By guest author Gerry Langeler from his e-book Take the Money and Run! An Insider’s Guide to Venture Capital
So, now you’ve made it to a VC firm partners meeting. Do you ever wonder what REALLY happens around the venture capital partners table once you, the entrepreneur, leave the room? Well, it’s time someone told you. Hopefully, out of this you’ll become more skilled at getting to “Yes,” or maybe getting to “No” – but faster, and getting some value out of the experience. The most dreaded words you can hear, if you had an ear pressed to the conference room door are:
“What do they do?”
But how can it be that after an hour of your best PowerPoint magic, VC’s can ask that question? Because the entrepreneur did not think about that question before he put together said PowerPoint!
Candidly, this happens fairly regularly. Recently, the CEO of a startup came in and presented to our entire partnership. He talked about his company, and the issues of his markets, and his competitors, and his financial plan. But nowhere, and certainly not at the outset, did he stop to explain the simple issues of this is the problem we are solving; this is the value to the customer of having this problem solved; this is what we make that solves the problem.
This entrepreneur was simply too close to the forest to see his trees anymore. All he saw was bark and moss and the occasional ground squirrel.
Now, lest you think this was some neophyte or someone not otherwise ready for prime time – here’s the dirty little secret. The presenter was the CEO of an existing portfolio company of ours. We KNEW the answer. They already had millions of dollars from us. So, while the question raised by one of our partners was facetious – that made it even more powerful. From the presentation, you couldn’t tell what they did.
If this is a trap even experienced VC-funded CEOs fall into, you can be sure that those less seasoned fall in far more often.
OK, so you’ve passed the test of “What do they do?” Now we come to the next set of words you don’t want to hear with your ear pressed to the [VC] conference room door:
So, you think we’re just being rude? (Well, maybe.) But, in reality those words level a verdict on the startup as falling into one of two traps: Either the company is serving a market that is just too small to scale or is offering a product that is in the “nice to have” rather than “have to have.” category
Recognize that institutional venture capitalists fund a remarkably small percentage of startups (again, fewer than 1 in 100). The reason is that the overwhelming majority of new companies will never be able to grow at the explosive rates to the major scale that VCs need to make their economics work. That’s not a slam on those other 99% of startups. It just means they should look for funding someplace else.
This reminds me of an entrepreneur who came to see us some years ago. He had bootstrapped his company over five or six years to about $10 million in annual sales. It wasn’t growing all that fast any more, but he was taking home over $1 million a year personally from the enterprise. My first question to him was, “Why in the world are you here? Go, home. You don’t need us!”
The flip side can also be true, as in we don’t need you.
Before you visit with VCs, ask yourself or a trusted service provider who caters to startups, Is this really a VC deal? If so, we’d love to see you. But if not, that’s perfectly OK. Just spend your valuable time with potential investors more likely to find your idea compelling.
“Right idea, wrong team.”
This is a tough one. If you were listening in to a partner meeting after presenting your startup, what would you do? Well, the first thing might be to think hard about why [they] were feeling that way. Does your team have deep domain expertise in the business you are starting? If not, then [VCs] worry a great deal about what you don’t know you don’t know. Or perhaps to paraphrase Will Rogers, “It ain’t what you don’t know that hurts you. It’s what you ‘know’ that just ain’t so.”
If you don’t have domain expertise, it is still possible you’ve come up with a killer business idea. But, you’ll need to go land some senior people from that industry to team up with you to help you avoid the obvious (to them) pitfalls. Please come back when you do – or at a minimum, when you realize you need to.
Now, what if you do have deep domain expertise in the space, but [ the VCs] still give you the “right idea, wrong team” brush-off? Then the real message is, you have an A quality idea but are chasing it with a B quality team. Did you round up just your buddies or the best and brightest in the field? Did you make everyone a VP, or did you recognize that you’ll need to hire people above some of the founders to grow the business? If you are a founder coming out of the sales ranks, do you know what makes a stunning VP of development? If you are a killer engineering or scientific founder, do you know how to select and hire a VP of sales?
One of the best things you can do if you have a great business idea is to leave the VP titles at the door and even leave holes in your team. If you don’t have world-class talent in all areas or aren’t sure how to evaluate talent in certain functional areas, let us help you. It is part of what we do every day.
Now for one of the really tragic whispers emanating from a [VC] partners meeting…
“Right team, wrong idea.”
We really agonize over this one. It doesn’t happen all that often, but every once in a while [VCs] get an absolutely killer team in to present, with deep domain expertise in an exciting market. And then, after they explain their business concept [the VCs] say:
“Is that the best they can come up with? What a shame!” (and then shed a collective tear)
It is so hard to get really high performance teams put together that it pains us to see one going after a target that is just too small to be interesting, or too far ahead of the market to be financeable, or too crowded to be sustainable. I have to admit, there have been times [that OVP] has come close to backing these all-stars in the hopes that they’d figure out some other business to conquer nearby the original target without blowing a wad of cash first.
In fact, it turns out that some of the best startups, whether [OVP] backed them or not, fall into the category of “missed on the original plan, but adjusted.” Great teams can do that. The problem is, great teams can also simply fail if pointed in the wrong direction, or burn so much cash bumping into trees in the forest that it is the same as failure.
So, if you have pulled together that once-in-a-lifetime team, please work hard to make sure the business you are chasing is worthy of the talent. You don’t want to see a VC cry, do you?
Wait…let me rephrase that.
How to Wow a Venture Capitalist in Seven Slides
We’ve seen all sorts of presentations from startups over the years. But none were as succinct, yet as effective as the one described below.
The company in question was one that had pitched OVP a few years prior. At the time, we loved the team, but thought they seemed to be remarkably unfocused. So, rather than have our money burned in a “bumping into trees” exercise, we passed. Now, they were back with laser focus, and it showed.
Before the presentation started, the CEO told us he only brought seven slides. And oh, by the way, they were all in 30 point type. My immediate reaction was, “This guy must have his stuff together.” Rather than subject us to death by PowerPoint, he was planning to engage us in a real discussion where the knowledge of the management team was the foundation, not the slides. And the goal was interaction with potential investors, not to baffle us with BS.
They did not disappoint.
Slide 1: Company name, their thesis in three words, the opportunity in nine words
Slide 2: Their secret sauce – in about five bullet points and a total of 15 words
Slide 3: Why their customers see their value – in three bullet points and a total of 30 words
Slide 4: Their customer traction – in four bullet points and about 40 words
Slide 5: Customer traction graph (essentially proof points for slide 4)
Slide 6: Revenue forecast for last 2, next 8 quarters – with justification in less than 10 words
Slide 7: Profit model – in three bullet points and about 20 words
That was it. We talked for an hour and ended the session with all of us still fully engaged.