Pitching Posts

If you’re a passionate entrepreneur, you can often see the vast potential for your product. In your head, the possibilities of the future branch out, with infinite forks and potential. When pitching to investors, you’ve learned to define your market as broadly as possible while remaining credible. So, it’s not surprising that you’re disappointed when investors don’t disclose a conflict, and you steer clear of investors who might already have an investment in the same space — dating, social gaming, compliance, security, etc.

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.

Last week, I tweeted some thoughts for first-time entrepreneurs raising money and asked Naval, Chris Dixon, and Mark Suster to chime in. Here are the results.


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.

Naval here. Adeo Ressi recently invited me to speak at the Silicon Valley Founder Institute. The topic was how to present to investors.

[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


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

[

I just replied to a startup that applied to AngelList with a website behind a closed beta wall:

"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?

High concept pitches are great for getting your foot in the door (“It’s Friendster… for dogs!”).

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.

Ho Nam (@honam):

“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.

Simeon Simeonov:

“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.”

Thanks to FastIgnite, a startup advisory firm, for sponsoring Venture Hacks this month. This post is by Simeon Simeonov, the firm’s founder and CEO (and formerly a partner at Polaris Ventures). If you like it, check out Sim’s blog and tweets @simeons. – Nivi

“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

“Your first stop if raising money!”

– Adam Smith, Founder of Xobni

The rumors are true. You can buy Pitching Hacks in paperback, for $19. And you can still buy the good old-fashioned PDF for $9. Get them here.

So far, we’ve sold about 700 copies of Pitching Hacks and gotten great reviews. But we want to sell even more.

So we’re selling it in paperback. And we’ve added a short new section on Pitching Resources, with links to great blog posts we wish we had written. And we’re giving away the first two chapters of the book for free. You can find the new Pitching Resources section and free chapters here:

Link: Pitching Hacks Preview (pdf)

Buy Pitching Hacks here.