January 21, 2014 | 8-minute read (1564 words)
By Marlon Nichols. Originally published on MarlonNichols.com.
As an early-stage venture capital investor with a keen emphasis on the seed stage, I spend a lot of time at startup accelerators working with first-time entrepreneurs. Increasingly, and without fail, at some point during these interactions founders ask variations of the ”how do VCs evaluate pitch meetings” question. First-time entrepreneurs want to better understand the criteria that VCs use to evaluate startups, particularly during the pitch meeting. The quick answer is market, team, business model, projections, and the ask...prioritized in that order of importance.
The most important thing to remember when pitching a prospective venture capital investor is that VCs are, well, VCs, i.e. we are attracted to hugely disruptive companies. A venture investor’s goal is to help startups grow into large and profitable businesses. Ultimately VCs seek to provide our investors (limited partners or corporate sponsor) with a significant return on their investment. So, keep this in mind while introducing a potential investor to your company. Now let’s visit each section of the pitch conversation from the investor’s perspective:
The Market: At the beginning of the conversation VCs want to know the market you plan to address and the size of that market. In other words, what is the problem that your company aims to solve and how large of a pain point is it for your target customers? I am usually excited by companies entering into a space with large market potential, i.e. companies capable of becoming at least a $500 Million business in a relatively short period of time.
You should also articulate whether the intention is to disrupt an existing market or create a net-new sector (often more intriguing to me). In either case take the time to help the investor understand how you arrived at the stated market size and assumptions. In the case where you intend to disrupt an existing space particularly if there is a clear market leader, you must clearly communicate how you intend to steal market share…remember the incumbent didn’t get there by luck and that dethroning them will not be an easy feat.
So be sure to communicate a solid understanding of this fact while educating the VC on your companies compelling value proposition. In most cases I’ll have an opinion on the market prior to the pitch meeting, but will want to gain a better understanding of how you arrived at your market size figure and accompanying assumptions...I want to understand how founders think about the space and whether they truly understand the market.
The Team: Here investors want to understand why your team is uniquely qualified to take this startup forward. Put differently, do you have relevant experience or domain expertise that you bring to the company? A couple of examples:
A CEO with a MS in computer science, a PHD in robotics, and an impressive track record of building products for top companies, who is now building a 3D imaging company is considered a good investment candidate. Similarly a black male that has successfully run business development and lead marketing initiatives for an emerging startup would be considered qualified to launch a technology enabled consumer packaged goods company focused on ethnic minorities. Penetrating ethnic markets requires intimate familiarity with the culture and strong marketing acumen.
Team chemistry is also important...investors will want to know how the founders met, how long they’ve worked together, and how they handle conflict? Generally, I need to believe that the CEO will have the courage and intelligence to successfully lead the company through difficult challenges. There will be many tough turns on the long road to success. The earlier the stage, the more important the team becomes. At the Seed stage I find the team to be more important than the market because the company may very well re-purpose its solution to address a different sector.
Business Model: At this point of the conversation the VC is most concerned about three points.
The potential to address the problem in a unique way that is potentially disruptive to incumbents. I want to learn of technology advancements and/ or process improvements that address a market in a new way or have the potential to flip a market on its head. A recent and popular example is Uber. It leveraged existing technology to re-engineer an old process that is changing the concept of and approach to hired vehicles.
The ability to sustain a competitive advantage. If the differentiation is technology based then I’d like to know whether the IP is protected or will it at least produce a wide lead on the competition. If the differentiation is process based, share whether the process can be protected. If not, then traction (e.g. users for consumer companies, brand name beta customers for enterprise companies, etc.) becomes extremely important. Essentially I need to understand if the company has enough of a head start to create a barrier of entry for fast followers.
The founder’s in-depth knowledge of the business and space. This is usually assessed while discussing key metrics. I listen to see if the entrepreneur focuses on the key elements that determine success, given a particular business model, and whether the plan to drive growth in that area is realistic. I tend to base this on the success and failure of a group of relevant companies. I intentionally did not call out competition as a main section because it is inherit to both the market overview and the business model segments. Others may feel strongly that it is broken out as a separate section, but the important thing is that the founder articulates how exactly the company is different from the competition.
Projections: This portion of the conversation is pretty straightforward and usually is adequately addressed with a fairly detailed profit and Loss statement (P&L). VCs basically want to understand what it will cost the company to generate revenue, how quickly revenues will ramp (the hockey stick), and when the company predicts breaking even. I find P&L’s that contain revenue, cost of sales, gross margin, operating expenses, net profit/ loss, and resource count by type (e.g. engineering, sales, etc.) over a 3 year period most useful.
It’s also very important to disclose your assumptions as this helps investors to further assess whether you truly understand your business. This is the perfect time to share your knowledge of successful companies in your space or those with similar business models, while clearly explaining why your company should be viewed as a comparable (e.g. you are a consumer Internet company that is experiencing user acquisition, monthly actives, retention, etc. similar to facebook or Twitter during a similar stage).
The Ask: This part of the pitch is much more important than most first time founders appreciate. In many cases startups only state how much capital they intend to raise and in a few cases whether they prefer a convertible note or a priced round. From an investor’s perspective this is good information, but it is not enough to help me understand how the founder intends to use the funding nor does it help me to determine if the founder understands the steps necessary to build a real company. I recommend that you also use the time to speak about resources and milestones leading up to the next round of funding…yes you will likely have to raise a few more rounds of funding before achieving a liquidity event. An example:
We intend to raise $2.5 million; the bulk of which will be used to grow our sales and marketing team. Specifically, we intend to hire a VP of sales and two sales reps. Then link the resource estimates to the revenue projections and assumptions shared in the projections section.
It is also helpful to share where you are in terms of achieving your fund raising goal (only firm commitments need be mentioned). If this isn’t your first round of funding, do mention how much capital you’ve previously taken, who from, and in what form. VCs partner on (syndicate) deals more times than not so it’s always great to learn that a firm that I’ve had a good experience with is a participating investor in your company.
Remember that the initial pitch meeting is just the first step on your journey to build a relationship with prospective investors. Like all productive conversations a pitch meeting requires that you speak intelligently about topics that matter to your audience. So, if you thoroughly cover the aforementioned topics and approach the meeting with sincerity, humility, and rigor you will likely find success.
What do you think is the key to success at a pitch meeting? Tell us about it in comments below.
Marlon Nichols is a venture capital investor and Kauffman Fellow at Intel Capital, the global equity investment and M&A division for Intel Corporation. In this role, he sources, conducts due diligence on, invests in, and advises early stage high growth software companies that produce cloud services, internet, and mobile solutions. He also conducts market research, analyzes investment trends, and works with Intel business leaders to help define Intel Capital’s mobility and early stage investment strategies.