If you’re an experienced investor, you’ve seen it all. How every startup thinks they can take over the world, but usually has to struggle to accomplish even its one core product or task. How three copycat business plans will arrive in the same week, and how each one thinks they’re unique and protectable. How domain knowledge and therefore your ability to help a startup accrue by having multiple investments in the same space.

Both points of view are pretty extreme, and the truths about conflicts of interest are highly contextual. Here’s how to think about it.

1. The idea

Firstly, the idea — it’s no big deal. If it’s any good, someone has had it before and someone will have it again. If you’re still convinced it’s that good, go file a patent first, and then go talk about it. Keep in mind that investors outside of big tech (cleantech, biotech…) automatically have a bias against “patented” ideas, and most brilliance seems obvious in hindsight. Ask an investor to sign an NDA, and you’ve just filtered out all but the most desperate investors.

2. The space

Secondly, the space — it’s tricky, but you have to define it as realistically narrow. There was a time when having an investment in ”web” might have been considered a conflict for another “web” company. There was a time when the term “portal” was a competitive category. Unless it’s head-on competition, Foursquare v. Gowalla, Disqus v. IntenseDebate, Google v. Bing, it’s really, honestly, not competitive. If there’s room for multiple equal-sized players in the space, it’s not as competitive as you might think. Also, theories about where you might zig or zag don’t count — just compare on what you’re doing at this moment.

3. Angels vs. VCs

Thirdly, the type of investor matters — active angels have a lot more deals than active VCs and are more likely to have an investment in an adjacent space. This is not a big problem — angels invest in syndicates and usually only provide help in a contextual, on-demand way. Because VCs are likely to be on your board, have more money into the company, and have more control and information rights, it makes more sense to pay attention to conflicts VCs might have (Disclosure: I consider myself to be an angel investor).

4. Conflict checks

Fourthly, just ask the VC to disclose potential conflicts up front, but don’t be too broad-minded about what constitutes a conflict.

Lastly, beware the “entrepreneur check.” This is where the VC tells you that they like your company, want to do due-diligence, and then just have to check with the entrepreneur in one of their investments about whether this investment would be competitive or not. Since entrepreneurs tend to have an overly-broad view of what’s competitive, this check usually fails. Even in the rare case that it doesn’t, it’s used as an excuse by the investor to pass. Therefore, always insist that they run the “entrepreneur check” early in the process, before you’ve invested too much into this investor.

Your own biggest competition

Our flawed patent system aside, ideas do not have the merit that we were all raised believing. You do have to pick the right space, but after that, execution is everything. Here’s a quick confirmation test — go back to your classmates and pick out the smartest ones, and then the hardest working ones. Now look at who is successful. A certain base level of intellect and idea-formation capability is required, but beyond that are strongly diminishing or even negative returns.

Consequently, the best entrepreneurs display a lot of chutzpah. They aren’t fazed by the competition, nor do they see shadows in every corner. They are their own biggest competition.

Me

If this is your 1st time raising money…

1. It takes way longer than you think.
2. You’ll assume you’re much further along than you really are.
3. It’s not about optimizing the round, it’s about whether you can raise the round at all.

Naval (@naval)

If this is your 1st time raising money…

1. If you’ve launched and have traction but you’re not getting funded, your team is likely the problem. Look in the mirror.
2. Your financing usually goes nowhere until you’re suddenly oversubscribed.
3. Launch first, raise later.

Chris Dixon (@cdixon)

If this is your 1st time raising money…

1. Make sure the valuation is one that you can get a 2-3x step up on if you hit your milestones.
2. The earlier the investment stage the more you should think of them as partner versus buyers of stock.
3. After 3 months of pitching, you risk being perceived as damaged goods.

Mark Suster (@msuster)

If this is your 1st time raising money…

1. The biggest problem is “anchor tenants.” Once you get them, the lemmings will follow.
2. Everyone wants a “deal.” Even rich people. Get the highest profile anchor tenants and give them a deal. My commentary is specifically related angel investing.
3. Everyone obsesses with dilution from investors. The biggest dilution comes from co-founders. If you have 2 co-founders, you’ve diluted 66% before doing any of the hard work. Start by yourself and bring in co-founders for smaller stakes once you’ve got initial momentum. Unconventional wisdom, but the most economically practical advice you’ll ever get.

