by Ed Zimmerman with Jordan Salcito*
[see disclosure note below]
What — aside from a deck and an audacious vision -- do venture capital investors want from founders in a pitch meeting? And what should a founder do beforehand to really nail a pitch?
These two questions emerged from my conversation with my friend Jordan Salcito about startups and what makes a pitch successful. While Jordan is an accomplished sommelier and very well-respected in her field (see biographical information at the end of this column), she isn’t entrenched in the startup world. Increasingly, though, she's been surrounded by more and more people who are, and has begun giving thought to new entrepreneurial ideas. After she and I discussed the above two questions, I reached out to several friends who fund first-time entrepreneurs and endlessly assess pitches from startups seeking capital. This column summarizes what the experts told us.
Before Reaching Out
Jenny Lee is a Managing Partner of GGV Capital, where she’s been a venture investor for more than a decade. Forbes ranked Jenny #10 on the 2015 Midas List of the top 100 venture capital investors in the world, the first woman in the top 10 in the history of the list. She encourages founders to understand the “fit between the company, their sector, the VC firm and the partner in charge…”
Understanding a startup’s fit with the fund (and the specific person at the fund the startup is targeting) will avoid wasting everyone’s time. For instance, a fund that solely invests in enterprise software is unlikely to invest in an ecommerce business. Similarly, many funds articulate a stage focus. Seed stage startups are unlikely to make a good impression or achieve a fruitful outcome by reaching out to a billion dollar fund that does not make seed stage investments. I’ve also been surprised when startups seek capital from a seed fund for their later stage rounds. As a friend at First Round Capital once told me after I’d been a bit too quick to forward them a pitch deck from a company that had already raised two rounds of venture funding, 'Ed, our name is First Round — but thanks anyway!’
Geography is another easy consideration — GGV, for instance, is a fund based in the US and China, and does not want to spend time reviewing business plans from seed stage startups in London. Of course funds do make exceptions, but it makes sense to understand the focus and, if you’re seeking an exception, to have a very specific and clearly articulated basis to compel them to understand why your startup merits that exception.
Fit with the specific investor is also important. Jenny Lee’s first job out of college was as a drone engineer. Her online bio specifies that Jenny focuses on “Consumer Internet and SAAS [Software as a Service] companies especially those in the Mobile Social, IoT [Internet of Things], Finance and Education sectors.” Based on that statement alone, startups ought to be able to self-qualify or disqualify. Looking at the investor’s recent portfolio should also be very instructive in assessing fit. For instance, Jenny’s bio also lists her recent investments as well as the four companies she helped get to an IPO.
Stephanie Palmeri, of SoftTechVC in the San Francisco Bay area, similarly emphasizes the extent to which a startup falls within the fund’s mandate: “While I like to scan a pitch deck for overall fit with our fund prior to setting up a first meeting — this prevents me from wasting a founder’s time if the market or the target raise is not a match — I generally avoid digging deep into a deck before meeting with a
founder.” Stephanie’s fund invests in seed and early stage consumer and enterprise companies and scored a big win with FitBit, for instance. If I were approaching her fund, my cover email - before asking her to click into the pitch deck - would explain why it is (or isn't) a fit. For instance, the subject line of the email might say “New York-based seed stage Internet of Things startup,” which may well impact her level of enthusiasm for continuing to read. In this case, I am banking on the facts that Stephanie lived in New York City, is an alum of Columbia Business School and has invested in NYC businesses in her current fund. It helps, too, that Softech achieved real success in IoT investments like FitBit. The subject line is so specific that it may be enough to prompt her to click into the attached deck, or in some cases to dissuade her from doing so. If that seems like a bad idea, bear with me: the goal isn’t to get all investors to read the deck, it’s to get the right investors to read the deck. For more on how to approach investors or ask for an introduction to investors, I authored this column.
In Summary: Before Reaching Out
- Do your homework on the VC firm, the person at that firm you’re targeting, and anyone else you expect to encounter during your pitch.
- Pitch VC firms or angels with whom you / your company are a viable fit.
- Connect the dots in your cover email; give the right people reason to click on your deck.
