Lately I’ve been answering questions on Sprouter and having a lot of fun doing it. Hopefully it’s useful to the people asking as well. Not surprisingly, a lot of the questions are about VCs and investors – how to pitch them, what to pitch, how to prepare, etc. It’s a popular topic and something I’ve written about a number of times. But even still there always seems to be more ground to cover, from some of the basics to the more complicated. So here’s a summary and extension of some of the answers I’ve been providing on Sprouter with regards to preparing for VC meetings, and dealing with investors in general.
1. What should I do if I suspect an investor is taking a meeting with me just to gain competitive intelligence?
This does happen. Generally associates at venture firms are tasked with (a) doing outreach to see what’s going on in a space, and (b) doing competitive or just broad scale intelligence. And it makes sense. If you’re about to buy something very expensive, you usually check out the competition. This is no different.
And investors want to and should see as much as they can. It’s not something I really appreciated until I started Year One Labs – but it’s important for investors to see everything; it adds perspective, increases overall knowledge on what’s going on, and helps them identify the deals they really want to do.
Generally, I wouldn’t worry about this. If it’s a first meeting it will probably be very high level. Even more so if it’s a phone conversation and not a face-to-face meeting. And generally, most startups don’t have much to hide, especially early on.
If someone (an investor, competitor, client, prospect, prospective employee, etc.) wants to find something out about your company, chances are they will, with or without speaking to you. So in general, I wouldn’t worry about this as an issue, but at the same time you don’t need to reveal every secret and unfair advantage you from day one.
2. Is it bad form to turn down investors who approach us? Should we take all meetings out of courtesy?
You do not have to take every meeting with investors. If you manage to get some publicity and attention, there’s a very good chance investors will start calling. It’s a great feeling, but don’t let it distract you. The simplest answer is this: “We appreciate your interest, but we’re not raising money right now. I’d love to keep you up to date on what’s going on in the next few months when that’s likely to change.” That’s a standard line but it’s also the truth. It delays meetings that will very quickly become a distraction and still maintains a positive relationship with the investors.
Incidentally, if you say that, then make sure you do keep the investors up to date. Keep a list (in some form), do your research into the deals they’ve done and figure out which investors would be right for you. Do your due diligence. And then stay in touch with people. When the time is right for you to raise money, ideally you’re in control of the situation and can run a tight, well-organized funding process.
3. Is there such a thing as pitching too many investors?
Yes. Don’t be an investor whore. With Standout Jobs we probably pitched 10-15 investors seriously, but we met more than that (casually) and pitched some of them a few times. Probably 50-60 pitches when all was said and done.
You don’t want to pitch too many though and “shop the deal around” too much because investors will find out. And when they find out they’re not special or one of your top choices it’s going to reflect bad on you. It also means you’ve been rejected more, and that’s going to put a black mark on the deal.
On the flip side, if you’re pitching endlessly and getting nowhere you have to ask yourself what’s going on. Investors are not the gatekeepers of truth. They’re not guaranteers of success. But they do see a lot of startups, and if you’re not making progress you should take a step back and ask yourself what’s going on.
4. What should I bring with me to my first pitch at an investor’s office?
An executive summary (1-2 pages), which you likely sent in advance. A pitch deck and a demo. Business cards can’t hurt.
In the past I’ve brought a printed pitch deck as well – not focusing as much on the “pretty pictures” of a presentation, but more focusing on the details of the business. Not everyone agrees with me, but I found it to be a decent leave-behind. I don’t think it’s necessary though. And while I’d rather investors be looking at a handout than their phones, the best case scenario is that they’re focused entirely on you.
5. What information should we include in our executive summary?
I wish I could share one with you to show you what it looks like, but they’re all very confidential. Generally you’re looking to explain:
- Current status: funds raised to-date, monthly budget, revenue, team size, team expertise, customers, metrics
- Problem you’re solving
- Market size & potential
- Go to market strategy
- Unfair advantage
- The ask (how much you want to raise & why)
Fit this all on 2-pages. Look at every word, cut everything that’s unnecessary, on point and on message. Think of this as your high-level sales pitch to get investors interested enough to call you.
6. What’s more important to finding an investor a business plan or an actual product or service?
This is an easy one — the actual product or service is infinitely more important than the business plan. Having said that, you do need a plan – something that speaks to how you’ll go to market, your unfair advantage, user acquisition strategies, pricing (if you’re charging), and financial models. But this isn’t a big ass document. It’s a pitch deck with 10+ slides. It’s a couple of pages for an executive summary. It could even be a lean canvas.
What you need is a product / service AND a business model. The business model is important and encompasses the items I listed above: how will you acquire customers, how will you make money, how are you different, what are your unfair advantages…
7. How do I calculate the amount of money I should ask for?
I recommend having two or three plans, with one that’s ideal but others that are doable as well. Actually, the first plan is that you don’t raise any money, so find a way that your business can work in that situation. So your ask to investors is really: 1 small number and 1 bigger number.
At a very early stage this is particularly difficult, if you’re getting traction and growing there are other comparables in the market, you have a better handle on growth and requirements. Early on though it’s very difficult to figure out.
Start with this: Raise enough money to provide 18 months of life.
Most startups need at least that amount of time to figure out what they’re doing, so you need to buy yourself that amount of time. And if it typically takes 6 months to raise capital (at almost any stage), that means you’ve got 12 months from the time the money hits the bank to get to the next level, so you can go out and raise financing again (if needed.)
Aside from physical amount of time, you have to make a judgment call on the next critical milestone you’re trying to accomplish.
If you’re following a Lean Startup approach (and I hope you are!) and you’ve got to or you’re close to Product/Market Fit then you know it’s time to accelerate user/customer acquisition. That can be expensive if you need to bring on salespeople, or if you’re buying a lot of traffic. Usually at this stage companies are raising good chunks of money. Prior to that, the risk is significantly higher and so raising less money is a good way to mitigate that risk.
8. What should I be looking to get out of my first meeting with a VC?
If you’re relatively new to pitching investors I’d recommend that you focus on learning. Soak it up and learn as much as you can about the process. When I started I was always amazed at the questions investors asked. Each one asked a few different questions based on their own experience and biases. It helped me anticipate questions and get better at pitching. So focus on learning.
You also want to gage interest, and you’ll need channel your inner psychologist a bit for this one. Assess body language and attention.
Finally, you want to get a sense of next steps and action items. In most cases the next step is likely going to be a request from the investors that you stay in touch and follow-up. That’s pretty vague, and you have to decide whether they’re really saying “no” or not. But at least come away with some clarity on next steps and follow up from there.
This is just the start…
This isn’t the entirety of issues surrounding VCs, investors and raising capital, but there are some interesting questions in here for sure. If you have your own questions, leave a comment on this post, or go to my Sprouter page and ask there.