The top 3 things we look for in the startups that apply to AngelList are initial traction, social proof, and product. The team is also obviously important, but good teams tend to have good traction, social proof, and products.

Since I was a child, people have asked me, “How much traction do investors want to see?” My answer is “you tell me.” Find the competitors that investors wish they had invested in, and compare yourself to them. And skip the #’s — show graphs. The Google Analytics screenshot above compares the traffic bump that [Startup Digest] got from TechCrunch vs. Venture Hacks.

Even better, show cumulative graphs that imply your second derivative is positive:

(Unlike these graphs, make sure you include axis labels, a legend, and a title.)

I’ve heard that Google’s entire presentation when they were raising money was a metrics graph. You should put together a more complete presentation than that — but, if you only have time to pull together one slide, make it traction.

[Nivi: There's a lot of new stuff in this presentation — I learned a lot that goes far beyond the topic of pitching VCs. I bolded my favorite parts in the transcript below.]

SlideShare: Presentation hacks
Audio: Interview with chapters (for iPod, iPhone, iTunes)
Audio: Interview without chapters (MP3, play anywhere)
Transcript: See below

Outline

Here’s an outline and transcript of the presentation.

1. Does the presentation matter?
2. The presentation doesn’t matter
3. What really matters
4. Preparing for your presentation
5. What’s in the pitch?
6. Seducing investors
7. The high concept pitch
8. The elevator pitch
9. Elevator pitch example
10. The 10/20/30 rule of PowerPoint
11. The 12 pieces of the presentation
12. Learn from the masters
13. AngelList

Transcript

Naval: So, Rashmi mentioned the information asymmetry that exists between investors and entrepreneurs, and at this point I’ve been lucky enough to have been involved with a large number of startups as a founder, advisor, and investor. And along the way, what my partner Nivi and I are doing is trying to break open that information asymmetry. So everything we know about venture capital, from term sheets, financings, cap tables, equities, negotiations, goes up on Venture Hacks, and we’re always trying to update it.

Recently we even launched a list, an open directory of angels, and we connect the startups with the angels directly so they don’t have to pound the pavement all the time.

So, what is Venture Hacks? Basically, game theory applied to venture capital is the shortest summary I can give you, and I’ll get into it.

I’ve focused this time on presentation. There’s a lot we could talk about: How do you raise money? How do you pitch investors? How do you convince people? And [we could talk about] the process itself. But right now I’m just going to talk purely about presentation, because I think that was the topic at hand. So, let me see if this works. Forward! No.

Man in audience: We’ll go manually.

There we go. OK.

The presentation doesn’t matter

So here is my first piece of advice – the presentation doesn’t matter. I really don’t think it’s that relevant, not to a high-quality, experienced investor. They’re not really there for the presentation, and your presentation skills are kind of secondary.

What matters much more is the substance of what you’re talking about, and you should take heart in that because even though it seems like an arcane process, funding is still largely a meritocracy. It is your job to articulate what you have, but if you don’t have that much you’re not going to get funded. And if you have something great you will eventually get funded.

What really matters

Here are the things that matter in rough order of importance.

I think traction is the most important thing. So, congratulations to SlideShare; you guys did it the right way. You built a product that had traction, and then you went to raise money.

Secondly, you – you, the team – are the second most important thing. And if you’re not getting funded when you have traction, or you’re not getting funded when you think you have a really good team, maybe you don’t have that great a team. Maybe you need to take a cold, hard look in the mirror, go back to the drawing board, recruit another cofounder, or go get some more experience or build up your own credibility.

Social proof. As Rashmi said, investors are sheep; they stampede in herds. But you know what? Everyone does. We’re all the same. It’s the theory of cumulative advantage. We listen to a band because our friends listen to a band. We go and watch Avatar, not because it’s a great movie, it’s because everybody else went to see Avatar. Investors are no different.

The product is number four. Especially if you’re a consumer web facing company or a largely web facing company, you should have built a product before you go to raise money. Certainly if you’re spinning silicon or you’re building a giant routing device, you need to raise money before you can go and build a product, but if you’re on the web you should have a product or at least a strong prototype of a product.