The Meeting
For Jessica Nilsson of NorthZoneVC, the initial meeting between a startup’s founding team and a venture investor is “about getting to know the founders.” Jessica wants the founders to "show their
personality and explain what they’ve done before.” She hopes that first meeting will help answer the question: “are these entrepreneurs that I believe in?” Jessica understands what it’s like to be on the other side of the table, because prior to joining NorthZone she co-founded HelloFresh, the Berlin-based global recipe kit delivery service, which has raised almost $280 million of venture capital (according to Crunchbase).
Jenny Lee cautions entrepreneurs against the notion that they will be able to get through their deck in the originally intended flow. These meetings are dynamic. "Listen carefully to the questions being asked and morph the conversation accordingly,” she urges. This resonates with Stephanie Palmeri who respects pitch decks because they “provide structure, help investors visualize data, and keep the founder in the driver’s seat,” yet Stephanie needs “to see that a founder can stray from the planned presentation and engage in a deeper discussion that demonstrates their unique knowledge of the market and the business.”
Angels are perhaps a bit different. On one end of the spectrum are angels who approximate venture investors and like to hear a very professional pitch. At the other end are angels who will invest without sitting through the pitch. I’m far closer to that latter end of the spectrum. As I’ve previously written, I’m generally investing in founders I know well because I’ve learned that a pre-existing relationship is generally more effective (for me) than an hour-long pitch. My investment diligence has been the year or years during which I’ve known the particular founder. This is especially true because so often the original pre-launch deck differs materially from what the business looks like a year or two later. In my personal portfolio, the companies LiveIntent, Appnexus, Yext and Flatiron Health bear this out as each of these startups looked pretty different on the day I invested than they did a year or two later. In each of those instances, my investment thesis was my firm belief in the founder(s).
Just as Jenny Lee suggested that founders conduct diligence on venture investors before the meeting, it is very helpful if the founders have some understanding of the type of angel they’re pitching. It’s often easier to do one's homework on a venture investor before a pitch meeting than it is to learn about an angel investor prior to speaking with her. Diving right into the pitch, however, is usually a misstep. Instead, founders should ask a few questions to calibrate at the beginning of the meeting. Founders can easily start that calibration simply by asking ‘how much time have you allotted for our discussion today?’ Founders should also consider posing this straightforward but helpful initial question: ‘is there a particular part of the presentation that interests you or should we just take it from the top?’
Finally, founders should have some sense of the backgrounds of the angels, as that knowledge definitely can reshape the founder’s pitch.
I once judged a business plan competition at Princeton University in which the entrepreneurs had created a nanotechnology solution for monitoring glucose levels in patients with diabetes. They launched into their pitch. I stopped them about two minutes in and advised them to ask the two other judges for their backgrounds, and then to completely ignore me. The judge to my right was a PhD/MD, a partner at a life sciences venture fund, and had done research in nanotechnology. The other judge was the CEO of a publicly traded diabetes monitoring company. Newly armed with that 60 seconds of biographical data, the founders completely altered the pitch in real time. For so technical a product, I was surprised that the founders hadn’t first sought to understand the level of technical knowledge the judges brought to the conversation. But I’ve since learned that some founders view pitches as a monologue rather than a conversation. The pitch should always be a dialogue, never a monologue.
In Summary: During the Meeting
- Research the VCs and/or Angels you’re pitching.
- Be prepared for the conversation to take turns; if the conversation goes well, you won’t get to drive the meeting.
- Successful pitches are dialogues, not monologues. Tailor accordingly.
- Be confident, but be open to advice.
Must Haves
Founders need to show up prepared to discuss a) the founding team’s background, b) the market (which should either be both large and rapidly growing, or completely new, vast and untapped), c) the startup’s value proposition and d) the competition the startup will confront. Jessica Nilsson believes “people fail in a pitch most often” in their explanation of the startup’s value proposition. Founders must clearly explain the problem they are solving and the startup’s long-term goal. As Stephanie Palmeri explained, “there are few truly unique ideas out there — what makes an opportunity stand out at the seed stage is a team uniquely situated to tackle the problem at hand” in a way that gives the team a competitive advantage.
