Telling a founder No is the part of being an investor I still haven't made peace with.

We're in the relationship business; spending weeks or months (sometimes even years) getting to know a company over coffees and calls. We learn their product, their market, the very spark that ignites them, and somewhere in that process a real relationship can form. Which is exactly what makes passing on an investment opportunity so hard. Telling someone their company isn't a fit for us, after they've let us that far in, never stops feeling like a small betrayal of the time we've both spent. Ultimately however, no's are inevitable and when done right, can be the most respectful thing an investor can offer a growing company. I'm going to aim to explain why in this article.

While you're here: if you're interested in understanding the true meaning behind some of what an investor tells you when passing on your company, Principal of Cintrifuse Capital in Cincinnati, Ilana Habib does an excellent job - in my opinion - of doing just that in her recent article here.

‍

Why a No handled right can be valuable

Sometimes, diligence genuinely needs the extra weeks, the extra calls, the time sitting with an opportunity before a conclusion comes into focus. Other times — and I think this happens more than any of us like to admit — the reason for not investing shows up early, especially once you've come to understand your firm's investment thesis and have already worked on deals that made it through your investment committee.

This is where the mental wrestling happens for me. When I see something that just makes it a no, shouldn't I just tell them straight away? The conclusion I keep coming back to is that there's a difference between taking time because you're still working toward an answer, and taking time because you already have one and don't want to say it out loud. I'm guilty of the second kind. I've waited, telling myself it was to avoid hurting someone's feelings, when the truth was I already knew — I just hadn't said it yet. I have to imagine the disappointment founders feel rarely comes from the no itself. It comes from how long it took us to say what we already knew.

It's an imperfect craft, especially when I like the founder and I'm genuinely rooting for them. Being an empath and a Midwesterner is a tough combination for this part of the job. At the end of the day - and this sounds like something my parents would say to me - it's not about when you pass, it's about how you pass.

‍

The Craft of the Pass

At Straylight, we aim to hold ourselves to a standard for how we pass: when something isn't a fit, we point to the specific data, the exact place where our investment committee got stuck, instead of offering something vague and easy to swallow.

To me, a good pass comes down to specificity. It sounds less like "not the right fit for us right now," and more like:

Here's why we don't think this product has enough of a moat to defend against competitors.
Here's why customer concentration is a risk we can't get comfortable with.
Here's the retention data that gives us pause.
Here's the gap on the team we don't think gets solved by hiring alone.
Here's the cap table complexity that would need to get cleaned up before an investor at our stage could get comfortable.

I'm always trying to think about what the founder can actually use. When capital isn't a solution I can provide, at least I can share some pointers they can take with them to the right investor. If someone can't walk away from our no with concrete points to act on, we haven't done our job, even if the no itself was kind.

I may not have figured out what the perfect pass looks like, but I know that timing, level of detail, and how many questions to ask before you get there are all part of it. But the more no's I've had to deliver, the more I believe the same thing: share your hesitation early. Sometimes that early honesty is what gives you the chance to keep learning about the opportunity instead of closing the door or make the introduction to the firm that is excited to close the deal.

At the end of the day, founders are the only ones who really know what a good pass feels like from the other side — what actually helped, what was just noise, what you wish someone had told you sooner. I'd genuinely like to know.

If you've been on the receiving end of a fast, honest no — or a slow, mushy one — tell me what made the difference. Find me on LinkedIn or at caroline@straylightcapital.com.

‍

Caroline Wolanin is an Associate at Straylight Capital, a growth equity firm for “the magnificent middle”, based in Detroit. As an associate, she helps source and vet deals for the firm. Outside of her work, she writes pieces like the one here and was once a pastry chef.