We get ~3,000 startup pitches a year and can fund only 8-10 at best. This means that we reject a lot of great startups.

Some of these startups are rejected because they are too late or early for us, and thus don’t fit our investment criteria (see item #7). Some are rejected because they are very similar to the companies we have funded and thus compete with them or fall in to the same risk bucket that we don’t want to add to.

Sometimes we reject very good companies, which pass all of the above criteria because there is another company ahead of it in the mental stackrank, one which we believe is even better poised to be a bigger hyperscaled startup. Typically if you are an investment lead you can lead at best 2 investments a year. So if it isn’t the #1 in the stackrank at that point, the startup will be rejected. So being #1 in the stackrank matters.

Now, these stackranks are fundamentally subjective. There is no objective truth to why a startup is higher than another in the stackrank. It boils down ultimately to gut / intuition honed over years of experience and supported by high quality analysis. Now, another VC may have a different view and her stackrank might well be very different.

Thus, when founders ask VCs why they rejected a co, the truth is that unless it is well outside the sweet spot or is not a conflict, then it was probably because it wasn’t #1 in the stackrank. For some reason, VCs find this hard to articulate. I don’t know why. Often VCs say stuff like if it was at X stage we would have done it but you are at 50% of X now, or they tell founders, when you get to revenue level Z1 reach out to us (when founder hits level Z1 they again assess stackrank and if the startup isn’t #1 in the stackrank then they say come back when you hit Z2 and so on).

Here is what I think. If a VC thinks you are likely to be biggest hyperscaling play in her stackrank, she will bet on you, subject to it being in the sweet spot / not conflicting with an existing play. They will factor in the lower revenues in to their valuation. The fact that they aren't doing it is a sign that you aren't top of the pops in their stackrank.

Founders who understand that VC is a relative, not absolute business, and thus look for the right VC who will back them, will do well.