On a more controversial note, founders often worry about what financial analysis they will need. More specifically, founders often ask whether to show financial projections. On December 9th, we had Delaware Governor Jack Markell, visit us at FirstGrowthVC to talk about leadership and apply it to tech startups. Governor Markell is among the few elected officials with true startup credentials, as he was among the earliest employees of Nextel and, as a member of the senior executive ranks there, helped lead it from a startup with barely more than a dozen employees to a post-IPO company with well over 3,000 employees. During my Q&A session with the Governor, he told our gathering of founders and investors that Nextel’s founder had difficulty obtaining initial funding because he had a great business plan that was completely devoid of projections or any other financial data. At that time, financial information was desperately necessary for a telecom startup seeking early funding. Once Nextel’s founder enlisted help to generate financial projections, the investment community changed its receptivity to the plan and the rest is telecom history. I encourage founders to have some financial data but, in my experience, it isn’t the most important part of the plan for many startups. I’d rather, as Jessica Nilsson urged, ensure that the founders have a clear understanding of their business model and how it can scale.
I’ve heard many investors say that they have an allergic reaction to founders who believe that they have no competition. If you don’t think you have competitors, you’re probably viewing the market too narrowly. Often the competition is a customer’s own internal team. When the market is totally novel (uncharted territory, like that which Twitter confronted when it launched), then perhaps there’s no real competition, but that’s more the exception. If the founding team’s pitch deck doesn’t show competitors, think harder before deciding to go with a blank slide for that part of the deck.
For startups that already have traction, or a product or service in market, metrics matter. There’s an old saying in venture capital: there’s nothing like numbers to muck up a good story! While Jessica Nilsson wants her initial meeting to be “more about getting to know the founders,” she also cautions that “[i]f you have real customers I will also start asking you about more metrics (CAC, CLVs, Cohorts, etc.)” If those terms are new to you, “CAC” is “customer acquisition cost” and “CLVs” means “customer lifetime value” (sometimes also abbreviated as “CLTV”). For more on these acronyms and how startups and venture investors view them, visit the CBInsight blog’s recent post for an explanation in words and graphs and the Insight Venture Partners’ “Periodic Table of Online Marketplaces,” for a graphic explanation.
Agreeing with Jessica Nilsson, Stephanie Palmeri also finds data very important, as she advises “if the product is live, data about the product’s traction (even if it is a small pilot) is something I expect to discuss.” Stephanie wants founders of a pre-launch or pre-beta product or app to show her a prototype. For founders with a live product, she expects a demo and a robust discussion about the data that demonstrates traction. “Sharing strong momentum with users or customers is a sure way to give your deal momentum at a firm,” she notes. The longer the product has been in the market, the more the data will matter, advises Nilsson. That raises the issue of whether you want to approach investors pre-launch or post-launch (or post-beta). Investors are entitled to draw an inference that you lack confidence in your launch if you have the financial means to launch but are trying to obtain funding before the launch. Presumably a successful launch will increase the startup’s value. If you can’t launch without funding, it can be helpful to explain why not.
In Summary: Must Haves
- A compelling narrative about your company’s founders and their backstory.
- Fluency in discussing the market (its incredible size or untapped potential).
- Your company’s value proposition.
- A realistic assessment of your competitive landscape.
- A clear breakdown of your business model and its scalability.
- A compelling reason why you need funding at this stage.
- If your product has launched, an understanding of your sales and conversion metrics.
Of course, if you launch and the data indicates that customers don’t like your startup’s offering, a great pitch deck will only carry you so far!
[Disclosure Note: Ed Zimmerman is an investor in and/or advisor to and/or, through his law firm, Lowenstein Sandler LLP, serves as outside counsel from time to time to the following firms referenced in this column: GGV Capital, NorthZoneVC, First Round Capital, Insight Venture Partners, LiveIntent, Appnexus, Yext, Flatiron Health and CB Insights. Ed is also a customer of restaurants in which Jordan Salcito is directly or indirectly involved and has bought her wines. Ed also teaches at Columbia Business School.]
*Jordan Salcito is a Master Sommelier Candidate, Beverage Director of Momofuku, and founder of Bellus Wines.
