Dr. Earl R. Smith II
Managing Partner, The Federal Circle
DrSmith@Dr-Smith.com
Dr-Smith.com
You seldom get a second chance to make a first impression. This is a very important lesson when it comes to meeting with venture capitalists.
~~~~~~~~~~~~~~~~~~~~
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[1] 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 your 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 couldn’t 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.
77 Responses to “Venture Capital – The First Meeting”
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Herwig Delvaux wrote:
1/
These places (LinkedIn groups) , are places where small and average sized businesses meet and network. If you read well my article, before critizing it , you will notice this passage:
< << (Of coarse, multi billion investor companies DO this, effectively,
I am talking about our daily small and mid size ventures.) >>>
If you are, in answer to the writings, referring to business with < << businesses (run-rates over $100MM) >>> , you are at the wrong place to discuss these realities, because enterpreneurs within that size of companies, are just NOT around here. They have OTHER kinds of networking than LinkedIn…
That’s realism.
Within the capital range of 50.000 – 20.000.000 , you will find the majority of capital seekers and the majority of complaints, and these are astonishingly true, in the way I describe the situations.
The specific range of 500.000 – 10.000.000 even has another structural problem that blocks out the majority of businesses: there is allmost NO capital available, within THAT range. Investors are largely “uninterested-very-sorry”.
2/
Your point of view is related to the obvious fact that your personal position (as an intermediary) is depending MORE on the game, than it is for enterpreneurs themselves. Isn’t that right?
You didn’t denie the fact I described with :
< << However, the only thing you catch is:
"Oh, yes, we 'can' !", without further explications, ... it is just bluff. >>>
and which Nicolas supplemented with
< << -> In both cases investors DON’T DO THEIR HOMEWORK >>>
And this leads to the eternal structural lie in any business plan !! These are facts. (Feasibility figures x3 are common…. and THEN investors take the whole thing for granted.)
If the expertise among investors (within the range we are actually talking about) really exists, and is structured in a calculated system of reviewing , we would ALL know wich system they effectively use.
Communication about this is BLANC, because there is none… its Darts.
If you could convince us, we will look forward to your publishing of these “secret” review and descision making systems.
3/
Take note, Dr. mith, that my contribution was not a reaction onto your own article, if there would be a misunderstanding. It is on comments, appearing halfway this discussion.
Regards
I am glad that my original post stimulated so much great discussion.
I would point out that it makes little sense to take such a critical approach to investors if you need them to help build your company. For every founder who has a derogatory story about investors there is an investor who has one about a founder. This conversation takes on all the characteristics of an old man yelling at clouds. The practical fact is that entrepreneurs need investors to fund their businesses and investors are in the business of finding and taking advantage of opportunities to put their funds to work profitable. I work with a lot of investors. The statement that most of them operate on “only 1% professional, and 99% sheer casino premises” is self-serving and completely wrong. Sure there is a small percentage of investors who do so – but there is a much larger percentage of so-called entrepreneurs who do.
The groups that I spend a lot of time working with and listening to are 1) entrepreneurs who have figured out how to build very successful businesses (run-rates over $100MM), and 2) investors who have built successful and highly profitable portfolios. These people have figured out how to accommodate each others needs and perspectives in a way that is win-win. They eschew resentment and name calling and find ways to productively engage.
One of my favorite comediennes used to say “I’d rather pay a young man’s airfare from New York to Los Angeles than tell an old man the distance.” I remember telling that to an investor friend. His paraphrase was “I’d rather invest in a C-level deal with a CEO who shows that he understands and respects my perspective than take a presentation of an A-level idea from one who makes it clear that he thinks I am only just above pond scum when it comes to evolution.
You are what eats you.
Dr. Smith
Herwig Delvaux wrote:
Thanks again, Nicolas !
and I am fully convinced this kind of behaviour (indeed, also on the stockmarket) is continuously SLOWING DOWN economy (worldwide), instead of letting it florish towards what the total capital market COULD achieve.
It is an alternative vision on global economy… “The law of Royal-self-downgrading”…
At the stock market, I allready was a long time convinced of the analysis those market places are only 1% professional, and 99% sheer casino premises. It is a shame this institution “exists” in its current form ! These gambling halls were invented, not more then a 210 years ago (first : 1801, London) … after SO many years of bad experiences with a 19th century institution, it is time for a completely new concept….
Where are the politicians ???
Nicolas Saubié wrote;
Very true, Herwig!