The market size is important. Even angel investors look for fairly large markets, and it’s not because they necessarily need the huge exits, it’s because a lot of times they face a downstream funding scenario, which is the they might give you money, you run out of money, then you need VC money and VCs only fund very, very large ideas – things that are going after big markets.

In fact, if I had to point out one overarching failing of incubators and combinators and those kinds of institutions, it’s that too often their entrepreneurs are going after very niche ideas, and that means that when they go out for funding they hit a wall. So go for the biggest idea possible. You can always narrow it down.

So after all that stuff, now comes what I consider the three important components of presenting your company.

The most important is the high-concept pitch. So for example, Venture Hacks, you could say in my words, is game theories applied to venture capital. That small, pithy pitch is very important. I’ll get more into that.

Then comes the elevator pitch – the old line, something you could pitch in an elevator or in a TV commercial.

And finally, the least important is the presentation itself. I spent maybe 30 minutes on this presentation, just as long as it took me to write the stuff down. So I’m reading it for the first time also, or second.

Preparing for your presentation

More important than your presentation is being prepared for your presentation. You have to know your subject cold, inside out. You have to know your company inside out, and the test that I use for that is the whiteboard test, which is: could you get up and pitch your company on a whiteboard without a single slide? If you cannot do that you are not ready to present. You don’t know your own material well enough.

In fact, the first company for which I raised a substantial amount of money, and I confess it was during the bubble, but I raised an $8 million Series A, with not a line of code written.

[audience laughter]

Those were the days. It was all done on a whiteboard. I just got up on a whiteboard with my cofounders and we just drew it out, and we walked out with a commitment for $8 million.

I think the whiteboard pitch is also very impressive because it stands out. Everybody fires up the slides – everybody. If you can just sit down in front of your investor and pull out a sheet of paper and sketch your business out, or if you can do it in front of a whiteboard, I guarantee you’re going to make an impression. Now, of course, if all of you do it then maybe it won’t make as much of an impression, but whichever ones of you can do it, I guarantee it will make an impression.

Public speaking. There’s a lot that’s been said on this topic. It’s actually quite simple. Public speaking is purely about confidence. Confidence comes from knowing your topic.

There is a famous school of public speaking called the Dale Carnegie School. Scott Adams, Warren Buffett – they have a lot of famous graduates. It’s the oldest school of public speaking in the country. You can go to that school; they do a great job, but I’ll tell you everything you need to know about that school. It’s just about confidence building. What they do is get you up there, you pitch, and then everybody in the audience, afterwards, is allowed to give you feedback on your pitch. But they’re only allowed to say positive things. They’re not allowed to criticize you in any way, shape or form. And after 10 sessions of this you think you are so great at public speaking that you are very confident, and you are a good public speaker. So public speaking is purely about confidence. A lot of this stuff applies to relationships, too.

[audience laughter]

Man in audience: So if we have Adeo Ressi, he’s building us up.

Yeah. OK, good. Yeah, Adeo…. that’s not building confidence.

[audience laughter]

Man in audience: We don’t say anything nice about anyone who gets up.

In the spirit of being positive, I’d say Adeo was trying a different strategy.

[audience laughter]

One big mistake I see in a lot of presentations is that the entrepreneur will go on and on about the macro economics of the market that they are operating in. They will spend a lot of time trying to convince you that it’s a $34 billion market instead of a $32 billion market. It doesn’t matter as long as it’s a big market. Forget macro economics. Anybody who reads the news knows that with macro economics you can find anybody who will say anything on the topic.

What matters are the micro economics of your business. You better know what a customer costs to acquire. You better know what they’re worth. You better know how long they’ll last. You better know their churn rate. You better know what their alternatives are. If you understand your customer, your individual customer at a micro economics level, then you will do a very good job of convincing the investor that you know your stuff around the business.

So whenever you’re dealing with stats, numbers or marketing, focus on the micro, not the macro.

What’s in the pitch?

This is an interesting thing that I learned a long time back, and I still can’t do it because I just used the word “uh” a moment ago. Get rid of the words “you know,” “like,” “uh,” and “so” from your vocabulary. They just make you sound less confident. They make you sound like you’re less of a good public speaker. The reason you do these things, the reason you go “uh” and “ah” is because your brain is buying time for you to figure out what to say next. It’s a very common thing. So, just learn to pause. It’s OK to pause. You don’t sound dumb because you pause; it adds more gravitas to the situation. But learn to eliminate these words from your vocabulary. This is probably the single best thing you can do to sound more intelligent and persuasive in your life, so this is beyond just presentation.

