The Take It or Leave It Choice
The market for startup financing is a very lopsided one. For every VC pitch meeting that results in an investment, there are 399 others that typically conclude with the dreaded words, “Thanks for coming in, we’ll get back to you if we’re interested.” Given those odds, delivering a successful pitch means that virtually everything needs to come together in perfect harmony, and any one misstep, no matter how small, can derail the process.
As such, there are hundreds of ways to turn off a potential investor. But four of the quickest ways to lose my interest are:
Asking me to sign a Non-Disclosure Agreement before the pitch Because there is a very strong likelihood that I will hear many pitches from startups with similar business plans, there is simply no way that as an investor I can afford to sign an NDA, because it would cause endless complications if I end up investing in a competitive venture. I learned this lesson the hard way as an entrepreneur, when I pitched my first startup to a major VC firm during the dot-com boom. I started out by giving the partner an NDA to sign. When he politely declined, I politely got up and left, which is something I came to regret for a long time afterward.
Showing signs of desperation This one is excruciatingly painful for everyone involved. People become angels or venture capitalists because they admire entrepreneurs and want to devote their professional careers to supporting them. That is why it is so hard when a founder comes in with a tragic story about how he or she has spent his last penny on a so-far-fruitless venture, and desperately needs my investment in order to avoid bankruptcy. My heart goes out to him, but my head is screaming that I should run in the other direction as fast as I can.
Pitching the product and details, rather than the business and Big Picture One of the most frequent mistakes I see in startup pitches is for a founder to wax poetic for fifteen minutes on how revolutionary and wonderful his or her product is, and then completely miss explaining how and why this great product will mean a great return on my investment in the business. When I hear a business pitch I take note of the product, but then spend most of my time considering the business model, target customers, marketing approach, future extensions and defensibility of the business itself. I am also listening for big, sweeping visions that paint a picture of inevitable success for the company, regardless of specifics.
Stating a valuation without having a committed investor Startup financing from an investor’s perspective comes in one of two flavors: fixed or negotiable. These are very, very different things. If a company does not yet have an investor who has presented it with a term sheet, the relationship with every prospective investor is an analog discussion of terms and valuation. That means if I like the company and want to be involved, there probably is some valuation number at which I would be willing to write a check. Then our goal is to come to a meeting of the minds such that both founder and investor are comfortable with the resulting number.
However, if another investor has already completed this dance, and both sides have agreed on terms and valuation (in the form of a signed term sheet), then the potential for a relationship with company suddenly turns binary. I am presented with a “take it or leave it” choice. That means if an entrepreneur makes up a valuation number and puts it on the table as a given, there is an excellent chance that I simply won’t negotiate. I will assume that it is a hard number that can’t be changed, and if it doesn’t fit with my assessment of the company, I’ll simply walk away. There is nothing wrong with this on either of our parts, but it is critically important that both the entrepreneur and investor understand the ramifications of a nominally fixed valuation.
In contrast to all of the above, the perfect elevator pitch is a short, sweet, compelling teaser to get me to invite you to my office for a full presentation. It will be 30 to 60 seconds long, clear and to the point. Start by explaining in one sentence exactly what the company does and why you are the right team to do it — it will make clear why you have some special advantage. Then paint a big, inevitable picture of the company’s success. That’s a lot to ask for half a dozen sentences, but I’ll be happy to listen to those all day long.
*Original post can be found on Wall Street Journal Blogs @ http://blogs.wsj.com/accelerators/2013/07/08/david-s-rose-the-take-it-or-leave-it-choice/ *
Written by David S. Rose
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