As I described in yesterday’s post, I was invited last Friday to sit in with Investomex founders Sergio Romo and Jonathan Lewy, along with several colleagues, including Startup Weekend co-founder Clint Nelsen of Startup Labs, Ulrick Noel of Rocket Internet Mexico and Ulises Vazquez of Matomy, as they listened to pitches from a number of startup companies. Yesterday I told you about some of the companies I saw do pitches in front of the “shark tank” panel.
Today, I’m going to cover five things those entrepreneurs should have learned from the experience of pitching a VC panel, whether they came away with an investment or not.
1. Be prepared to ditch the script
It’s great to have a pitch ready, and you should, in fact, always have one ready if you are going to talk to a VC. Make sure it’s got all the important elements: problem, solution, team, revenue, users or metrics, raise/valuation, and customer acquisition strategy. But also be prepared to ditch your script if necessary (or if you are prompted to do so by the VCs listening). These guys hear a lot of pitches, and while you may have the best pitch ever (unlikely), they may not need to hear it in order to make an informed investment decision. You may not even be given a chance to start your pitch before they start asking questions. So, as the saying goes, expect the unexpected. And be prepared to talk off the cuff.
2. Put your best foot forward (i.e. $$$)
At the end of the day, as much as they talk about wanting to help entrepreneurs (and many if not most truly do), VCs are in the business of delivering returns for their investors. They will make a lot of bets on unsuccessful companies in order to find the few that are massively successful. Be mindful of that business model. They will be more impressed by your company if you assertively explain how you will deliver returns near the beginning of your pitch. If you don’t have revenue yet — many companies don’t at first — explain how you will get to a point that you will start generating revenue.
3. What’s your valuation?
I was actually surprised at the number of entrepreneurs that didn’t have a good grasp of the concept of valuation. VCs probably won’t ask you to prove at the first meeting what your valuation is with hard numbers, but they will expect you to have a decent idea of what your company is worth, and how much you want to raise in terms of capital. After all, you’re there to raise capital, right? An easy (and simplistic, but instructive) way to think about valuation is this: the amount of money you want to raise from a VC should equal the amount of equity you are willing to exchange multiplied by the number required to get to 100%. If you are trying to raise $50,000 and you are willing to give up 10% equity in your company, the de facto valuation of your company is $500,000. Later on, VCs will expect you to show the math and you will get into discussions of pre- and post-money valuations and Internal Rates of Return, etc. But on pitch day, just have a good grasp of what you think your company is worth. I’m told the current “going rate” for seed investments in Mexico is about $30,000-50,000 for approximately 10% equity, meaning that most seed-stage companies will be worth less than half a million pre-money (all numbers in US$). And, of course, be able to say why you need the investment and what you plan to do with it.
4. Know your competitors
All startup companies have competitors. A business without any competitors usually isn’t a viable business. You should be able to list your competitors and provide a detailed (but brief) explanation of all the ways your startup company is superior to them and will deliver better outcomes for customers. Provide better customer service, faster delivery, higher quality, more interesting features, and more variety, and VCs will recognize your value because they know customers will, too.
5. Be interesting/memorable
There’s a fine line here between interestingness and gimmickry. One of the most effective pitches I saw last week had a fully integrated theme, with good graphic design, a humorous hook, consistent colors on all their materials, and a name that was easy to remember. It helped that they also had paid close attention to the user interface and user experience and were working on a business model that was well-established. While there were others that were good, and though I couldn’t easily remember all the companies I saw that day — or at any given pitch gauntlet I attend — I will remember these guys. As an investor, that doesn’t necessarily mean I would put money in the business, but it probably means I will keep them at the back of my mind and might consider investing in them at some point in the future. What it demonstrates to VCs is that the founders have put in the effort to produce something that is highly professional and worthy of respect.
There are many other factors that go into a successful pitch and not all companies will be a good fit for venture capital. But, as with other situations in life, it’s often helpful to put yourself in the other person’s shoes before you get up to tell them how awesome you are. If you were an investor, what would you find most compelling about your company’s story — and what would make you inclined to put money into it?