And finally, when you’re in doubt about your fundraising and your pitch, when you think your presentation is not up to snuff, don’t work on your presentation. Go and code. Build your product. That’s far more important than actually tweaking your presentation. Anyone who tweaks their presentation repeatedly is wasting their time.

Now, the pitch itself — we will get to the pitch. Uh….

I just used “uh.” See? Even after 10 years of knowing that rule, it’s very hard to get it out of your vocabulary.

Start off by introducing yourself. People should know who they’re speaking to. Tell them a story – this is very important. Don’t just give them a random series of facts; stitch together a narrative. Very often it is a true historical narrative of how you started the company, how you met your cofounder, why you got excited about what you’re doing. Tell a story.

Keep a quick pace. You have about 10 minutes before you lose everybody. Human beings do not have a long attention span. This is true in almost anything. Very often in good pitches I find that you get stuck on the summary slide that’s at the beginning and you never get past that because right there in the summary you’ve pointed out all of the important things for the investor, and then they just go straight into Q&A.

Confess ignorance if you don’t know the answer to something. It’s always OK to say: Well, you know, that’s interesting. I didn’t know that. I’m going to go figure that out.

Now, that shouldn’t be about core and basic things. That should only be about curve balls that they throw at you.

And finally, it’s OK to think out loud and to muse about things. It’s completely OK to say on the one hand this, on the other hand that. You don’t want to project false confidence when you don’t have any.

One of the things you’ll find in this process from a lot of the mentors is that very often we’re going to contradict each other. We’re going to contradict each other because there are no absolute rights and wrongs in this game. If there were it would have been automated a long time ago, and there would be no value to being an entrepreneur. Every situation is unique, has to be figured out on its own merits, so it’s OK to think out loud and to express uncertainty.

Seducing investors

Now we get into the fine art of actually seducing the venture capitalist. A very good friend of mine put this well, He said, “The process of raising venture capital is a process of younger men and women seducing older men and women.”

[audience laughter]

Basically what you’re doing is going to somebody who still fancies themselves an entrepreneur, but no longer has the energy or the time to be an entrepreneur, but they don’t know this. So what they’re doing is projecting into your shoes and saying: Oh yeah, this is great! I can see the younger me. If I wasn’t already above this or beyond this, I would go ahead and do this and I would be so good at it.

So you’re going through that process. The best study on seduction is a book by Robert Cialdini called Influence. If you haven’t read it, I highly recommend it. Cialdini is a psychologist who basically breaks down what he believes are the six ways in which people influence other people, and he goes into it in excruciating detail, but here they are. I’m just going to give you examples as they apply towards fundraising.

Reciprocity might be [where] you do the investor a favor; they want to do you a favor. A classic example is when there are entrepreneurs who, before they even come to me to raise money they send me high-quality deals. And then after I’ve looked at a couple of high-quality deals they’ve sent me I have no choice but to look favorably upon them.

The classic example of reciprocity is the Hari Krishnas. You’re walking around the airport and they hand you a flower. You just got a 10 cent flower and then they try to sell you a $20 copy of the Bhagavad Gita. At this point, reciprocity kicks in, and the next thing you know you’re forking over $20 for a $2 book.

Commitment and consistency bias. People are highly consistent with their past statements, so if your investor has written a blog, and in a blog post they’ve made a certain point, you can always say, well, we agree with your point on so-and-so. It’s sort of locking them into their earlier decision.

Social proof I’ve talked about. It’s very, very, very important. It’s a herd mentality. You build up your advisors and you build up your angels and you build up your VCs.

Authority. If you have people who come from a high stature or a high background, as Rashmi mentioned, some very high name and value advisors like Mark Cuban for example, those people can lend you a lot of proof.

