After a debate that several of us had at a recent DealMaker Media event in Los Angeles, my friend and fellow SoCal venture capitalist Peter Lee wrote a post recently about the different roles within a VC and spent much time on the role of an associate. VC’s keep different titles but the most common that I’ve come across that are investment professionals are (in ascending order of seniority): analyst, associate, principal and partner. These are the permanent members of a VC. Then there is the EIR (entrepreneur in residence) who is usually at a VC for a temporary period of time and other individuals such as venture partners or operating partners.
The process for raising money from a VC is a sales process and as such much of what is taught in enterprise sales can be applied. My initial career was as a software developer, database designer, product manager and then project manager. So running a sales process wasn’t originally in my professional toolkit. Some of the best advice came from a senior sales coach in Germany named Kai Krickel who ran a consultancy with the appropriately name of TEDIC (the excuse department is closed). He had formerly run country operations for a very prominent enterprise sales company called PTC. I’ll cover more sales lessons in a separate section of the blog, but for now some thoughts about people you’ll meet in the VC process:
1. Some people have authority (A)
Somebody with authority is a decision maker. That’s obviously a good starting point in any sales process. I’ve always subscribed to the “call high” philosophy of sales where you hope that your initial entry into any organization is the highest level at which you can usefully be introduced.
This is a post in the ongoing series about how to pitch a VC. If you want to to see an overview / table of contents of the series go here and if you just want to see what the first slide in the pitch deck should be go here.
This is the slide that most presenters handle very easily so I won’t spend too much time on it. For the first-timers I’d like to tell you the two most common approaches that I see and for everybody else I’d also like to add a section on the common pitfalls – even for experienced presenters.
1. Harvey Balls
One of the most common ways to present the competition slide is to show your company stacked against your main competitors, who will be plotted in vertical columns against each other. On the horizontal rows you will plot a set of features or key attributes of how you define your competitive differentiation. This is not only a way to talk about you versus your competition but a chance to reinforce two things: 1) what you see as the most important buying criteria for your customers and 2) how you believe your firm differentiates.
Many VC websites have a tab that will tell you that you can submit your business plans to enquiries@vc_company.com or some similar generic email address. But does it really work?
Can you really send your business plan over the transom and expect to get a positive response? The short answer is “no” – don’t waste your time.
I know some VCs would take issue with this and somehow I’m sure that there are some success stories with this method but trust me this is worst way to approach a VC.
Why is it a bad idea? Most VC firms receive an unbelievable number of business plans every year. It really is hard to process them all effectively so some sorts of filtering techniques develop. I remember asking for advice from a law firm in 1999 (before my first fund raising exercise) the best way to approach VCs. He told me that “most VC’s will figure that if you are truly an entrepreneur you’ll find somebody that knows them, develop a relationship with that person and find a way to get them to introduce you to the VC. If you can’t do that then you’re probably not really an entrepreneur.” It sounded a bit like an “old boys club” to me.
In my last post I outlined a way to think about market sizing for your VC pitch and emphasized what I think you should do. In this much shorter post and with no title alliterations (and some emoticons 😉 I will highlight 3 common mistakes that I often see and that I suggest you avoid.
1. 1% of China
The first problem I call metaphorically the 1% of China problem because it uses a large number and small market share to make it sound like a “no brainer” that you’re business will be successful. We are only charging $3 / month so if we capture just 1% of China that’s a $430 million market opportunity for us.
In reality I see people pitch it this way, “we’re going after the $2o0 billion US market for local contractor services annually. We think that third-party websites that help broker these relationships can capture 5% of the value, making it a $10 billion opportunity. If we capture just 2% of this market (not a tough ask, right?) we will be doing $200 million in sales. Your market sizing (and frankly your income statement) needs to reflect realism about how the market is disaggregated and therefore the real value you can capture.
Part 6 in my VC pitch series:
If you haven’t read any previous posts in this series consider starting here at the start but it isn’t really required to get the gist of the post. If you want to go to the post immediately prior to this one it is here.
So by now I know your bio and why you eat nails for breakfast. I understand the problem you’re trying to solve and why your solution is just the fix. You’ve shown me your killer demo and I’m excited. MAN! Who could have thought you could do THAT with Ajax 😉
But now comes the time for one of the biggest VC roadblocks that many VCs will tell you they aren’t obsessed with and I guarantee you that 98% are (and the other 2% are liars). “How big can this get?” It is one of those vague objections that is used to kill off many deals. The reason that many companies fail on this question is that they don’t put enough effort into this analysis (and frankly, if more people did do this analysis some businesses might actually not get started).