Making Your Pitch for VC Funding Means Facing a Very Tough Crowd
Finding an investor is potentially a life or death moment for your company. To survive you must prepare.
Things are looking pretty bleak for startups trying to raise seed and A-round funding. A quick Google search reveals articles by ex-VCs entitled “Why 99.95 Percent Of Entrepreneurs Should Stop Wasting Time Seeking Venture Capital” and reports of an “A-round crunch”.
Even in Silicon Valley, which was previously a global hotspot for VC funding activity, VCs are battening down the hatches to prepare for a storm. Even though Silicon Valley VCs have raised a huge amount of money -- roughly $13 billion in the first quarter of 2016 alone -- very little of this will trickle down to up and coming startups any time soon.
But rather than hanging their heads in defeat and dusting off the personal phonebooks for a number of uncomfortable calls, how can startups be proactive in preparing themselves for a tough VC climate and improve their chances of walking away with a slice of the increasingly small funding pie? I asked industry leaders who work closely with startups in Silicon Valley and further afield for their opinions.
It’s about who you know and who knows you.
Networking is an integral part of building a startup in busy ecosystems like Silicon Valley, but less so in more ‘conservative’ business cultures in Europe. To get their name out there, up-and-coming entrepreneurs in the Bay Area need to jump into the startup community with two feet. Through attending events, speaking at conferences and workshops, mentoring, contributing thought leadership articles, and getting involved in accelerators and incubator programs, startup leaders can widen their networks, and in doing so increase their circle of influence.
However, even in the busiest startup ecosystems, searching for funding for your company is becoming increasingly proactive.
“In the Valley, you need to adopt a ‘village mentality’. This means contributing regularly, making connections, doing favors, getting involved, and generally giving more than you take if you want to be noticed by the right people.” said Dea Wilson, esteemed Silicon Valley networker and founder of Lithograph.
2015 saw the highest level of VC funding since the dot com boom, with more than $27.35 billion invested on private companies in the Bay Area alone. But good things don’t last forever, and funding tapered off over the last three months of the year, suggesting investors were getting cold feet about investing in startups.
Consequently, if you want to sit around and wait for a VC to approach you, you had better have a comfy chair and “The Walking Dead” levels of supplies in your office, as you are going to be there for the long haul. Thanks to the funding dearth, VCs are being bombarded with pitches and decks so it’s up to you to get yours in front of the right people and make your company stand out from the crowd.
“You have to go out and get the investment capital, investments are sold not bought so startups need to pound the pavement and make the sale. Raising capital is probably the hardest part of being a startup,” says Matt Zito, founder of Travel Startup Incubator.
One way to make your pitch stand out from the towering pile is by leaning on personal contacts to get a "warm introduction," a recommendation from a respected and well-known contact, a VC, CEO or angel investor. This is a benefit of working as part of an accelerator program, which are normally founded and coordinated by veteran entrepreneurs, who over the years are likely to have amassed a "Golden Phonebook" of valuable VC contacts. According to CBS Insights, approximately 35 percent of startups who go through accelerators raise funding when they "graduate."
If you have friends in high places, use them. Likewise if you have contacts at companies which have raised funding from VCs, and therefore have ‘an in’ with the inner workings of a firm, then don’t be shy asking about help to get your foot in the door. “Fundraising is 100% who you know,” continues Matt Zito.
Be prepared for more than bean counting.
Since the startup explosion, investors have had to update their toolbox to assess the real strength of new companies. In the past investors were extremely focused on hard financials. However, this all changed thanks to the unpredictability of the startup market -- in which we see previously unheard of companies which still aren’t profitable being valued as Unicorns and the lifespan of Fortune 500 companies plummeting over the last 50 years. Nowadays, to deal with the new landscape, investors are looking past the books, and looking at ambition and potential.
Jonathan Greechan, co-founder of Founder Institute says: “Everyone knows that projections for startups are impossible, and good investors will glaze over financial projections and instead grill you on the reasoning and thought process behind them. This is usually just a way for them to uncover assumptions you are making in the business that may have not been discussed.”
That said, don’t forget who you are talking to. While they might not be focused on solely numbers anymore, it’s important to have your financial ducks in a row, with past records and accurate future predictions to hand. Not being full prepared is a funding death sentence, and don’t expect a late reprieve.
Jonathan Greechan argues that it is important to do your homework before you pitch to or meet with investors, and check their background and what makes them tick:
“Each investor has certain things that they look for and certain things that they’re skeptical about, and a good entrepreneur will get that information before the pitch - whether through preliminary chats, mutual contacts, or online searches. Each pitch needs to be crafted for an audience of one or several, in the case of a partner meeting.”
Sell your vision and mission.
The startup ecosystem in general is becoming cluttered, with hundreds of thousands of ‘revolutionary’ new startups emerging each year. Raising funding is a natural step in the process of scaling, so let’s presume that 99 percent of these new companies all want the same funding that you do.
Thanks to the saturated market, the chances of someone pitching a similar product or service to yours is high. As a result, founders need to differentiate themselves from the competition, and show investors they can become something huge by expressing their company’s big mission and vision.
This is where you see your company in five years and the massive difference that you are going to make to the world.
A clear and ambitious vision can get you the meeting with investors to begin with, and also help you seal the deal when the time comes.
“Investors often gush about vision, and for good reason.” says Jonathan Greechan. “VCs exist to find companies that can yield 10X to 100X returns on investment. They’re not looking for penny-pinchers who can squeeze out and extra ten percent on a P&L - they’re looking for visionaries who can see a market opportunity before anyone else. That usually boils down to a big and well articulated vision.”
Nabyl Charania founder of co-working accelerator Rokk3r Labs argues that finding a good middle ground between hard data and ambition is important:
“From a bird’s-eye view, there is a definite balance between the foundational thesis of the startup and traditional KPIs such as revenue. It’s like a well choreographed dance with many movements that impact the audience in different ways, but are all part of the overall performance. Startups need to promote their massive transformative purpose, their higher, aspirational purpose that connects everyone at the company to a world-changing end-goal, that drives a global cultural phenomenon.”
Push your team.
In the same way as investors are commonly looking past products at company’s vision and big missions, they are also looking under the hood at the team which drives the company.
With rumors of a talent shortage emerging, team members have become a commodity. Acqui-hiring became a popular tactic for Silicon Valley’s biggest giants especially Yahoo, but has tapered off since the end of 2015. But if tech giants are on the lookout for the best staff out there, don’t think investors aren’t too.
“Interestingly enough, most investors focus on the team more than anything. They bet on the jockey, not the horse,” says Dea Wilson. “They know that the idea might change, the market conditions might turn, etc. but the team is the common denominator of all startups. A strong team will be able to navigate a tough economic environment, pivot the idea when needed, and get the revenue going once they found product/market fit.”
The reality is for most startups, it’s not quite as simple as taking it on the chin and accepting they have little chance of raising funding. For most growing companies, seed funding is essential to get turn their great ideas into realities, and gather a team which can push their product forward. A-round funding is essential to scale and make their product or service global.Rather than being downhearted, startups need to be energized by the huge challenge facing them. Finding an investor is potentially a life or death moment for your company, so let the adrenaline motivate your team. While your product and traction is the first thing which investor will look at, your pitch needs to sell your team and your dream too. Show investors and the wider startup community that you are 100 percent invested in your own big mission, and others may consider investing in it too.
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