Liking just means that they like you. Do you smile? You don’t have to dress well, but you have to be a likeable person. I think that’s actually pretty important. This one is underplayed. Most investors have more money than time, and so they’re always having to choose; is this someone I’m going to spend time with? And every great investor that I know eventually comes to the same set of conclusions, and those conclusions are: this business is completely random, I don’t know if I’m going to succeed, and so I might as well only spend time with people that I really like because that way, even if it doesn’t work out, I had a good time.

[audience laughter]

And finally, scarcity. You do have to create a sense of scarcity around your business. You have to create a time limit on your fund-raising process. You have to make it clear, especially to lead investors, that there’s not room for two or three, so that they will collude. And, it is only when they feel that the deal is disappearing that people will be incented to move.

The high concept pitch

So let’s get into high-concept pitch. This is the most important piece of your presentation. Hollywood has perfected the art of the high-concept pitch.

So, Sequoia Capital has their version of it that they put on the back of a business card.

And here are the Hollywood examples: jaws in space is Alien, bus with a bomb is Speed, snakes on plane – self explanatory. They’re very, very, very, good at summarizing a very quick pitch.

Here are examples from the entrepreneurial world, from the world we know. I especially like the Sequoia Capital one. I think that one’s pretty clever. It would have taken me a while to come up with that one.

Venture Hacks is a little self explanatory.

YouTube did start off pitching as Flickr for video, which actually did them a bit of a disservice because the Flickr exit was pretty small by comparison.

You basically want to draw quick, short analogies.

The elevator pitch

Elevator pitch is a little longer. Here you just go through some of the other factors that I’ve talked about. It shouldn’t be very long. It should be something that could run in a 60 second TV ad. You could write it down in two paragraphs, or you could explain it in a long elevator ride.

The pieces of it are kind of obvious, and I’ll hand this presentation out later so you don’t have to write all this down. The one piece that I think is pretty important is to be very, very, very concrete. I see a lot of elevator pitches where people say: we are creating an exciting and large new business! Well, that was a worthless sentence. They coded absolutely no information. Be very concrete. Do not use adjectives. Do not use adverbs, they have no value. You should actually talk about things that are specific and unique to you. If you see a single word in there that could apply to any startup in your graduating class other than “the” or “a” or prepositions, remove it.

Elevator pitch example

Here’s an example of an elevator pitch. It’s a little hard to read. It violates all the rules of presentation, but you can go over it later. This is one Nivi and I wrote up of what Marc Andreessen would be like if he were pitching Ning. We have all the components tagged out such as the links to the product, the social proof, talking about the team, et cetera, et cetera. Your experience might vary.

The 10/20/30 rule of PowerPoint

I like Guy Kawasaki‘s rule on the presentation itself, the 10, 20, 30 rule of PowerPoint: no more than 10 slides, no more than 20 minutes, no font smaller than 30 points.

There are exceptions to that when you’re presenting data, when you’re presenting charts and graphs and information, of course you can go a little more data-heavy. In fact, in those cases you probably want to go very dense rather than less dense, but in general you should be talking to your audience, not reading off the slides. You should know a lot more about the business than is prevalent on the slides. And you also have to be watching your audience, and obviously adapting what you’re saying to them. It helps to be a little empathic.

The 12 pieces of the presentation

These are the 12 pieces of what could go in a pitch. I’m just going to talk about what I think are the non-intuitive pieces.

On the team, I think it’s pretty important to brag. I think it’s pretty important to brag about your accomplishments, but you can’t do it for yourself. So, normally you go into a pitch with a cofounder; your cofounder should be talking about how amazing you are; you should be talking about how amazing your cofounder is. That’s great.

When you talk about the problem, people can belabor this one. Just be quick. You should be able to summarize it, again, a high concept pitch.

When you talk about your solution, especially if you’re a web company, you should be able to show it, you shouldn’t be talking about it.

When you’re talking about your technology piece, you should be pointing out that you’re doing something hard. Fundamentally we’re all in tech business. If it’s something that you’re doing that can be very, very easily replicated, or if you need an NDA to protect it, then it’s probably not really hard technology.

When you talk about marketing this is a tough one. A lot of people, when they’re talking about marketing are being very qualitative. I think it’s important to be quantitative. Your marketing slides should be among the heaviest in numbers. All the modern marketing on the web is done through numbers, either SEM where you’re buying traffic, or SEO where you’re doing link building, or even in APIs and cost of customer acquisitions or Facebook virality coefficients and so on, you should be very quantitative in your marketing slide. And I think this is where engineers can excel in marketing. It’s a real opportunity for an engineering-trained marketer that did not exist 5 or 10 years ago.

