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What Investors Look For: POVs from the other side of the table

 
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Get your story straight as you prepare for a credible Series A pitch 

What’s your startup’s story? That is essentially what venture capitalists want to know from founders at a pitch meeting. Ideally, that story will be a compelling narrative about a team of skilled entrepreneurs inventing the future or devising an innovative approach to an old problem that will result in a happy ending — meaning a profitable exit — for all.

As you prep to tell that story confidently, here’s the first thing you need to keep in mind: Investors have heard some version of it hundreds if not thousands of times. To keep them from nodding off or checking their phones, it’s crucial that you understand how VCs will try to poke holes in your pitch. Examining your own strengths and weaknesses will help to smoothly answer their questions. You also need to understand the VC mindset to recognize how potential investors are likely to view your startup in a larger context.

“I want to get answers as to why should I invest in this company”

“I think that sometimes founders drink their own Kool-Aid a little too much,” says Nancy Pfund, a veteran venture capitalist and managing partner at DBL Partners, an early investor in Tesla, Space X and SolarCity. “For all the benefits of being laser-focused on their company, they risk not having a broad enough lens to view all of the dimensions that their startup will exist in.”

Questions venture capitalists are guaranteed to ask

Your pitch may be your big moment — the meeting when your startup’s future is decided. For VCs, it’s just another day at the office. “I want to get answers as to why should I invest in this company over all the other opportunities I have,” says Pfund.

To answer that question, VCs will start by pressing you on these key areas:

  • What problem is your company solving?
  • What is unique or proprietary about your product or service?
  • How large is the market for it?
  • What is the competitive landscape and how is it evolving?
  • What are the revenue and growth models?
  • Can your team pull it off?

But the devil, as they say, is in the details, and VCs will drill down to determine the depth of your knowledge about the market you aim to capture and your understanding of the obstacles you may face.

Brett Plotzker, co-founder and chief executive of Los Angeles health software startup Patch, initially prepped for VC meetings by sending his deck out to a core group of advisors. The response could be withering but paid off when it came time for the real pitch meeting.

“It's exhausting and temporarily deflating to hear about what pieces of a presentation are flat, parts of the business that need improvement and how far we still have to go,” says Poltzker. “But this feedback is gold. I'd say, if a new founder has an experienced person who will spend the time telling them harsh — and real — truths, they should thank their lucky stars.”

Hard questions VCs may ask

Of course, investors will put money in your startup in the hope of scoring a big return. And so they’re going to be paying close attention to how you plan to use their money and how far it will take you.

“How much money is it going to take you to get to a certain point, where you've proven that you are worth the further investment — that's a big, big issue,” says Pfund. Importantly, Pfund says you need to be able to credibly say what — and how long — it will take to get your startup to the point where someone will invest at a markup in a new round.

VCs will want to know what milestones — particularly those related to growth and revenue — you will hit and when. If your startup has no immediate plan for revenue, say, because product development will take time, you should be ready to list other benchmarks you will achieve in lieu of revenue.

“The hardest questions to answer, at least for me, were the ones that were more process questions that may not have necessarily had correct answers,” says Plotzker. “The hiring and marketing plan was something I had a hard time explaining in the early days.”

He adds that there are two questions from VCs that always made him think hard and choose his answers carefully: Where do you see this business in five years? And what are you looking for in an investor?

“These are very important questions to critically think about and answer honestly when pitching an investor,” he says. “The last thing you want as an entrepreneur is to be disingenuous while seeking a big check  — which you may think you need but may not.”

Lisa Suennen, a longtime Bay Area investor who currently manages the venture fund for law and professional services firm Manatt, says there are two questions that often stump founders: Who is your real competition? And who absolutely needs to have your product?

Similarly, Pfund says founders are often unprepared to answer questions relating to political and regulatory change. “They don’t adequately risk-adjust their view of that,” she says.

VCs invest in people first; persuade them you are worthy

Your story and that of your team will have to figure prominently in any pitch. After all, absent a marketable product or revenue, VCs at this stage are really investing in the people behind any startup’s big idea. So you should be ready to talk about your team’s expertise in management, technology, product, sales and marketing. If there are knowledge and skill gaps, you must have a story about how you will fill them.

"Be open-minded to concerns and criticisms"

How you react to questions — especially the ones that are difficult to answer — will also come under scrutiny. “If you see a very peevish founder that bristles at any of these kinds of questions, that's not the greatest sign,” Pfund says. “It’s not necessarily a deal killer.” But composure and honesty can help make up for the lack of a good answer, she adds.

