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Venture Capital and
Investing in Business Start-Ups
Venture Capital - The
First Meeting
The Acceleration Lane
I do a lot of work with
companies seeking financing. Whether it is a first round or
follow-on, funding for further research and development or
marketing and branding efforts, equity or debt financing, a
start-up or mid-market company or financing to prepare for
acquisition by a strategic buyer, there are strategies which
can significantly improve the prospects for success. In this
column I want to focus on preparations for and managing the
initial meeting with a venture capitalist.
First meetings with venture
capitalists present multiple challenges. Many of these
challenges are best addressed with guidance from an
experienced professional. There is simply no substitute for
having been through the process successfully multiple times.
Over the years, and as a result of working with a large number
of companies, I have developed a ‘first meeting’ checklist.
Here are a few of the items on it:
1. Pre-screen the funds you
approach: Focus on funds which understand and have a
preference for investing in your space and your phase (seed,
early-stage, etc.). Most venture capitalists make their list
of portfolio companies available on their website. That makes
it easy to identify those who prefer to invest in your stage,
industry and technology. But identifying the fund is not
enough. You need to identify the partner who will be the most
interested in your presentation.
2. The rifle is better than
the shotgun: Avoid ‘wallpapering the world’. It is certainly a
good idea to approach a small number of potential investors at
the same time. But you do not want to give the impression that
you are shopping your company on the street. Also, be careful
not to get yourself into an ‘auction’ frame of mind before you
actually have more than one serious bidder.
3. Avoid presenting to
investors who lack a general understanding of your space: I
have sat in on presentations by companies whose value
proposition was so alien to the focus of the venture fund that
I began to wonder if the presenters had not entered the wrong
door along the hallway and should be presenting to one of the
other venture funds in the building. If your value proposition
and technologies are completely foreign to the fund’s
investment strategy the meeting will be over early on.
4. Be clear on why you want
to raise venture capital: This is one of those ‘of course’
questions that sometime slips through the cracks. You should
be able to communicate not only why you are seeking venture
financing but also why this particular form of financing
rather than any of a wide range of options is most suitable.
Your explanation needs to be reasonable and clearly well
thought out. You also must make a strong case for the amount
you are seeking and how you need it funded (i.e.: if you need
it all up front or are willing to take it in tranches based on
milestones).
5. Red-team your presentation
mercilessly: One of the most important contributions that I
make is through arranging red-teaming sessions. I bring
together individuals with expertise in the technology and
combine them with experienced venture fund managers. The
client is instructed to approach these meetings as if they
were a session with venture fund principals. As practice
sessions, these meetings go a long way to refine and
streamline the presentation and can radically improve the
probabilities of success.
6. Highlight your relevant
past experience: Many presenters overlook the fact that their
credibility is as much on the line during this initial meeting
as the viability of the product/ service offering. Yes, the
venture capitalist is highly interested in your value
proposition. Yes, they will focus on the potential for
monetizing that value proposition. But they will also be
deciding whether you and your team are capable of
implementing. One way to help them do this is to talk about
why you’re past experience and accomplishments make you a good
candidate to exploit the opportunity.
7. Be on time: An old
girlfriend used to say that there were two kinds of guys she
just could not stand – those that showed up early and eager
and those that were late and useless. Plan the logistics
carefully and make sure that you reliably arrive at the site
of the meeting five to ten minutes before hand. Be sure that
your team is assembled before hand – and make sure that
somebody puts a leash on the one team member who is always
late.
The insult of wasting
somebody’s time is one of the worst that you can manage. It
will become clear immediately to the people who you are
meeting that you don’t respect them or their time. How likely
are you to succeed when starting off with such an unnecessary
liability?
8. Manage the meeting: Time
management is critical in the first session. Keep the first
1/3 of the meeting focused on your presentation. That means
that questions which might come up should be postponed to
after the end of the presentation if at all possible. If you
are successful in doing this, you will end up with the second
1/3 of the meeting for discussions.
Now I know what you’re
thinking - that’s only 2/3 - what happened to the other 1/3?
Well take it from someone who has been through a lot of these
sessions, if you’re meeting is scheduled for an hour it will
most likely, after adjustments for people being late, cell
phones ringing, interruptions of an amazing variety and the
general conspiracy against order, turn out to be more like
forty minutes. Manage the meeting and your time under the
assumption that that’s all the time that you are going to
have. If the Fates don’t conspire against you, the extra
twenty minutes will be pure bonus.
