Dr. Earl R. Smith II
Managing Partner, The Federal Circle
DrSmith@Dr-Smith.com
Dr-Smith.com
Here are some suggestions that will help you better manage your meetings with investors. They are garnered from years of experience and many meetings. Following them will improve the results and increase the chances of a favorable outcome.
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The most the important difference is that early stage investors have to deal with a class of uncertainties that are much the better quantified in the later stages of a company’s growth. Their attitude towards risk aversion and the focus of their diligence can be quite different. Additionally, because there are no significant ‘corporate tracks in the snow’, these investors very often have to make ‘leaps of faith’ based on their gut feel.
In this article, I want to focus on some of the threshold questions that are almost always on the checklist of every early stage investor. Many of these issues will seem logical to founders but often the logic they see in them is not the logic that the investor applies.
Investment Focus: Most early stage investors specialize in a relatively narrow range of areas. They rely on their experience and expertise in these spaces to help them avoid major missteps and to identify those opportunities for major gains. For instance, I know of one very substantial group of angel investors that strongly prefers information sciences and the life sciences. Given this focus it makes little sense to present a consumer goods company to them. But as any early stage investor will tell you this ‘myth of fingerprints’ happens all the time
Often the investor’s web site will help identify investment preferences. But sometimes even the portfolios which are listed can mask decisions which the group has made. For instance, they may have historically had a preference for investment in a particular space but now, with a significant portion of their total deployed capital involved in that space, may have decided that enough is enough – that they need to diversify. Considerably more current intelligence is required to make sure that a team is presenting appropriately.
Let’s assume that the founders had done their homework or employed an experienced and well connected professional to help them target the right investment groups. Now they have a list of potential investors who are likely to listen with interest. But with that, the challenge has only begun. You may be talking to the right people but you may be saying the wrong things to them. So in that spirit, here are a few areas that are going to be of particular interest to the early stage investor.
The Founding Team: The days when the technology alone was enough to guarantee funding are long gone. In fact most early stage investors will focus on the founding team before they focus on the technology. This tends to be true for two reasons. The first is that recent experience has led them to realize that an early stage investment is first and foremost an investment in people. From their point of view, the management team needs to consist of very experienced individuals who can credibly execute the business plan being presented. Team members need to be able to modify the plan on the run and be battle tested in the chaos that always accompanies a start-up. They need to be the kinds of people who see their company’s growth in terms of critical yet achievable milestones to the next stage of funding.
This last point needs to be clearly understood by the founders. An early stage investor’s horizon extends to the next stage of funding. This event constitutes their first opportunity to either cash out or establish an increased evaluation for their investment.
Certainly investors will want to make sure that the team has a CEO that can lead the company through its early stages. They will also want to see significant experience in important skill areas. All of this can lead the founders to think that their horizons and those of the investors are coterminous. This is a serious mistake. Investors want to see a team which is passionately committed to building the company into a dominating player in its space. But they see themselves as only being a long for part of that ride. Their threshold question is “Are these guys going to make a good, relatively short-term and highly profitable investment for me?”
The Market: I recently heard an early stage investors say that the best decision making process for their group was anti-democratic. By that, she meant that when everybody in the group was ready to vote ‘yes’ on a particular investment opportunity it was probably not a good idea to make the investment. The most successful investments that her group had made were advanced and defended by one or two of her partners with the investment being made over the reservations of the rest.
Early stage investors by their nature prefer opportunities which are disruptive to existing technologies. They look for a ‘big idea’ in a relatively small but rapidly expanding market. They don’t tend to be attracted to marginal improvements which yield marginal returns. They’re in the business of betting on the nature of the next new world.