I’ll talk on sales on business development. Business development is just sales without a quota. It’s a bunch of people sitting around having coffee.

[audience laughter]

You should not have BD people in your company at the start. It’s a huge negative indicator. You should have a sales person, you should have a quota driven, pipeline driven, card carrying, bag carrying sales person who’s willing to fly to the ends of the Earth and get you your 10 customers every quarter.

BD as a role did not used to exist in Silicon Valley until around 1990 when we had to figure out what to do with the problem of that business founder who was now useless in the company because the company had outgrown them, and what do you with them? So you stuck them in BD.

[audience laughter]

It’s not a real role, people.

About the competition, be honest.

Man in audience: That’s like 2/3 of the room.

[audience laughter]

Yeah. Well, sorry. It’s not too late to go to Stanford for that CS class. Don’t mind that. I did BD for a while.

So, on the competition be honest. Those two-by-two matrices are kind of neat, and yes, you’re supposed to be up and to the right, but I don’t take any competition slide seriously unless someone tells me the tradeoffs the competition made. So, it’s not that the competition is worse than you at everything; it’s that they made a different set of tradeoffs. They made a different set of decisions. Be articulate about what those decisions are, especially when you’re competing with big companies. Don’t say the big company can’t do this; it’s better to say the big company won’t do this. They will make a different decision because of their incentives, their motivations, or their legacy structure. I think that’s a much more intellectually honest way of talking about the competition.

Milestones are good; projections are bad. By that I mean that projections are prognosticating about how you’re going to perform in the market. Nobody really knows. Milestones are good because they’re talking about what you’re going to build and who you’re going to hire and what you’re going to do. Milestones are talking about things under your own control. Projections are often talking about things outside of your control, so projections are often not taken seriously. Milestones are taken seriously.

That’s kind of it.

On the financing side, as Rashmi said, you can answer that question wrong by throwing out a valuation when you shouldn’t be. On the other hand, if you have talked to someone who is knowledgeable in the space and you have a good sense of what a valuation is, there are ways to signal it without being too Machiavellian about it. For example, you don’t want to say you have $5 million pre-money because that’s putting a number out there and you’re kind of throwing it in their face, but you can say something like: we’re raising a million bucks and we don’t want to give up more than 20% of the company. So there are subtle ways to signal it. All of this is on Venture Hacks.

Learn from the masters

Finally, if you actually want to do a good presentation or a good pitch or a good explanation, [here are] the two most influential things I’ve seen or read on the topic. First is this guy, Charlie Munger. He’s Warren Buffett’s right-hand-man. He has a little speech that he gave where he dissected Coca-Cola as a business, and he did it in what I would call whiteboard fashion. It’s really worth reading that speech. I have the link to it up there. But it’s fascinating how he digs underneath and shows that he clearly understands the important pieces of the business. After you’ve read that you would write that man a check for any amount that he wanted.

And finally, Lawrence Lessig, who is a professor at Stanford, did a presentation called Free Culture. The whole flash of it is online, and he does kind of this fun stream of consciousness rolling presentation. You can learn almost every trick about presenting by watching that presentation.

AngelList

And next steps: Pitching Hacks is our book on Venture Hacks that is kind of the collated, best-of hits about how to go out and pitch your startup. Just as a freebie, afterwards, Adeo, I can give you a link. You can pass it around and give it to everyone in the company as well as everyone here. It’s a paid product normally, but we’re not really making money off of it. It’s just there because if something doesn’t have value people aren’t going to pay for it.

And then we have Startup List and Angel List in Venture Hacks. When you’re ready to raise money, please feel free to send us your companies. We’re happy to introduce you to any number of angels, assuming you pass muster. Right now we have about 75 angels on the Angel List, including people like Ram Shriram and Ron Conway‘s group and Founder Collective. And what we do is every week select one or two great startups and we send them out to the whole list.

That’s it.

"Thanks Jeff. Where's the demo? If your team isn't pedigreed (founded a company and made money for its investors) and you don't have outstanding traction, the #1 thing you have going for you is a demo. I also think closed betas are generally a bad idea. Who cares if someone sees the site? Hope you don't mind the direct feedback. Send us a demo and we can take it from there."