If you are not well prepared
and focused, the venture capitalist will get impatient and
take over the pace of the meeting. Many VCs will deliberately
jump in with questions and requests which may be on Slide 12,
while you are still presenting Slide 4. Here is a great tip:
structure the presentation so that all the most important
information is in the first few slides.
In an important way, clock
management is a test of your ability to manage a process under
pressure. One VC recently told me “In our case, if we schedule
a meeting for 90 minutes, we terminate it after 90 minutes,
even if the entrepreneur is in the middle of a PowerPoint
slide.”
9. Layout your value
proposition at the outset: You need to present your value
proposition within the first five minutes of the meeting. By
that I mean a presentation which highlights the problems that
the company’s solutions are designed to address, the
advantages of those solutions over competing ones, the
clientele for which these advantages will be important and a
clear statement of how you intend to monetize the value
proposition – all within the first five minutes.
I have watched entrepreneurs
spend fifteen or twenty minutes getting ready to deliver their
value proposition punch line. The problem with this approach
is that they lost the attention of their audience long before
they got to the most important part of the presentation. One
VC suggested the following: “The way I like to see this
presented is: Slide 2 is “The Pain” and Slide 3 is “The Cure.”
10. Manage the level of
detail: Remember that the initial meeting is designed to give
the venture capitalist a first brush description of your
company and team. Approach the meeting as an executive summary
of the chapters that may follow – or as a first paragraph
designed to draw the readers in and make them want to read on.
You need to hit the high points and emphasize your strengths –
outline your intended responses to important challenges. Avoid
the ‘And now for the first of 45 slides …” approach – keep it
down to ten or twelve summary level slides. Brief the venture
capitalist; don’t bury them in an avalanche of detail.
11. But don’t oversimplify
your value proposition: Solutions to complex problems are most
often complex. If this is the case with your company, it is
important to communicate your understanding of that complexity
and how your solutions will reduce its effects to manageable
levels. Red–teaming with an outside group of experts can be
particularly helpful in refining this type of presentation.
For a first meeting, there is
a delicate balance between over-simplification on the one hand
and drowning the audience in a sea of details on the other.
You need to design your presentation to adequately describe
levels of complexity while making sure that the presentation
can still be completed (and comprehended) within the time
available. It is always good to leave them wanting more.
12. Turn off your cell phone:
This is one of those prescriptions that one would think would
be unnecessary. But I have sat through too many luncheon
events with a moderator who begins by asking everybody to turn
off their phone only to have the keynote speaker interrupted
mid-sentence by some moron’s custom ring tones. Do yourself a
favor. Before you go into the meeting turn off your cell
phone. If you can’t trust yourself to do that, leave it in the
car. According to one VC, “Personally, I tune out totally the
entrepreneur whose phone has rung. I may miss some good deals
this way, but I don’t want to be involved with anyone who has
no respect for me.”
13. Situational understanding
is a key: This is one of the areas where working with a very
experienced advocate can yield huge benefits. Situational
dynamics is the awareness of what is going on around you - and
an initial meeting with a venture capitalist is indeed a
complex process. It is important that you understand what is
going on within the frame of reference of the venture
capitalist. Make sure that you understand what is at stake at
each stage, the most likely outcomes, which of them will lead
to a next step and what that next step is likely to be.
14. It is their process that
you are involved in not yours: One of the toughest things to
remember is that you are a guest in the venture capitalist’s
house (even if the presentation takes place in your conference
room) and engaged in a ritual process which has been designed
and is enforced by the occupant. Many entrepreneurs get used
to getting their own way by force of will. Some believe that a
forceful presentation coupled with an insistence on a positive
result will succeed. Both of these strategies are inherently
flawed. The decision-making process within a venture fund is
collegiate and often highly ritualized and, although the
individual you are meeting with may have a major say,
investment decisions are generally made after a collaborative
process – most of which occurs outside of the experience of
the entrepreneur.
15. Every step of the way
with a VC has as its primary goal to get to the next step:
Many entrepreneurs enter an initial meeting with a burning
desire to get through the process and be funded as soon as
possible. As a result they try to provide the entire range of
diligence requirements within the boundaries of one meeting.
The dominant purpose of an initial meeting with a venture
capitalist is to decide whether there is going to be a second
meeting. In order to decide this, the VC is going to need
enough basic information to decide whether to commit resources
to doing further diligence. In fact, I consistently tell
clients that the only thing you should be looking for as a
result of the initial meeting is a request for next meeting.
Forget about the platitudes and how nice this person is being
to you – how enthralled they seem with your technologies. The
only thing that matters is that they want to see you again.