After all they are no different from most investors in the stock markets, they invest without real analysis. They will read someone else analysis, which is very convenient because 1. they don’t have to do it themselves and 2. If it turns wrong it is not their fault. The problem is that they will build an intellectual wall around their investment idea, and will stick to it even if the analyst who convinced them later changes its mind.
-> In both cases investors DON’T DO THEIR HOMEWORK
My opinion is that they must feel like Kings, and Kings do not lower themselves to investigate themselves or double-check things.
I have seen investors buy the idea that a product was avalable in all tobacco retail stores in France (which was a lie) and never even bother to go accross the street and ask their local tobacco retail outlet!
What is striking also is that some people who have worked hard all their life to build a capital will later throw it all on an investment idea without much thinking about it. They know perfectly real life is difficult, but seem to forget it at the time to invest their money in somebody’s else venture!
Herwig Delvaux wrote:
=Topic opener, continued=
7/
Investors generally TURN AROUND the world of responsability.
Investors just don’t want to invest (intellectually) in project evaluation.
They demand ready made reports, thus provoking professional lies ,
instead of investigating themselves,
putting time in looking at early-idea project drafts.
(Of coarse, multi billion investor companies DO this, effectively,
I am talking about our daily small and mid size ventures.)
An early-idea project draft, could be NEUTRAL only,
if the project can or must be presented WITHOUT ROI figures.
The investor then can evaluate the POTENTIAL,
give prior remarks from sector expertise,
and ask the enterpreneur to further develop the venture idea,
to be revised again,
making it into a joint venture. (Enterpreneur + investor as a TEAM…)
The investor then will become a responsible partner in development,
instead of an untouchable darts player.
The investors must understand that just by becoming owner (full or part) ,
they MUST play part of the enterpreneur role as well.
They MUST take responsability, from expertise.
Now, they handle everything as GAMING.
They “win” or “loose” but allways blame the enterpreneur.
This is what sickens the economy.
Food for thought.
Herwig
Herwig Delvaux wrote;
Idd like to copy my full article from the other group to this place.
Good for real discussion…
———————————————————————- HEADER :
>>>>>> The eternal bleeding wound: Gaming investors ! ??
>>>>>> To all money seekers/enterpreneurs:
>>>>>> give your opinion from this discussion opener !
.
This is meant especially to be a discussion for us ENTERPRENEURS.
——————————————————————————————————
Lets place a finger on the eternal bleeding wound…
1/
Circles of investors are allways pointing towards bad business plans from enterpreneurs.
Do these bad plans exist? Yes, undoubtly.
But, are they solely originating from the failing insights of enterpreneurs ?
Clearly NO.
We all know the long checklists of business plan defects.
They don’t help us as a whole, however.
2/
Why???
Because there are the investors, who have as well failing insights in business plans.
All of them? No, of coarse not, but probably the majority.
They want to get a “high” from reading a summary. An unrealistic ‘high’.
As all enterpreneurs KNOW this, and as all professional business plan writers KNOW this,
these documents are manipulated, towards the “high’ provoking little lie.
MOST of the plans… perhaps 99% of all plans…
It’s mainly the size and the style of the lie that differs.
3/
The UNREALISTIC high minimum ROI requirements from investors,
is provoking this general falsification,
and the investors are happy with the situation, it seems.
Do you think, if the enterpreneur is HONESTLY giving out his REALISTIC figures,
(like 2%, 3%, 4%, 5%, 6%) he will make chance to find an investor ?
NEVER !
A healthy start on very small but STEADY profit,
can be a path to serious growth, statistically spoken.
And investors work on risk spreading, right ??? (Perhaps…)
But, NEVER predict such growth, it’s a lie you can ! Nobody can !
4/
Therefore, ALL business plans are made far too optimistic.
But STOP blaming the enterpreneurs for this !
They try to sell the best possible lie, in order to get the money,
available only to a fraction of all professional liears…
5/
Investors mostly claim they are extremely competent in choosing,
so competent they immediately see the difference between successful and failing projects.
They don’t prove it, however, due to reality.
Otherwise, they would NEVER be involved with numurous failings,
from their own investment money.
They would grow and grow, and never fail.
It is not the reality.
More: if their “never-failing-technique-of-’immediately’-seeing-the-difference”,
really exists,
it would have been described in all business articles at schools, reports and the WWW.
No secret about such, I would say.
However, the only thing you catch is:
“Oh, yes, we ‘can’ !”, without further explications, … it is just bluff.
6/
Investors choose for the most talented liears, under the candidates.
Such can be a good business however,
BUT some more modest liear, could have had a better business,
or could have had NO bankruptcy after the investor took back his money,
whey figures showed much lower then expected…
The investor, in general, WANTS a lie, but don’t want to admit such.
