Actually the way most VCs say no is either by not returning your phone calls, or by saying "looks interesting; let's keep in touch," while not actually giving you a termsheet.
Things change fast in the startup world, so VCs always want to leave the door open in case you suddenly take off. (Taking off can mean becoming popular with users, or just other VCs.) As a rule they reject you in ways that can be claimed later not to be a rejection.
Business and VC funding are not American Idol. There's almost always a chance to keep a door open to future prospects, upon failure, thus gaining an ever growing list of contacts and resources. This is part of "follow up". Unless the entrepreneur is dead or in jail, the door can be open.
I would take a direct no, but i had had nasty experience when they go on lecturing things like "get traction on what u are doing", "you dont seem to have background in this field", "this wont work becoz of ......". This is more irritating than a simple NO with a reason like we arent interested. Vinod Khosla is bit polite in saying this :D rather than giving a lecture.
It works similarly in dating.
(Note that I date with the goal of marriage in mind - definitely not a player, which makes this a good analogy to the good VC's - they're hoping to 'marry' founders when it's a good match)
Many guys burn bridges when they have to break up with a girl. However, that's totally unnecessary! I've certainly done that when I was a teen, but have found the charitable approach much more effective. Let me be clear that 'charitable' does not mean unclear or deceptive in the breakup. On the contrary - it's being very clear and honest about the breakup with the girl. That being said, you do withhold any information that would unnecessarily hurt her (ex: you're not attracted to something about her that she can't help).
The breakup needs to establish that:
1) the relationship is not a match for you, but that that is no reflection on her personally in the slightest
2) you genuinely admire the N number of amazing things about her
3) you hope that you both can still be good friends, but that you understand and honor her wish if she thinks it's better not to
4) the romantic possibilities of your relationship are just not there sufficient for marriage and never will be (let her move on with closure!) Don't worry, if you change your mind later you can crawl back on your knees to her and tell her you were wrong - but you have to let her go and pursue other possibilities.
5) you are open to talk with her about it at any time - this will usually relieve a lot of her anxiety about having to wonder why you broke up later.
Note: Be careful about the 'still being friends' thing. If you are hanging out too much with her, most other guys will avoid asking her out - and you don't want to hinder her ability to move on. Be sure to honor her space and let her know that you are doing that so she doesn't feel rejected by it.
Success stories:
2004 girlfriend: Good breakup, she decided it was better for her to not have contact. I honored that and imagine she has gone on to great things.
2005 girlfriend: Good breakup, though we did get back together several times. Ultimately it ended, but our communication was so good that we have remained best friends since then and talk regularly about our new relationships. We both are huge advocates of each other - she sells me to other girls and I sell her to other guys. We do business together too since there is such a high level of trust.
2006 girlfriend: Had a great time together, but we both knew it wouldn't work. We had great communication and though it was hard for me to let her go, I did and that really impressed her to the point where we have a similar high-trust, high-advocate relationship as with 2005 girlfriend.
2007 girlfriend: Ended about a week ago. So far so good. Very hard for both of us. But we've had good communication since and it is evolving well into a good friend relationship.
Note that these tips assume that you are only dating reasonably sane girls - with psycho chics this probably won't apply ;)
It's important to remember that going the charitable route is often harder in the short-term than the alternatives, but it's important to suck it up and have the kahoonas to do it right. Some guys may be tempted to not give her a clean break or feel they have to diminish her as a person to satisfy their own insecurities. DON'T DO IT! Seriously, it will hammer your karma and make life much more difficult for you in the long-term. To illustrate: 2006 girlfriend only dated me because of the good things 2005 girlfriend told her about how good our relationship and breakup was. The same with 2007 girlfriend. It's really the way to go if you can be respectful and honor them, because more often than not, they will return the sentiment.
(sorry for the length - it started as a comment, but turned into a full post - hopefully a few will find some value in it ;)
Things change fast in the startup world, so VCs always want to leave the door open in case you suddenly take off. (Taking off can mean becoming popular with users, or just other VCs.) As a rule they reject you in ways that can be claimed later not to be a rejection.