Unless you’re famous or a big company, why do a closed beta?

But once you’re in the building, pitch a bigger vision. I’ve been talking to a lot of startups that apply to AngelList and most of them don’t have a vision that would separate investors from their money. Here are some great visions:

Facebook isn’t a social network. Facebook “gives people the power to share, making the world more open and connected.”

Plancast isn’t a place to share plans. It’s a “platform for all intent data.”

Sequoia isn’t a VC firm. They’re “the investor and business partner in companies that make up over 10% of NASDAQ’s value.”

Twitter isn’t [insert whatever Twitter is here]. They’re “the best way to share and discover what is happening right now.”

Google isn’t a search engine. They “organize the world’s information and make it universally accessible and useful.”

Vision principles

Vision isn’t a replacement for traction and milestones. But a compelling vision helps differentiate you from the competition (i.e. every other startup pitching that investor). And vision is especially helpful for a startup like DailyBooth where the value proposition isn’t immediately clear (It’s not an online photo booth. It’s your life in pictures.)

Don’t make your vision too abstract. Be concrete like Plancast and Sequoia. Facebook and Twitter can get away with abstraction because everybody already knows what they do.

Vision is aspirational. Google couldn’t claim to organize the world’s information when they wrote their first line of code. But they could aspire to it.

Make sure your vision is crisp, short, and articulate. No ums, ahs, justs, you-knows, or likes. This is hard for everyone, but there’s a solution: talk slower. You say um when your brain needs time to think. So give your brain time to think by slowing down and replacing the ums with silence.

Don’t belabor the vision. Keep it brief — extremely brief. Consider mentioning it once at the beginning of the pitch and once again at the end.

Vision is free. Unlike your product, team, and traction, you can literally make it up.

“The blockbusters are oftentimes the ‘ugly ducklings.’ Cisco is probably the best example in the VC world. Everyone passed except for Sequoia. In the book world, almost everyone passed on JK Rowling.

“It’s just hard to predict the future looking into the rear-view mirror, yet everyone wants to pile onto the brand names [VCs] and they in turn pile into the hot deals in droves pushing up valuations to unsustainable levels.

“It doesn’t help the poor entrepreneur who just wants a little capital to back his dream. He has no clue whether or not it will be another Google, yet in order to raise VC funding he has to make promises that only hucksters can make. The VCs in turn make those same promises to LPs and some LPs actually believe the nonsense. What a shame.”

Emphasis added. Read Ho’s full comment. Also see Simeon Simeonov’s How to raise money without lying to investors.

“You have to understand that you are not competing with an abstract notion of what a good investment is. You are competing with the other teams that saw the investor that week.”

This is why investors often don’t have good reasons why they’re passing. Maybe your company is good, but the competition is simply better. It’s really hard to understand this until 20 companies pitch you in one week. Simeon continues,

“To an investor, it costs about the same in terms of time to make a big or a small investment. Given the same risk/return expectations, they’d prefer the large investment most of the time.”

“Prediction is very difficult, especially if it’s about the future.”

Niels Bohr, Nobel Prize winner

By penalizing entrepreneurs who are humble and honest about how their companies will grow, many investors cause entrepreneurs to over-promise (and later under-deliver) when they’re raising money.

The histories of some of the best-known technology companies demonstrate the power of luck, timing, the mistakes of incumbents, and solid execution.

Execution is the main tool under a startup’s control but it’s often under-valued by investors.

So it’s not surprising that most entrepreneurs come to pitch meetings armed with very precise statements about a very uncertain future and a list of proven strategies guaranteed to make their company successful. While sitting through these pitches, I sometimes wonder which is worse: the entrepreneurs who know they’re spinning tall tales or the ones who “got high on their own supply.”

VCs and entrepreneurs collaborate to lie about the future

Instead of bringing entrepreneurs back down to earth, some investors push them further into orbit. Some VCs ask a seed-stage, pre-product startup for a detailed five-year financial plan. When I was a partner at Polaris Ventures, I saw many of these spreadsheets built “for fundraising purposes.” We didn’t ask for these spreadsheets — entrepreneurs had usually built them after meeting other, less early-stage, investors.

