While interning at a Venture Capital Fund focused on Digital Media investments during my MBA days at NYU, I got to see startups pitching for funding and being evaluated by the partners pretty often. And of course, if you have seen all the nine seasons of Shark Tank, you cannot miss the rudimentary mistakes over which Mr. Wonderful or Mr. Cuban tear you apart in pieces. While most of the VCs will be less forgiving verbally, getting a reject after a hard-earned investor meeting is an end result no one looks forward to. And yet, first time entrepreneurs keep making the same mistakes going into their first pitch meeting.
Hopefully, reading this article will leave you a lot wiser and careful before you get another chance in the hallowed board rooms.
1. Not knowing your numbers
You may not be a financial wizard but when you are meeting an investor, you need to have all the business metrics at your finger tips. Why is the year four growth estimated at 66 percent when you have only 43 percent in year three? Not knowing your cost of customer acquisition is unforgivable when you are asking someone to give you a million dollars. Go over the financial projections carefully and understand the rationale behind all your assumptions. Never give an excuse that someone else prepared the projections. It is your startup and you are the one asking for money – take ownership.
2. Undermining the competition or worse yet, saying there is no competition
While you may think that having no competition is comforting to the investor – it is quite the opposite. No competition means that the problem you are trying to solve is not really big enough to attract other players. Always do research on your competitors – direct and indirect. It is okay to say that you do not know deeper details about a particular competitor but ignoring the competition altogether is unforgivable.
3. Underplaying the risks involved
Every business has risks involved. While it is customary for entrepreneurs to be irrationally optimistic about their startup, underplaying the risks only makes you look like a rookie. According to Forbes, 90% of the startups fail. Showing that you understand the hurdles makes you more trustworthy. That is what Christoph Westphal of Sirtris did when he told one of his investors, “Look, the odds that I’m right are less than ten percent. But if I am right, this is really big.”
4. Showing desperation
Urgency is not the same as desperation. Investors understand that raising capital may be paramount for a business especially when cash is running out and most of the principled investors will avoid exploiting such situations. However, if the entrepreneur tries to twist what he is looking for to better suit the investment philosophy of the VC firm, it is a major red flag. Do not start bargaining or change your ask in middle of the pitch — which brings me to the next point, do your homework beforehand.
5. Not doing the homework on the VC firm
Every VC firm has a sweet spot for the size of the deal it prefers based on the size of its current fund. Also, every partner has an inclination towards certain industries and domains. Finding the right fit is almost as critical as in dating. You try to woo, get to know each other and you decide whether you are compatible before signing the contract. Take your time to study the past deals of this firm, their concerns, preferences and pitch only if you fulfill their criteria for investing. It is always a great idea to talk to the founders of their portfolio companies and even try to get a reference from a mutual connection. The brutal truth is that it is rare for any VC to invest in someone who approached through a cold email. Finding the right introduction and researching on the fit will help you avoid any awkward ask and mismatched expectations later on. In the end, you should be selective about who you partner with as well. Doing your due diligence is not only good for you but is admired by the VCs too. It tells them that you will not take reckless decisions down the line.
There are other rookie mistakes that entrepreneurs make all the time — asking someone else to pitch for them, saying this is the last money you will ever need, using unfounded assumptions in the deck, bringing non-founder people to the meeting and so on. But if there is one that that never fails to amuse a VC, it is hearing this from any founder — “this is a very conservative projection.”
Strike that out from your deck and mind. Forever.
Citation:
Tripathi, Nistha. (2018). No Shortcuts. 2018 / 308 pages / Paperback: Rs 395 (9789352808267)/ SAGE Response.
Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of Bangalore Insider.
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