How not to pitch to a VC
16 min read
23 May 2017
Martyn Holman of Forward Partners continues with his deep dive into the venture capital space by explaining how not to pitch to a VC if you want backing.
There’s a lot written about what investors want to hear from entrepreneurs when they are on the hunt for investment. But what about the flip side? To provide a different look I’m going to explain how not to pitch to a VC.
The route to successful entrepreneurship is far from simple. Even when you’ve cracked perhaps the most difficult problem of all – a compelling proposition, tackling a major disconnect in a huge and fast growing global market in which you have direct and relevant experience – you are immediately posed with the question of how to bring it to fruition.
Perhaps you’ve laboured for months without salary getting an MVP into the market, begging and borrowing advice from all and sundry, interrogating early trial customers. Perhaps you’ve spent some of your own hard earned cash buying customers on Facebook and Google. Perhaps the KPIs are starting to improve, and your confidence in the original thesis, although inevitably amended, is growing daily.
What now? You need to resource the business with people, equipment, and resources to deliver customers in ever greater numbers. Your business needs the oxygen of capital to survive, and a VC can provide you with this means to achieve your ambition. So how do you maximise your chances of making this happen? Well the first thing is to secure your first pitch and to nail it properly without falling for many of the common pitfalls that can stall your progress.
This article details ten things to avoid in your pitch to a VC, arranged in three sections: (1) Getting to your first pitch, (2) Delivering your first pitch, and (3) The content of your first pitch.
What to avoid in getting to your first pitch
(1) Assuming that a partner is best
Everyone will tell you that it is best not to approach a VC cold – introductions through trusted networks, meeting investors at events, or somehow creating a relationship with your target investor are obviously more preferable and more likely to yield results.
VC funds often see thousands of potential deals every year, and will usually only invest in a handful. The funnel is harsh for the majority of submissions. This article has more tips of how to develop relationships and get to your first pitch meeting.
But if you have a truly compelling business idea which you think will make it through the triage process, it is best not to assume that emailing it to a partner is undoubtedly the best choice.
Most firms will have an established triage process for inbound enquiries, most often handled by associates and principals. A cold approach to a partner with whom you have no relationship is most likely to end up in the standard triage process anyway, just with an added layer of conversion.
(2) Broadcasting to every member of a firm
Again in the case that you are approaching a firm with a cold enquiry, it will not multiply your chance of securing that initial meeting if you email multiple members of the firm. More likely it will cause minor irritation, and provide an easy excuse for rejecting your approach.
(3) Choosing detail over brevity
The aim of a pitch document sent to a VC is to secure a first meeting. VC firms see thousands of deals, and simply have no time to read a long deck, or worse, read through a prose based business plan. Your pitch should every time rank brevity and impact over depth – don’t you want to leave the VC with questions he/she cannot answer in order that they invite you to pitch more fully?
Detail is of course critical to a deal completion. But deal completion is several steps down the chain from getting to that first pitch, or indeed from the first pitch itself. Balance your content at the start and encourage a continued dialogue by leaving some questions for the VC.
Visit the next page to find out about convoluted preamble and getting ride of slides in this look at how not to pitch to a VC.
What to avoid in delivering your first pitch
(4) Starting your pitch with a convoluted preamble
You will have an hour, perhaps in some cases just 30 minutes, or if in an office hours programme like we run monthly at Forward Partners, just 15 minutes, to deliver your pitch and make the case for your burgeoning company.
Use it precisely for that. Whilst context for the idea, and your prior background are important components of this, do not spend unnecessarily long periods of time pontificating an overly complex academic rationale, or expounding on the vagaries of the sales cycle at your previous business. Be concise.
(5) Pitching without slides
I am going to risk some controversy here by stating that first pitches should be backed by a deck. It has often appeared fashionable in the startup world for a pitch to be without slides, but this misses two fundamental points.
Firstly, you want to make it easy for the VC – the investor is under pressure to understand your proposition, the market disconnect, and the proposed business model sufficiently within just a few short minutes. If they do not understand these points quickly, it is unlikely that you will progress further – so why not make it easier for the investor? A picture tells a thousand words.
Secondly, it demonstrates a skill. Can the entrepreneur effectively communicate his/her business, and does the dialogue coordinate to the written narrative. How effective is the entrepreneur at selling his/her vision in all forms of communication. Without a written aid this is more difficult to evaluate.