=Continued below=
Herwig Delvaux wrote:
Thanks a lot for your opinion, Nicolas !!
ONE of the reasons, there is allways to few capital to “distribute” among enterpreneurs, is in reality because INVESTORS are constantly throwing away money in dogmatic constructions-of-mind, (Their strongheaded but non realistic templates) , and as such not having the average good profit they believe in, and less profit means less new investments….
It is an eternal “the emperors new clothes” story.
The investors lead this economy with FAILURES.
It is amasing however, how LITTLE we can read about the investors mistakes !!!
Any press is ALLWAYS about investors successes.. and enterpreneurs failures…. So, WHO pays the newsmakers !! ???
LOL
We need a REALLY independent press, who will not spare the investors mistakes…
Nicolas Saubié wrote:
I agree Herwig,
They may claim they are open-minded but in reality many investors want a simple business which follows their own view of succesfull models.
I have seen one of my competitors raise more than €50 millions and … lose it all. I told one of the investors they were wrong, I explained why, but they had eared what they wanted and were so convinced nothing could change their mind. Now they have lost it all and try to go to court claiming they were misled. I think they were misled, but it was their expectation!
Herwig Delvaux wrote:
Hello Nicolas,
What you write ,
just proves once again,
that investors are narrow thinking…. in MOST cases…
….
Investors, all over,
have repeatedly invested in failing businesses….
yet allways BLAME enterpreneurs,
NEVER blame themselves, allthough they pretend to be able,
allways to recognise good opportunities “at once”. It’s a lie.
We enterpreneurs, need investors, of coarse.
But there must be done something,
to find “quality” investors….
Greets, Herwig
MARCO Cardoso wrote;
Dr. Earl Smith,
Thank you for sharing your thoughts.
It is brilliant what you kindly made available.
I will recommend it to our consultants, clients and potential clients.
Have a great weekend.
Nicolas Saubié wrote;
Hello Dr. Smith,
Thanks a lot for these advices,
My experience is that the company seeking funds should have one and only one value proposition. I have been very embarrassed because my company is successful in at least 2 different fields, and it is one too many …
dr-smith.infoThanks for three great comments. Robert: I do not raise capital for start-ups and early stage companies. Most of my work is with mid-market companies with revenues north of ten million annually. Brian: You are exactly right. My experience has been that the icing on the cake for VCs is a team that is implementing as a high rate – if they find that in addition to a great team and strong board, they tend to want to invest. A 4th component of the ‘ideal investment’ is an advisory board focused solely on business development. That addition can get a VC positively salivating. I build these board and have written a book about them – http://www.dr-smith.info/books-by-dr-smith/amazing-pace/ . Ian makes a similar point. the team is the foundation of everything. Their most important characteristic is that tendency to implement – to monetize the value proposition. Investors regularly see ‘strong teams’ that seem to feel entitled to funding – a real turn-off. They search for those teams that they have to run to keep up with. Thanks again – add more comments if you feel like it. Let’s keep the discussion going. Earl
Ian Thomas wrote:
Dr Smith,
As someone who has worked on several “start up” projects over the years, from “local” two man, to Plastic Logic, there sems to be a great deal of correlation between the team and the success.
For me a capable team brings care and experience to the initial planning and operational design, but also brings greater capability to deal with variance as the project progresses – even to the extent of recognising when the team needs to be reconfigured!
Ian Thomas
Kurt, There is an old saying – “when you are up to your ass in alligators, it is tough to remember that your original plan was to drain the swamp”. Part of my contribution in advisory engagements is to assess the situation and suggest better approaches to challenges like getting funded. Most of these approaches are logical and straight forward – but the heat of battle and fog of war can make them hard to see from the front lines. Earl
Kurt Haug wrote:
Excellent article. It’s amazing how many of these seemingly “no-brainer” principles are actually apparently not nearly as obvious as those of us closely involved with the process would assume. Forwarding it to a couple of clients tonight!
Ann, Thanks for your comment. You picked out one of the most frequent errors that entrepreneurs commit. They approach investors because they have money – seeing all of them in the same light. The tragic fact is that, with just a little diligence, this mistake can be avoided. Most VCs and angel investor groups post their portfolio companies on their website. It is a simple matter to visit the website and look at the companies they have invested in – and measure the fit of your company against that standard. Investors who receive submissions that do not evidence at least this minimum level of professionalism will almost always refuse a meeting – and then tell their contemporaries stories about this band of amateurs. You brand yourself whether you are right or wrong – it is all branding. Dr. Smith
Anne Cull wrote:
Thank you so much for posting this article. I wish I had read it last month! Two days ago, I thought I had closed the deal on at least $100K of the $150K start up capital required but both investors opted out at the last minute 2 days ago. I have been over in my mind several times where I could have steered this in a different direction and after reading your article, I know exactly what happened.
