Editor’s note: Brian Brown advises startups. He has raised hundreds of millions in venture capital and been a co-founder in a number of startups, including Joyent. Prior to startups, he was deputy editor with the Wall Street Journal Europe.
Raising venture funding may have just gotten a little tougher. A major investor recently announced that venture capitalists are “taking on an excessive amount of risk right now – unprecedented since ’99.”
Marc Andreessen recently said that valuations seemed to be getting “warm.” Add to this the public market jitters, with stocks hitting a two year low last month before bouncing back, and there’s a touch of nervousness in the air.
Given this, it is surprising how startup executives often make a tough task more difficult by ignoring some rules of fundraising. Whatever the market, startups should remember the basics, from the earliest contact to the close.
Venture capitalists like to say that the initial contact is best set up through referrals. That’s a great rule for those lunching on yachts, but for everyone else, a little hustle can make a difference. Referral or not, when you do reach out, do the obvious and make sure that both the investor and her firm are interested in your product area. You wouldn’t send a biology textbook to a literary agent, so don’t send a mobile app to a cleantech firm – if there are any left.
In your note, be clear and brief. It never ceases to amaze me how fantastically bright people craft verbose and convoluted outreach emails. Their long notes to investors who receive hundreds, if not thousands, of pitches are really simple pleas: Reject me. The first sentence or two should inform why this deal can’t be ignored. That’s followed by machine-gunned facts, not opinions, which should make it impossible to not want more information.
Now comes the hard part. You need a really good story. By story, I mean a narrative that crisply explains in a way that makes your product real, showing (not telling) why it’s needed and why it’s going to be big.
As the entrepreneur Santosh Jayaram told writer Michael Malone: You need to tell stories “about your product and how it will be used that are so vivid that your potential stakeholders imagine it already exists…” And few people, he added, have this “real talent.” Malone also noted that Steve Jobs knew this when he explained that Apple’s uniqueness derived from this fact: “It’s technology married with liberal arts, married with the humanities, that yields us the result that makes our heart sing.”
Injecting that art into the technology is a tall order. It is made a little trickier when trying to accomplish it through one of man’s most atrocious inventions: the slide deck.
Most investor pitches, like initial emails, lack clarity and brevity. A marketing executive once told me that none of the 72 slides in his investor deck could be cut. If you’re going beyond 15 slides, then it better be about cold fusion – on second thought, you could probably get funding for cold fusion with one slide. Beyond length, decks often suffer from little organizational structure even as titling and transition slides attempt to camouflage this fact.
At the very least, make sure you’ve covered the basics. What is your thing? What problem is it solving? Explain how it is solving that problem. Is it a nice-to-have or a need-to-have? Is the market big enough?
Venture capitalists can only sit on so many boards to get the returns they need for their limited investors. If your market is too small, or if you can’t get enough of it, you’re toast. Think in b’s not m’s. And don’t give the clichéd comment of “if we could just get 1 percent of this market!”
Give a clean and crisp outline of the competition without withholding data and explaining why you are different in the ways that will make your product the obvious choice. You must have a good explanation of the business model and how the executive team is well-suited to execute on the entire vision.
Finally, be careful about running your mouth. There are only two types of pitch statements: Those that move the deal forward and those that create objections. Talking is not selling. With that in mind, be careful whom you invite to the meeting. I’ve seen plenty of self-important types bloviating on their importance, i.e. chewing up valuable time, irritating investors and creating objections.
Leave a little time at the end – your designated timer can kick your foot to shut up — and ask for concerns or objections. Even if the VC is running for the door, nail him down. And follow-up, whether they do or not.
If you really do all that, you may have a shot at raising, even in the unlikely event that another nuclear winter is looming. And if there is tighter money ahead, it’s probably better to raise earlier, rather than later, if it’s an option.