Ensure that your pitch deck succinctly addresses all areas that an investor will be interested in, and that you have the necessary detail in back up to address more detailed questions as they arise. There are numerous guides available – this one I came across recently seems to address much of the major elements.
(6) Preventing a dialogue
Though a pitch document should be a part of every first pitch, its role is to support the dialogue. Your job as an entrepreneur is to engage the investor, to excite them about your vision, and to convince them that you and your team are the ones to crack the opportunity at hand. You will know you are on your way to achieving this when the delivery becomes a conversation between you and the investor.
Don’t resist this simply because you have a set of slides whose order has been pre-defined, or because there is an elegant logic to the narrative that you don’t wish to spoil. Be prepared to rip up the order, or indeed leave the slides behind as this engagement transpires.
What to avoid in the content of your first pitch
(7) Not understanding your business at the unit level
To some degree this is a stage-dependent criteria aimed at those looking for early-stage investment. At the early stage it is likely that your model is unproven. If you have a product in market, it will likely be delivering negative contribution as a result of low scale, sub-optimal marketing, discounted early pricing and higher unit delivery costs. This is to be expected, but it is critical you have a view as to how and why these dynamics will change at the unit order or unit sale level.
(8) Stating that your business has no competition
It is likely, often expected, that the idea you pitch to an investor will be targeted at so called “white space” – areas of opportunity where a problem exists for which there is no known, direct solution. However, the reason a problem exists is because existing solutions are inadequate. They are by definition competing for your future customers already, albeit inefficiently.
If an entrepreneur says that his/her proposed product has no competition it is simply that he/she has done insufficient research around the problem they are addressing. In preparing inadequately they are signalling that this might apply to other areas of the proposition. Doubts will be raised in the investor’s mind. Do the research, and think thoroughly about where the competition will inevitably come from.
(9) Choosing a seemingly arbitrary round size
There is a cost to raising capital. A VC will not only take equity, diluting the proportion that is held by you, the entrepreneur, but will also often insist on controls on the business that remove your ability to act fully independently in the future (more detail in an earlier blog here). An investor is after all henceforth a partial owner of the business.
So just why are you raising the level of capital you are? Raising more capital will give you longer to prove out the performance of your thesis, and potentially enable the business to raise further money at a much higher future valuation. On the other hand, raising money at the early stages is expensive in terms of equity, and to a degree (see next point), is often structurally unachievable.
Set realistic milestones for your business – milestones that represent real proof points for your market thesis and which therefore represent real gateways to future funding. Adopt lean methods in achieving these milestones in the early stages and then cost out what you think it will take to reach them. Add a reasonable buffer. Raise money against this calculation.
(10) Valuing your business on a DCF of the business plan
Your business requires capital to grow, even in the unlikely event that your initial forecasts for the business are hit – if it didn’t you would not be sitting in front of a financial investor. This means that the value that you aim to generate, depends critically on the input that your investor will be making.
Even in the event that they were 100 per cent certain that you will make all of your forecasts, that investor is not going to be prepared to pay for value that his/her capital is fundamental to unleashing. The reality is that any investor is unlikely to believe your forecasts anyway, even if they buy into the opportunity.
Expressing your startup’s value as a sum of future cash flows enabled by the investment you are seeking exposes a large degree of naivety in thinking. Much as investors are not prepared to admit it, valuation at the early stage is perhaps more of a hurdle rate both for investors and for entrepreneurs. The investor needs to determine whether, given the risks both seen and unforseen, a possible future exit value gives sufficient return as a multiple of the purchase price for the risk they are assuming. For the entrepreneur it is a question of whether the enabling capital is worth the chunk of company that they are about to give away.
Given these somewhat self-balancing criteria, as a rule of thumb most “full” rounds (meaning a round designed to give 12-18 months runway and not simply a bridge to a pre-defined event) tend to dilute a business between 15 and 30 per cent. The variable in this is how much capital the business is raising to achieve stated milestones. For this reason it often appears that pre-money valuations of start-up businesses are somewhat a function of the round size.
At Forward Partners we publish a host of content on our Path Forward programme aimed at helping early stage entrepreneurs with the challenges facing their business. This article is a helpful guide to what you should be doing more of in meetings with investors, and this article talks through the questions you should be posing yourself to potential investors.