When you show VC’s what’s under the hood (I’ll be adding to this list):
1. You ALWAYS have competitors. If you say you have no competitors, the VC (and potentially their intern who wants to understand more about the space) will list plenty of existing competitors for you during their initial analysis, before they reject your proposal and let you down gently (if you hear back at all). Include a competitive comparison chart. If you list a similar competitor, you’ll at least have the opportunity to defend what sets you apart – it changes the conversation. When you’re in a high growth field, there are going to be competitors. If you have no competitors, send me an email – I’ll bet you an iPad that I can find a competitor, and if I lose I’ll also help you pitch the idea.
2. Not all startups QUALIFY for money. If you’ve spent two years working on a project, and can’t show significant traction, it’s going to be hard to raise VC money just because you need to pay yourself a salary to eat. It’s going to be an expensive lunch. For example, raising a VC size round of funding to spend on advertising a social networking startup can be a hard sell – there are many successful startups that do this with ZERO funding for advertising (such as OneDerr). Qualify why you need the money, describe what it will be used for, and understand that VC money is not for lifestyle businesses (there needs to be an exit).
3. Simplicty is key and VC’s are smart – if you pitch an idea and the VC doesn’t understand it, don’t just repeat yourself. Simple business models work. After enough refining there’s no business that cannot be explained to one’s own mother – and if VCs can’t understand it, only a small number of highly specific customers can.
4. Don’t use analogies for how big your market is if they don’t make sense. Using analogies for how big your market is can be confusing if the analogy requires an entirely different business model from what sets you apart or could be used in your particular market. For example, saying “We’re Google AdWords for eBooks” can be interesting, whereas “We’re Google AdWords for education” is confusing – Tech VCs understand tech, and it doesn’t look good if they understand the particular tech more than you do.
5. VC’s know how to show interest and JUMP on opportunities. If you’re on to something, they’ll let you know. There are many reasons for a rejecting an investment, and it may be that the investment just does not fit with their current investment thesis. When looking for VC firms, keep in mind that each prefers a different stage of the business, industry, revenue models, and thesis – e.g. a data driven startup could consider Information Arbitrage. Keep in mind that VC’s can be a good sounding board for feedback on pitching to other firms, even after they reject your proposal.
6. Every idea has been thought of before. Chances are the VC’s either had or heard your idea before. There’s no reason for them to sign an NDA – it only creates a legal liability they can’t mitigate. Holding back information on what differentiates your product from your competition is going to compromise the VC’s ability to justify investing their time in meeting with you. A VC firm is looking for a team to execute the idea, not the idea itself.
7. ALWAYS find a contact to connect you – even a second or third degree connection is better than a cold call. VC’s are amongst the busiest people, but keeping their image as a resource to the startup world is important and represents a significant investment of their Partners’ time. The startup world is small, and firms and people talk. Rounds often involve several co-investors, and VCs want to maintain their contacts and the expectation that a referral gets the light of day to present its proposal.
8. Expect to first meet with an Analyst or Associate. Often these people are the first to look over potential investments, provide initial feedback, and rank your company’s priority relative the list of deals in the pipeline. The more questions you answer the more likely they’ll be able to get excited about the proposal and be able to justify a Partners’ time for a follow-up meeting.
9. It’s easier to pass on an investment than to accept one which you may later regret. In the marriage commitment of VC investment, they’re going to be spending a lot of time with you – time which is very valuable. Remember that VC’s are time sensitive and busy – be on time and respect their time, and if they request a phone call instead of an in-person meeting, understand that they simply do not have the time.