I find the process of planning — and understanding how a founder thinks about a business — educational and valuable. But pushing the exercise to the point of assumptions layered upon assumptions is not just wasteful, but dangerous, because it sets the wrong expectations.

After a few pitches, entrepreneurs realize that the distant future is safer territory than the immediate. It’s easier to boast about 30 must-have features your product will have in three years, than to show the three must-have features in the current prototype. It’s easier to talk about how you’ll recruit world-class CXOs when you’re big and successful, than to show a detailed plan for bringing in an amazing inbound marketing specialist, when everyone on the team is getting paid below-market rates to conserve cash. The examples go on and on.

I’ve co-founded four companies. The two that most quickly and easily raised money did it with nothing but slide decks. Both were funded by Polaris, which has a lot of experience with very early stage investing. We didn’t waste time over-planning the future in those two companies.

And for good reason. Both startups ended up quite different than the fundraising presentations promised — for solid, market-based reasons that were invisible during diligence. Plinky acquired a new product line and became Thing Labs. 8th Ring failed quickly and cheaply, only seven months after funding. The CEO and I decided the execution risk was too high. And, in retrospect, we were right: our only competitor had an unexciting exit a few years later.

Over-promising causes startups to throw away money

Over-promising is not a problem when it comes with over-delivery. But the overwhelming majority of startups fail to meet the promises they’ve made during fundraising. After years of observing this pattern, I’ve come to believe that over-promising can actually cause under-delivery. Entrepreneurs over-promise to raise money easily and set themselves up for pain down the road.

How? The reasons have to do with information signals, expectation setting, and the psychological contracts between entrepreneurs and investors. It’s very hard to pitch one story today and then change it the day the money hits the bank, especially if you’ve drunk the Kool-Aid.

An overly rosy pitch leads to expectations and fateful commitments that downplay the variability of the future. Decisions are made based on assumptions rather than tested hypotheses. The burn goes up earlier. The sales team is hired much too soon. In venture funds, over-promising also spreads from the investing partner to the rest of the partnership. It can also spread from the company to its customers and partners, further extending the reality distortion field.

If you’re Apple and you’ve got Steve, that’s awesome. For everyone else, it can get rough. I saw this play out with one of my companies that was expanding internationally (the reason why the company had raised money). The world was going to be our oyster and, before the reality that our go-to-market strategy wasn’t as effective as everyone had hoped set in, we had burned through a good chunk of capital.

Find investors you don’t have to lie to

How should you choose between being honest (and hearing “no” a lot) vs. amping up the pitch and risking the anti-patterns above? I give two answers to the CEOs I work with at my startup advisory firm FastIgnite.

First, I strongly advise startups to go to venture firms where the decision process is more collaborative and less “salesy.” One of the main reasons a VC will push an entrepreneur to over-promise is his need to sell a deal internally.

Second, pitch investors with a track record of valuing a team’s ability to execute, over any specific strategy or execution plan. While most firms pay lip service to this cliché, few do many investments this way. Here are some examples from my experience in the past few months:

• On the smaller side, Betaworks and First Round Capital get this. Their portfolios and their philosophy show it. I look forward to working with them some day.
• Among VCs, General Catalyst has repeatedly backed companies like Brightcove, m-Qube, and Visible Measures very early — with the understanding that many important questions will have answers only after months of execution. I’m actively partnering with them at FastIgnite.
• Surprisingly, at the very high end, a private equity firm like Warburg Pincus can be a great place for the right early-stage entrepreneur. Last year, a Warburg entrepreneur-in-residence incubated Better Advertising, a company where I’m a co-founder and acting CTO. Better Advertising’s market and business model required a backer with staying power that exceeds most other investors’.

The firms above practice a form of agile investing by (1) not forcing entrepreneurs to over-plan for an uncertain future and (2) following the principle of minimizing wasted effort. Ultimately, it’s the investors’ responsibility to reward honesty with trust and cash. And I think that’s a win-win. I’m looking forward to discussing this with you in the comments.

If you like this post, check out Sim’s blog and his tweets @simeons. And contact me if you’re interested in supporting Venture Hacks. Thanks. – Nivi

– Adam Smith, Founder of Xobni

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