Number 3: Avoid presenting to investors who lack a general understanding of your space!
Yep…a construction worker and an electrician are not exactly ideal targets for an internet/tech/semi-adult type industry! Lesson learned. Back to the drawing board. Thanks for the guidance.
Brian Javeline wrote:
Well you are correct. I have seen some presentations where the person is so excited but really had nothing of substance to provide. Everything you said is so true. I guess another way to paraphrase my thoughts is, “even if you have a great model with all the unbelievable metrics and opportunities to present, never forget to ensure your passion shines through”. I have seen some rather successful people speak and I would begin to fall asleep since they are not that excited anymore. I have seen some other guys speak, and even knowing they have made tons of money, you would think that they are still striving for their first million based on how they express themselve.
Brian, You bring up a good point. My work with investors has given me a different take on the issue. Most of them are used to receiving passionate presentations. Most are very suspicious when passion overbears content, experience and results to date. In this current market, investors are looking for teams that have already implemented – generated revenue – developed customers. One investor recently made an interesting distinction that may bear further thought. He said that these was a difference between youthful exuberance and passion. May be an useful distinction. What do you think? Dr. Smith
Brian Javeline wrote:
#17 Present with passion should be item #1, especially if you are an early stage company. Investors know there will be a lot of maturing to go along with the investment and mistakes will be made, including you not being fully prepared to answer all the questions …. but having passion is something that will demonstrate your determination to fix all the other things. This coming from someone who has raised angel capital from more than six individuals in four states and two foreign countries. Brian Javeline, President & Co-founder of MyOnlineToolbox.com, a 2008 Dell Top 10 Innovator and 2009 Forbes Americas Most Promising AND STILL SEEKING A FEW MORE INVESTORS
Joe Jenney wrote:
Excellent and comprehensive. I am struck with how similar the process you advise is to the process needed in the Government to secure funding for technology investment and to that needed by businesses seeking funding for technology development from Gov. agencies. As with venture capital there are always more technology investment opportunities than funding and always more businesses seeking funding than will receive it. When I was a Gov. person the biggest failure of those seeking funds was not to listen when I explained what we were funding and why. Many marketing types were so busy selling they didn’t stop to listen to their customer.
Joe Jenney wrote:
Excellent and comprehensive. I am struck with how similar the process you advise is to the process needed in the Government to secure funding for technology investment and to that needed by businesses seeking funding for technology development from Gov. agencies. As with venture capital there are always more technology investment opportunities than funding and always more businesses seeking funding than will receive it. When I was a Gov. person the biggest failure of those seeking funds was not to listen when I explained what we were funding and why. Many marketing types were so busy selling they didn’t stop to listen to their customer.
Rob Tames wrote:
Dr. Smith,
Thank you for your insight and the opportunity to read your article. Being involved in the financial servicess industry many “deals” have come across my desk over the years. I have routinely made some calls and arranged meetings between parties to aid in the capitaliziation of the projects.
I am looking now to dedicate more time to this venture and professionally arrange these meetings as well as act as the presenter for a fee or ownership interest in the company.
In your article you refer to knowing the “space” the VC occupies. I would like to know the best resource for a list of VC’s and the projects they are most desirous of.
Thank you.
dr-smith.infodr-smith.infodr-smith.info
Tony, Thanks for the question and for adding to the discussion. I don’t think that your proposition would attract much VC interest although it might find some angel investors interested. VCs tend to want to put larger amounts to work. The trend over the last few years has been towards larger investments in well established companies and management teams. Angel investors tend to put money into companies that they think will grow into something substantial – giving them an exit strategy the will turn on either a sale of the company or some other form of liquidity event. I don’t know any investors who might be interested in the speculative schemes that you outlined. Most would avoid them and wonder – if it is as good as you say it is – why you need their money at all.
Another point, you have to avoid sounding like a scammer. There are so many of them around these days that investors are highly sensitive to the risks of doing business with strangers who have the next ‘get rich scheme’. Here is an example from one post that I saw: “I am looking for investors who would be willing to invest $50,000 in a 5 year old betting system that pays out every week. In return for investing with me I will send you $10,000 every month guaranteed!!!” I reported that one to the FTC and SEC. The memory of Bernie Madoff is still with most investors and simply saying that you are not a scammer doesn’t cut it these days.
