My current start-up (http://www.txteagle.com) just closed a $8.5 million Series A round with Spark. I’ve also raised money for my solar start-up (http://www.bandgap.com), my previous company (http://ecredit.com) and several other new ventures. During all of those road shows, I’ve often wondered what was going through the heads of the VC’s while we were pitching.
Howard Hartenbaum of August Capital shared some insight on the txteagle road show. While we ended up doing the round with Spark, I found Howard to be very smart, thoughtful and generous with his advice and from doing a couple of reference calls, I get the sense that his portfolio companies truly think of him as a value-added member of the team.
He described the pitching proces as akin to dating: you know instantly whether it’s a match and small cues like clothes, health, humor and trappings of success make a big difference in creating that instant impression (see Malcom Gladwell’s “Blink”). He also explained that like many in the dating game, VC’s collectively have an acute case of Attention Deficit Disorder and are sitting there waiting for entrepreneurs to quickly answer 5-7 main questions so they can pass judgment and either get more deeply involved or get on to the next deal.
Note: this isn’t a post about how to structure your pitch deck. For good templates, visit SlideShare and see Dave McClure’s “Startup Viagra: How to Pitch a VC” (hilarious with more than a few grains of truth) and the Canaan Ventures “Entrepreneur Pitchbook” (much more polished but less entertaining). That said, if you have some insight into what your audience is thinking, you should be able tweak your messaging appropriately.
So, according to Howard and based on my personal observations, here’s what the VC’s are thinking, roughly in order:
- Do they have a big vision? You need to boil your whole business down into a short vision statement that gets people excited. Classic example: Skype – “All phone calls will be free.” Wow.
- Are they killing pain or providing vitamins? Pull the vision back to reality (Skype: “people hate spending money on phone calls”) and make sure it’s real pain.
- Is there an interesting and defensible solution? VCs are looking for a simple and elegant solution that may involve technology or other factors that improve defensibility (e.g. network effect).
- Is the market big enough to support a huge company? Show a huge market (Skype: telephony is $1 trillion global industry”). The start-up just needs to pick up scraps to be viable but if it really hits the returns are enormous.
- Can this team execute on the above? They want to see domain expertise, evidence of how smart you are (degrees, schools you went to), evidence of past successes and a history of working together. (note: don’t underestimate this last factor – from personal experience, starting a VC-backed company is intense and conflict is not uncommon. Make sure you like and can solve conflict with the people you’re getting involved with).
- Do they have any traction or proof-points yet? It is very helpful to outline the key assumptions, what you’ve proven and what is still a hypothesis. Customers, revenue, response rates are all good data to share. Most entrepreneurs pitch as if all unknowns are known – this is so counter to every VC’s experience that it can be fatal during the pitch.
- Is the financing plan appropriate? Are the entrepreneurs asking for too much or too little money given the stage of the company, the size of the opportunity etc. This probably isn’t a fatal flaw and in my experience VC’s can help with some interesting insight into why you should raise more than you’re asking (e.g. go faster, try something else, send competitive signals) and, more often, why you should raise less (e.g. gain proof points and raise more later at a higher valuation).
In addition to, and running through, all of the above I suspect Howard would say that the most important thing VC’s are looking for is integrity. By definition, every start-up that is trying to make a major impact on the world is trying to do something that hasn’t been done before. Entrepreneurs see a future that no one else sees – or else it would have been created already – and so they have to use all of their powers of persuasion to marshal the resources necessary to make their vision reality. Thus, there is inevitably an aspect of showmanship, charisma and frankly hucksterism to many entrepreneurs and their pitches. That said, the really successful VC’s and entrepreneurs are the ones who go into a new venture with their eyes wide open, knowing the odds are stacked against them, acknowledging what they know and systematically trying to solve for what they don’t. If both parties have integrity in that process they can establish a true partnership and odds of success go way up.