This article is part of Tools of the Trade, a weekly series in which a variety of experts share actionable tips for achieving fast and effective results on everything from productivity to fundraising.
This week, Bob Ackerman explains how entrepreneurs can impress venture capitalists. Ackerman is the founder and managing director of Allegis, an early-stage venture firm that focuses on cybertechnology companies.
Pulling off a successful pitch and actually getting an investment from a venture capital firm is a huge feat. While the pace of venture capital investing remains strong — the second quarter of 2016 marked the 10th consecutive quarter in which VCs invested more than $10 billion — as an entrepreneur, the odds are stacked against you. VCs typically finance only one or two percent of the business plans they see.
Before you begin perfecting your pitch and approaching VC firms, take a moment to determine whether venture capital is the right funding option. VCs typically deploy millions of dollars in a startup and are looking to make several times their investment: 6X to 10X is a good rule of thumb. If your startup doesn’t truly target a huge market with a strong and credible management team, you should consider other sources of funding.
If you decide VC funding is for you, be strategic about the process. Start by doing your homework — target venture firms that are likely to be interested in your startup, based on their existing portfolio. Not every venture firm is right for every entrepreneur.
With that in mind, here are nine steps to get you started and improve your odds for getting a VC to bite.
1. Ask yourself the serious questions. Does the market you’re addressing really warrant attention from a VC? Startups always face lots of barriers to entry; is your product or service differentiated enough to overcome these obstacles? If you do raise venture funds, you will likely have to surrender control of your company to your new boss – i.e., your Board, which will now include VCs. Are you comfortable with that? If not, venture capital funding may not be the best route.
2. Make the intangible, tangible. Do as much as you can before showing up to a pitch: incorporate your company, set up your website and domain name, create business cards and, if possible, create a product prototype. This puts you in a better position to raise capital at a higher valuation, particularly if you have a prototype, than if you simply come with an idea.
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3. Read their minds. There are certain pieces of information VCs will always want to know. Be ready to address the three types of risk all startups face: market, product and execution. They’ll also want to see customer references. Finally, make sure you can address the technical credibility of your product or service.
4. Research which venture firms you should approach. Most have certain types of companies they like to invest in; make sure your company fits within those parameters. After that, research each firm’s reputation among entrepreneurs. If you can, contact entrepreneurs the VCs have previously funded, and ask if they’d work with the firm again. If not, find out why not (a sour ending to a relationship can say a lot). Also ask how the firm responded when things got tough. All of this will help you determine whether the VC firm can truly “add value,” as well as inject money.
Once you’ve answered all these questions, refine your target list to the best “potential fits”. Broadcasting your plans to venture firms who are not a fit is waste or your time and theirs.
5. Know what makes you unique. It’s important that you present yourself as the expert in the room. Make sure your brief “elevator pitch” is top-notch. Time your presentation: 30 minutes for the presentation itself, 10 minutes for a demonstration of your product or service, and 20 minutes to accommodate questions and feedback. Anticipate tough questions. Why does your business need to exist? Why you? Why now? What makes you unique?
6. Get a “warm’ introduction. VCs expect founders to use their social networks to get an introduction at the firm. It demonstrates you know how venture capital works and that you know how to hustle. It also shows us someone we know is willing to go to bat for you. Cold calls go to the bottom of the pile and are never really evaluated.
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7. Meet with as many suitable VC firms as possible and target the right partner. Successful fundraising is largely about persistence. In fact, it’s a lot like dating in quest of a soul mate. Don’t just target a firm, target the “right” partner within the firm that will most likely respond to your pitch. Every partner has different investment interests (which you can usually find in their online bios). Target the one most likely to be interested in your company.
8. Be yourself in the meeting. Resist the urge to don a mask of no-nonsense professionalism. Instead, act natural and be yourself. VCs invest not only in ideas, but in people, too. Investors are adept at spotting superficiality. It’s important to be yourself.
9. Remember the dos and don’ts. Do demonstrate how you can counter the competition. Do know your numbers cold. Do overflow with passion and conviction. Do balance boldness with believability. Do listen and engage. Do be honest about your competition and likely challenges (and know how you will overcome both). Don’t be vague. Don’t exaggerate. Don’t name-drop. Don’t talk too much.
In the end, your goal is simple: Land a second meeting. Good luck.