When entrepreneurs meet with venture capitalists (VCs) to raise money, they usually have the basics down cold. They discuss the market, the team, technology, and finance. However, all too often entrepreneurs shoot themselves in the foot and make mistakes that limit their chances of raising money. Here are some common mistakes and how to avoid them.
1. The Market Matters.
Before you walk into the conference room, you should be absolutely clear in your own mind about a few things. What market are you going to address? What is the customer problem that you are solving? This part of your pitch needs to say that there is a large market, there is an unmet need, and you have a significant competitive advantage in serving that market.
Startups are at a competitive disadvantage relative to established incumbents, which have the advantages of a broad product line, economies of scale, an existing distribution network, and name recognition. Startups need a substantial and compelling advantage to overcome these disadvantages. VCs are looking for two times the performance, or one-half the cost, or a novel and innovative business model.
2. Introduce Yourself.
Establish your qualifications and introduce the key members of your team. Why should VCs listen to you? Why should they believe what you say? Your job is to establish your credibility early on. If you can do that, then later in your presentation, when you make an assertion, it will be more likely to be accepted.
For most of you, your sustainable competitive advantage is your novel technology. Don't make the mistake of assuming that the competition is standing still. When your product is ready for market, say two years from now, your competitor will also be two years further along in performance, integration, and cost.
The challenge here is to strike the right level of depth. Imagine that you are talking to a very smart person who is not an expert in your field. Get to the point quickly and leave out extraneous information. Your goal is to whet their appetite and get to a second meeting. Save the details for a future meeting dedicated to technical diligence.
Each successive round of financing should move the company forward to a meaningful goal. Figure out a meaningful next milestone and develop a conservative budget to get you there. By meeting those milestones, each round will be at a progressively higher valuation. Your percentage of ownership will decrease, but the value of that ownership will go up and up. Everything takes longer than you expect, because most of what you don't know will work against you. The VC's goal is to reduce risk at each stage and invest their money commensurate with the reduction of risk.
Keep your eye on likely exits (partial sale of ownership) and make sure that the cash requirements are in proportion to the expected return. Series A -- or first round-- deals have a lot of risk, so VCs will be looking for a chance to make a five to 10 times return if you are successful.
5. This Is My Story, and I'm Sticking with It.
Have a clear and self-consistent story and stick with it. You are the entrepreneur, and it's your role to articulate a vision for this company. That doesn't mean that you should be stubborn. Be receptive to feedback and listen with an open mind. But you have to be an advocate for your vision.
Don't be offended by hard questions and don't get defensive. Even the best business plans have flaws. VCs aren't looking for a perfect business plan. Such a thing doesn't exist, and we're all smart enough to find the flaws in any story. VCs are looking for businesses that they should invest in despite the flaws.
BONUS TIP! Fundraising is not a popularity contest
Learn to accept rejection. The majority of VCs that you meet with won't be interested in investing in your company. That's OK. Fundraising is a lot more like getting a date to the prom than it is like getting elected to public office.You are just looking for the one or two VCs who like your story and want to help you build a business.
Steve Eglash is a venture capitalist at Worldview Technology Partners
(Palo Alto, CA), where he focuses on investments in high-tech start-up companies in fields such as semiconductors, displays and imaging, lighting and illumination, wireless, sensors, power and energy, and materials. You can reach Eglash at email@example.com