It’s the most common pass founders hear. It’s also the least forthright and most damaging.
If you're a founder that's ever pitched an investor, there's a good chance that you've heard it.
And my guess is that you completely misunderstood the feedback.
It's important to shed some light on this pass because not only do founders misunderstand it, but oftentimes it leads them down unproductive paths. When they hear “you're too early,” they focus on making incremental progress in order to satisfy that investor when the statement “you're too early” means something entirely different.
(btw - I reference “you’re too early” far too often to type that every time in this essay. We’ll go with YTE from here on out. 😛
In the game of venture capital, passing on deals is one of the least enjoyable and least productive things that you have to do on a regular basis.
Passing sounds like a simple task. Just say “Hey I'm not investing” right? Not so fast….
The way an investor passes is crucial because a venture capitalist's reputation is one of the most important assets that they control. A founder’s experience during their interaction with an investor can greatly impact how the community perceives that VC.
YTE is the easiest and least painful way for a VC to pass on a deal. It’s the softest delivery of bad news for a founder which protects the VC’s nice guy reputation. It’s believable and easy to explain (Well how much further do I need to go? Further than where you are, duh).
Last but not least, it has the added benefit of indicating they would be open to looking at the deal in the future…should you make more progress (read: when other investors are interested). Here’s one of the passes Brian Chesky received when he was fundraising for Airbnb, instructing him to “keep us posted”:
In other words, it accomplishes their immediate goal of getting the deal off their plate… but not entirely.
Well what if for some crazy reason they were wrong! And then you started building over the next few months??
What if they fully passed, and you were the next generational startup investment.
The truth is, YTE rarely actually means “everything is fine. I’m actually very interested, you're just slightly too early so if you make incremental progress I will do the deal.”
YTE is much more believable coming from an investor that completely focuses on a much later stage like Series C when you're a pre-seed company, but even then it can be misleading. Firms that focus on later stages increasingly allocate capital to earlier stage deals. In 2021, Tiger Global – which was known for their aggressive approach to investing in growth deals – popped up as the lead in seed stage companies.
And most often, when you hear YTE it’s not because you’re talking to a growth fund as a seed stage company. You’re talking to a firm whose stage focus is either squarely at your company’s stage or at least it looks like that if you squint. In those situations, you know YTE isn’t the reason because a cursory search of Crunchbase will show you deals they've done in companies with similar levels of traction.
They are completely comfortable investing at your stage... You’re not too early.
What YTE actually means is “I couldn't get excited.” It means, “You didn't interest me enough to cause me to move forward with this deal.”
It's important to hear this because you need to understand what that feedback means. Only then can you plan what to do about it.
At this point, if you were looking for some incredible judo tactic that takes YTE and feeds it back to them in a different way that miraculously convinces them to move forward with your deal…
…you've come to the wrong place.
If you get that response, it's already indicative of something that can't be fixed on the spot. The best you can do is take that feedback, internalize it and update your approach for the next investor.
There is no defense for a YTE response. Instead, you should realize that you're not meeting the bar when it comes to exciting an investor enough to move forward. Take steps to pass the bar next time.
When diagnosing the cause of YTE, the first thing to address is your narrative / story.
Are you surprised I didn’t say “traction?”
YTE does indicate that making progress in measurable parts of the business should help! And it’s true that “traction” is part of the story. But remember, most investors investing at your stage have probably done a deal with the same level of traction.
So what do those deals have that you don't have? If it's not more traction, then it has to be the way they told their story. Your story didn’t excite them.
Without hearing a founder’s story, I can usually guess the main problem. A startup story that fails, 9 times out of 10, is an overly complicated one. The complexity makes it difficult for an uninformed investor to get excited about the problem space and solution quick enough before losing interest.
A likely cause of this is the cognitive bias known as “the curse of knowledge.”
The “curse of knowledge” occurs when an individual, who is communicating with other individuals, assumes the listeners have the background knowledge to understand.
Founders often fall victim to this when they insist on including nuances in their pitch that investors lack the context to fully appreciate. The founder knows too much about their business to be comfortable excluding details that end up making it MORE difficult to get excited by an opportunity enough to dive deeper with the help of experts who will understand the deeper nuances of the company.
Entire books, courses, and coaching programs have been dedicated to improving storytelling. I won’t do the topic a disservice by cramming it into the last paragraph of this essay.
But I do want to encourage one practice to help improve your story.
One of the most effective things you can do to improve a story problem is to get feedback from as many people as possible.
Too often founders build in a bubble because they’re scared of feedback or want to prove they can win on their own. Both are stupid and will severely handicap your ability to raise money.
So go get feedback.
Ideally, that feedback would come from people within the industry who understand startups and investing. Even without that context, any 3rd party can share what confuses them. In some ways, feedback from industry outsiders is the best when it comes to the goal of simplifying the pitch since your goal should be to clearly communicate and excite even the least informed listener.
Understanding is the first step towards conquering YTE. Now that you understand, find the important elements in your story that can be clarified to drive understanding. From there, turn that clarity into excitement for your deal.