8 Responses to “Presenting to Early Stage Venture Capitalists: A Few Things to Remember”
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Alan, Thanks for the comment and kind words. I am glad that members have found the articles interesting and useful. As to the comment, it is good to remember that venture investment is by far the most expensive way to fund a start-up or early-stage business. As for funding people that investors already know, I’m not sure that the number is as high as 95% but I am sure that it is well over 50%. Most venture capitalists have relationships with CEOs in waiting – people they know and trust. I have known CEOs who have run serial companies funded by the same investor. That being said, I have not seen a higher success rate among these companies – and I have seen some real dogs that were a waste of money. One of the best hints for entrepreneur wannabees is to take a collaborative towards investors – build relationships of trust – and avoid the dogma that “all investors are stupid and all entrepreneurs are brilliant.” Just my two cents, Dr. Smith
Alan S. Michaels wrote:
Hello Dr. Smith,
Thank you for starting this Discussion; and I greatly enjoyed reading your article.
*** I also want to specially thank you for all the great articles you have been posting in our News Tab – your great content has made our News section valuable reading.
As for “things to remember when presenting to early-stage and angel investors”…. about three years ago I attended a major conference with a panel of Angel & Early Stage Investors, and the keynote speaker made a comment that surprised most of the attendees, myself included. He said:
“This is the last place you should come for funding because it is rare you will get any. And for the firms we provide funding to, over 95% of the money we collectively give is to people we already know. For the remaining 5%, the lucky 5%, the fees we require are far higher than what any bank or credit card charges if you could correctly compare the actual costs.”
Is the above true? (All seven of the expert panelists agreed with the above statement, and like most of the 200 in attendance, I accepted it as fact…. but would like your superior expertise.)
Quentin Parker wrote:
Sell the feeling, not the product.
If you sell yourself, you miss the point of gaining interest, because of the focus.
Take yourself out of the pitch as best possible.
Let the product or idea sell itself. Answer their questions, be patient, think about your reply first. There is no rush, no need to perform.
Your best replies are “Yes”, “No”, and “I don’t know, yet.”
Confidence is like laughter, infectious.
The fact that you are in this position with an angel means its yours to lose now.
No one wastes their time on things they are not interested in.
Be brief, succinct and confident.
Janet, Thanks for your comment – I am glad that you found the article useful. Many do not take the time to see the process from the perspective of the investor and that can cause all sorts of challenges. Investors are always impressed by the attitude which focuses on delivery – monitization of the value proposition – and the ability to turn markets into clients. Earl
Janet Nelson wrote:
As I am not an Angel Investor I cannot quote guidelines. But what I can quote from my years in strategy and market growth (from 0 – $100M in just over 3 years) paying attention to the risks and then putting the plans in place to offset or mitigate the potential bad-news is equally important as ‘selling’ the good news. I’ve found it the best way to 1) get my management to fund the activities and 2) deliver without failure.
Thomas M. Loarie wrote:
Well done. Since I am one of those legacy people in the industry, I always pitch first to those who know me well initially. I am able to discern the gaps that need to be filled in very quickly. It is most important for those that have not traveled this path before to remember that each presentation is a learning experience. Accept the learnings and integrate them into a revised pitch. The pitch and the plan will have a life of its own. Be flexible but be persistent.
Ralph Mango wrote:
I have been involved in 2 such situations. In one, we were dealing with venture capital for a financial services venture. Among several mission-critical issues I posed to the two principals was whether they expected to start from a flat-footed start, ground zero, if you will, or was there any possibility that the investors could provide deal flow. In the first scenario, it could take as long as 18-24 months to reach break-even; in the latter, break-even could be reached as quickly as 12 months. Each scenario obviuously carries significantly different capital requirements. In presenting financial projections, I have always subscribed to a best-probable-worst case trilogy wherein the assumptions for each are accompanied by identified risks to each plan, as well as management’s proposed risk mitigants by which to compete. It is vital that management open their thought processes, conflict resolution, and problem solving approaches to the scrutiny of those who are writing the checks. Their survey of the industy, the comeptitve landscape, regulatory, if any, environment, are examples that cannot be understated.
Finally, the unexpected. In the situation I mentioned earlier, we were assured by a lead investor that they would provide deal flow from the outset. Accordingly, we raised $ 5MM. Subsequently, their executive team decided to withdraw from that commitment, ultimately sinking the enterprise before it really gained traction.
Dr. Smith,
I enjoyed and appreciated your insight as usual. Thank you!