One Type of Founder Investors Hate Funding
You’d be surprised by what kinds of unexpected things can make investors say “no”
I invited a local venture capitalist to speak with my entrepreneurship class at Duke. Once he’d finished sharing his story and discussing the industry, I opened the floor to questions. Most of the questions were typical, young-entrepreneur questions followed by typical, bland VC answers.
“What kinds of things are you looking for in the startups you invest in?” one student asked.
“Our top priority is finding great teams,” the VC predictably answered.
“How much traction does a company need to get investment?” asked another student.
“We’re mostly focused on the Series A stage and later,” the VC replied, “but we’ll invest in an idea on the back of a napkin if it’s the right founder and right team.” I rolled my eyes. Yeah. Sure. Whatever. The only idea on the back of a napkin he’ll invest in is one that comes from Jeff Bezos.
“Are there any sectors you’re excited about?” a third student asked.
“We’re looking very closely at AI and how it’s impacting every industry,“ the VC said.
Again, like I told you, nothing was surprising. The questions were basic and the answers predictable. That remained true until the final question, which, admittedly, wasn’t an exciting question in and of itself, but evoked an unusually candid and passionate response from the VC.
One of my students asked: “What’s a red flag for you that’ll definitely cause you to pass on a company?”
I expected the VC to say something about companies that don’t have product-market-fit, or companies with solo founders. Maybe he’d say something about not investing in companies operating in a saturated market. But his answer surprised me.
“I hate investing in second-time founders,” the VC told my class. “I’ve been burned too many times.”
If you’ve spent much time with VCs, you know they rarely operate in absolutes. Everything is situational. But not this VC when it came to second-time founders. His response was so immediate, concise, and specific that I had to find out more, so I followed up on my student’s question by asking: “What makes second-time founder such bad investments?”
“First off, I should clarify that it’s not every second-time founder,” the VC explained. “I don’t care if your first startup failed and now you’re working on your second. I’m specifically referring to second-time founders whose first startups were huge successes. I’ll never invest in their second companies.”
“Why not?” one of my students asked. “Doesn’t someone who’s already built and sold a successful startup have exactly the experience you’re looking for when making investment decisions?”
“You’d think so,” the VC explained. “But second-time founders who had strong exits with their first companies don’t have helpful experience. They got lucky. Mind you, I’m not saying they’re not smart or capable or anything like that. But, because they got lucky, second-time founders don’t fully appreciate or understand what it takes to build successful companies, and that’s why I won’t invest in them.”
“Never?” another student asked. “What if it’s Mark Zuckerberg after he leaves Meta?”
“Definitely wouldn’t invest in his next company,,” the VC replied. “Zuck would be the perfect example of why it’s not a good idea. I guarantee, if Mark Zuckerberg left Meta and launched a new company, that new company would flop. Or, at the very least, it would waste tons and tons and tons of money getting off the ground.”
“Why?” the student asked.
“Mark Zuckerberg is so used to having a huge customer base and unlimited resources that he’d struggle to succeed without them. I guarantee he takes those things for granted when making decisions, which is the curse of the second-time founder after an initial, lucky success. Second-time founders assume all sorts of ‘givens’ in their startups that aren’t true. And they don’t learn to understand or appreciate how valuable their original resources and success were until they try recreating it again. That’s when they learn the hard lessons they need to learn about startups that’ll make them good founders.”
“It sounds like there was a specific moment or founder you invested in that taught you this,” I noted. “Is there any specific story you could share?”
“It’s every second-time founder I’ve ever invested in,” the VC replied. “They assume they already have product-market-fit. They assume they can reach customers. They assume the press will want to cover them. They assume they can get good talent. The list goes on and on.” He shook his head and laughed before adding, “It’s like the old saying: ‘A smooth sea never made a skilled sailor.’ Second-time founders have the same problem. They didn’t learn how to become good entrepreneurs because they got lucky on their first journey.”
After the VC left, my students asked what I thought about his refusal to invest in second-time founders. I shrugged. “Honestly, I don’t know,” I said. “It makes sense, but I also haven’t invested in nearly as many companies as him to have the right experience. Either way, I don’t think it matters. I think there’s a more important lesson in what he said. Does anyone see it?”
My students stared back at me for a few seconds while they thought. Eventually, one of them raised her hand and I called on her. “Is it a lesson about the importance of struggle?” she asked.
“Exactly,” I confirmed to the class. “It’s like our visitor said. ‘A smooth sea never made a skilled sailor.’ The same is true in entrepreneurship. Some entrepreneurs do get lucky, but that’s not necessarily a good thing. There’s immense value in facing challenges, and the best entrepreneurs are the ones who’ve experienced adversity. Remember that the next time you’re struggling to build your startup. Struggle, adversity, and failure aren’t bad things. They’re critical steps on your journey to becoming incredible entrepreneurs. Investors know this, and that’s why they only want to invest in entrepreneurs who’ve failed. If you haven’t failed, you haven’t learned enough to be investible.”