Suennen, who formerly served as senior managing director for GE Ventures, also says that poise is critical for founders. “They should just relax, figure out how to be, or at least act, confident,” she says. “Take a breath before speaking so they don’t interrupt, be open-minded to concerns and criticisms and try to see it through the investor’s eyes, too.”

Plotzker emphasizes the importance of bringing co-founders who will complement each other to pitch meetings. “Once my co-founder and I developed a cadence that allowed us to highlight our strengths, I believe it resonated more deeply with investors,” he says. “This allowed investors to understand how our interpersonal dynamic worked, which truly translates to what areas of the business we each excel at. After all, a solid co-founder relationship is one of the most important things for a startup’s success.”

VCs are also likely to see how much you’ve thought about the world in which your startup will live. What, if any, do you know about economic or political cycles? Have you thought about things that may be outside your control?

Suennen’s strategy is to “mostly spend time together getting them to tell stories.”

It’s a sales process; make sure you’re pitching the right “buyer”

Even if you think you have all the answers, they won’t matter unless you’re pitching the right VC. So do your homework. Take the time to really understand a firm’s investment thesis and portfolio and make sure your idea, product and scope are a good fit.

That approach paid dividends for Farmers Business Network when its founders pitched DBL Partners on their plan to use big data to increase the efficiency and transparency of agriculture. “We had been wanting to invest in agriculture and, even though they came in with a very early stage business plan, it was so compelling we were hooked,” recalls Pfund.

"Understand this is a sales process"

On the other hand, as an early investor in renewable energy, the firm heard too many undifferentiated pitches from solar startups, even after it made bets in the sector. For a VC, it’s “sometimes it’s just a function of been there, done that,” she says.

For her part, Suennen says she’s seen both great pitches and horrible ones. “The best is when they are confident but humble, get right to the 8-10 most important points and understand this is a sales process, not something else,” she says.

The Takeaway: Picture yourself on the other side of the table

Ultimately, the best way to understand how to prepare for a pitch meeting may be to mentally trade places with your prospective investor and think about what you would want to know. Says Plotzker: “I wish I had given more credit in the early days to VCs for being smart and rational people who had more empathy than I thought for the plight of a startup.

I think it's important to try to put yourself in a VC's shoes — not just the firm but the partner — and understand how a decision gets made, the risks VCs can take and cannot take, what they need and how firm dynamics work.”

You have a brilliant idea for a startup, a solid business plan, maybe even a prototype of a unique product. That’s a great start. But don’t make the mistake of thinking it’s enough to turn heads on Sand Hill Road — let alone convince an investor to bet on you.

Venture capitalists see hundreds, if not thousands, of pitches every year. To net a Series A investment, you are going to have to work hard to make sure your pitch truly stands out and sets you apart. The VCs and entrepreneurs we talked to offer plenty of ideas for how to do that. Much of it boils down to the following: understand the investor mindset.

— JP

This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that we believe to be reliable, but which has not been independently verified by us and, as such, we do not represent that the information is accurate or complete. You should obtain relevant and specific professional advice before making any investment or other decision. Silicon Valley Bank is not responsible for any cost, claim or loss associated with your use of this material.

About the Author

JP Giannini is a vice president in the Early Stage Practice group for SVB. Based in the San Francisco Bay Area, JP’s mission is to help pre–Series A founders transition from the most challenging of times to the most exhilarating of times. He starts by setting them up with state-of-the-art banking services to help get their businesses moving at full speed. But that’s just the beginning: Throughout their journey, he also serves as a relationship builder, connecting his clients to accelerators, influencers, service providers and the legal channels they need to turn big ideas into game-changing realities.

JP joined SVB in 2009 as a client services advisor in Santa Clara; he later served as a relationship advisor in Palo Alto, then as an associate before taking on his current role in 2017. To say that JP “gets” SVB’s culture is an understatement: SVB has been a part of his world since the age of 10, when he started attending company picnics with his grandmother, who worked at the bank.

Outside of work, JP enjoys cheering on the Warriors and 49ers. JP loves spending time outdoors hiking and exploring new places with his wife and dog. In his volunteer time, he strives to help disadvantaged youth get as inspired by future-forward entrepreneurship as he is. Since 2014, he has served as a mentor for BUILD, an organization that encourages experiential learning as a way to ignite the potential of youth in under-resourced communities. He mentors groups from their freshman to senior years as they build a product, organize a team and prepare for their journey to college.

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