they would be into the app. "We're thinking of doing ABC, do you want us to do that? How much would you expect to pay? Would you pay $X/mo to get premium membership access? Any suggestions? Like it/love it/want to buy it/want us to put you on the beta list?" You can do this formally via email, or just throw out some posts on your Instagram with a SurveyMonkey link and give them a discount code for $X off their next purchase (because marketing & recurring revenue, right?). Then tease the dirty proof to the VC: "What if I came back to you tomorrow with a list of 500 users who said they'd pay an average of $Y, and over 1,000 people who want to sign up to our beta..."
2. (WARNING: BE CAREFUL) Take it up a notch, and mobilize your community. Instagram Post: We want to do some awesome stuff for you! Tag @VCsInstagramPage in a post telling them the #1 reason why they HAVE to invest in our company, and why you want us to build you a [premium membership subscription offering]. Tag 3 friends, top 5 posts get a free product <3<3 #YourCompany P.S. Keep it PG-rated, people! Worst case scenario? VC: "I can't believe you, how could you do this to us?! Our Instagram inbox is flooded with love for your brand!" Even if things went really far south for some reason, you could still pull a mea culpa and restart discussions. Sure, it is an aggressive strategy, and not for every business, and I'd only suggest it if you've already got other capital circled from HNWIs & existing shareholders - but the hustle will be respected. And you just got a nice little pile of sales? And maybe a press mention from Business Insider? And some more inbound VC interest as a result? Hmm………
3. Lay down the rules, "We don't kick." This means underlining your existing value and reiterating that you are further along than perhaps that investor currently appreciates, something to the effect of:
4. "The reason why the valuation is where it is today, is because we haven't proven it yet. If we had proven these theses already, our valuation would probably be triple today's pre-money. But maybe consider the fact that our core offering sells for $XXX. Combine that with the fact that YY% of our customers are already repurchasing semi-recurring products at a $ZZ price point every 3 months. And we're talking about an $X/month subscription, selling to users who are forming their own freaking communities about our products on Instagram. They already use our existing app like crazy (and we have the stats to prove that too). I mean, we could charge $30 extra for a 'new fantastic premium semi-recurring product kit' and achieve the exact same recurring-revenue goal. And the only thing we'd have to do is build in the dang 'Are you out of your semi-recurring product? Buy more today!' push notifications on the already-existing app.
5. But the reason we're sitting with you today, Mr. or Mrs. VC, is because clearly you've guided subscription-based businesses through business line expansion before, such as XYZ and you clearly get it... etc. We know we can do it, we have the data and stats to back it up - we just want to do it the best way - and be partnered with some outstanding, supportive investors who can help us execute on that in the best way, and of course get the upside as a result.

"So, what do you say?"

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Notes:

1. I’ve seen this play out in real life from strategic acquirers in the context of a potential exit. All the pieces were there, we had all the traction we needed (or so we thought). But the potential strategic acquirers all came back with something to the effect of, “We need to see this as a completely-developed, mature business. We recognize that you’re selling for $50M now, but we can’t take that gamble. We would rather buy it in two years time at $1B, than in its current state. Just develop it more, and come back to us.”
2. A SAFE agreement can also work for earlier-stage rounds, but a Series A is typically a priced round, so we don’t mention it as a strategy here. Same goes for a call option trapdoor - most VCs we know would rather pass on a deal than cap their returns.