16. Be prepared for the
obvious questions: One of the great benefits of red-teaming is
that these questions are surfaced and dealt with during these
practice sessions. I can’t tell you how many times I have sat
in on presentations that have gone wrong very quickly simply
because the presenters did not have these responses rehearsed.
In one case, the business plan included projections of
operating results which started in January. The presentation
was done in April. One of the venture capitalists observed
that, if the company was on target, they should have a year to
date revenue of X dollars. Of course they didn’t and the
meeting was purely perfunctory thereafter. Another
entrepreneur was asked a rather standard question “Who are
your principal competitors?” He glibly responded, “We are
unique and nobody does what we do.” The venture capitalist was
a pro in their space and casually reeled off a list of at
least a dozen companies that competed either directly or
indirectly. As before, the meeting was over and the rest was
just professional courtesy to the person who had sponsored
them.
17. Present with passion:
There is a fine line between presenting with passion and
inappropriate (messianic) exuberance. You need to communicate
that this is a business that you passionately believe in and
have committed to. The venture capitalist needs to come away
with the feeling that you will do what is necessary to make
the company a success. VCs generally don’t like to invest with
entrepreneurs who are out to ‘change the world as we know it’.
Recent experience has graphically demonstrated the risks that
this approach can entail. They invest with teams who
understand how their advantages can be turned into a viable
business – and how to make money for the investors along the
way.
18. Establish credibility:
Once a venture capitalist has come to the conclusion that your
value proposition is a good one his/her attention will then
turn to another question which often does not occur to
entrepreneurs. “OK, these guys have a good idea but are they
the team to make it happen?” Most venture capitalists will
tell you that if they face the choice between investing in an
A-level idea with a C-level team on the one hand or a C-level
idea with an A-level team, the A-level team will get their
vote. Assume that, if they are involved in the space, they
will have seen others with similar approaches. Your team may
be the most important differentiator. The credibility you
establish in the first meeting may be your best asset.
19. Speak part of the time
from the point of view of the customer: “Amateurs have markets
while professionals have clients.” Those words are tattooed on
the inside of many venture capitalists’ eyelids. Make sure
that you spend part of your presentation talking about your
company from the perspective of your clients. And stay away
from the ‘this is a billion dollar space and if we can get
just 1% …’ crap. It is the kiss of death for presentations to
VCs and a clear indication that an amateur is presenting.
20. Remember that the
decision is theirs and not yours: You are providing
information. The venture capitalist will decide whether or not
they are interested in arranging a follow-up meeting. That is
their decision not yours and most likely he/she will want to
make it after thinking about your presentation and discussing
it with their partners. Your deliverable in this first meeting
is a concise description of your company, senior team, value
proposition, competitive advantages and the purpose to which
you are intending to use the proceeds of an investment.
Accomplish those goals, ask for an estimated schedule for
their response (when are you likely to hear from them) and
feedback as to whether you accomplish them (how well you did
in presenting). Finally, indicate that you are prepared to
respond if the venture capitalist decides they want to go to
the next level.
And don’t call or e-mail the
VC after the meeting except to thank them for the time and
attention that they gave you. Pestering will not improve your
chances – if they have something to say to you, they will
initiate the contact.
21. Don’t take ‘Not
Interested’ as a condemnation: A rejection can carry a number
of meanings. It may simply be a reflection that the interests
of the venture fund are not well aligned with your company.
The fund may be fully invested in your space and want to
diversify. Or they may have decided that you are not the
person to exploit the opportunity. But a rejection is a matter
of judgment by an individual fund not a demonstration of
truth. Learn from your experience, process the feedback that
you are able to get and work to improve your presentation –
sharpen your message. Then get back out there and present to
another fund. Persistence cannot carry a poor cause to victory
– but timidity and lack of persistence can condemn a good one
to a premature extinction.
Like most journeys into the
unknown, an efficient search for venture funding is best done
under the guidance of an experienced professional. Sure, you
can go it alone – but time and tide will tend to work against
you. Most professionals will work with you for a small
retainer – with most of their compensation coming through a
success fee and an accumulation of equity in the company. You
would do well to follow the example of the ship’s captain who,
upon bringing his charge safely to the mouth of the harbor,
acquires the services of a harbor pilot in order to arrive
safely and quickly at the quay.
© Dr. Earl R. Smith II
Dr. Smith is SafeGuard Guaranty and Executive Director
of Longview, a strategic advisory and executive coaching firm
based in the Washington DC area. (http://www.lngvw.com)
He serves on Boards of Directors, Advisory Boards and acts as
Strategic Advisor to senior management teams of emerging
companies. He can be reached at
drsmith@lngvw.com.
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