Finally, I wrote an article that might be useful to your current situation. Customers as Financiers: http://www.dr-smith.info/customers-as-financiers/ . If your transactions are a profitable as you say they are, you should be able to cut in your buyers and generate all the financing you need.
Hope this helps, Dr. Smith
Tony Moura wrote:
Dr. Smith,
Would a VC look at an opportunity to not put in say money, but a line of credit needed for an initial transaction?
I’ve stumbled across a niche business opportunity that I happen to have done one deal on 18 months ago. In a weeks worth of work I made a net of $25K with about $100 in expenses. From that, I’ve been getting calls an emails for much larger orders. I can reproduce my efforts but now I would need a line of credit from a “backer” of some type in order to move forward and complete a deal. These purchase contracts are for a year with monthly shipments of tens of thousands of metric tons of a renewable bio-fuel. The frustrating part is; I have the buyers, I have the suppliers, I’ve done the research on logistics and shipping. I just don’t have the funds or the line of credit for the initial purchase from the suppliers.
One deal of 20,000 metric tons per month can yield $350K – $500K net for a contract period of 12 months. As an example. The largest order I had a request for was 50,000 metric tons per month for 24 months. Once again, frustrating to have buyers, suppliers, me yet missing the critical part to getting a deal completed.
Any suggestions?
Michele North wrote:
Your article delivered some key points that I appreciated as an entrepreneur always considering funding options. ~ Thanks
Kurt, There is an old saying – “when you are up to your ass in alligators, it is tough to remember that your original plan was to drain the swamp”. Part of my contribution in advisory engagements is to assess the situation and suggest better approaches to challenges like getting funded. Most of these approaches are logical and straight forward – but the heat of battle and fog of war can make them hard to see from the front lines. Dr. Smith
Kurt Haug wrote:
Excellent article. It’s amazing how many of these seemingly “no-brainer” principles are actually apparently not nearly as obvious as those of us closely involved with the process would assume. Forwarding it to a couple of clients tonight!
Thanks for the comment Joy. My purpose in posting the question was to do exactly what you suggest – to help people improve their chances of getting funded. It is a tough market out there for early-stage companies. I participated in a seminar this evening on the subject. The lead speaker was a partner in an early-stage fund that had made 30 investments over the last couple of years. His message boiled down to “do the best you can with bootstrap money – generate real results before you approach venture capitalists or angel investors – they are very expensive in the current environment”. Some of the statistics he provided were sobering to the audience of entrepreneurs and would be entrepreneurs. He also focused on issues like deal structure, exit strategies and how they have changed over the last year or so and major shifts in the time it takes to do a deal and likely terms. My hope is that readers will take away some useful guidance that will help them through these tough times. Dr. Smith
Joy Valentine wrote:
Dr. Earl Smith has listed 21 points in his article and it is certainly useful and appears to be based on his business experience. In one article he cannot cover the entire gamut of knowledge on the subject and certainly no one can claim that an article is sufficient in itself.
For individual cases, specialized consulting assistance is no doubt available from not only Dr. Earl but from a wide variety of experts and the article itself is like a teaser which reveals enough information to make you want more or seek consulting services. We have to look at it from that perspective.
Healthy criticism and addition of new and valuable information will benefit others but attacking someone personally does not contribute anything constructive to the group. I do not think that Dr. Smith claims to know everything on the subject and others are welcome to add their points of view and enhance the learning value for members of this group.
I read these articles to keep myself abreast with the latest thinking on new and relevant topics that are related to my field and I would welcome good contributions from other members as well.
Ski, Thanks for the comment and suggested additional rules. I think that the last one is the most important. The chemistry between investors and the management team is incredibly important. Each has a role to play and interests to pursue but there has to be a balance in the relationship which is based solidly on mutual respect and consideration. Both are in very difficult businesses and neither needs the additional distractions. Your focus on what I call situational awareness is also important. I have sat in on presentations where the team left on cloud nine – figuring they had ‘aced it’. but I knew better – they had muffed it. Being able to understand what has happened and is happening in complex situations – how to read people with different agendas is an important skill. Dr. Smith
Ski Milburn wrote:
Good overview, and here’s a few additions.
Rule 22: Do your homework on the investors first. Go to their website and look at the portfolio. Call a few CEOs and CFOs. Go to TheFunded.Com and check out what people are saying about them. Talk to people, work your network. You should know more about them going in than they know about you.
Rule 23: When the presentation’s over, if they say “Good Luck”, they mean “Good Bye”.
And Rule 24, the Most Important Rule of all:
If you get to the end of the presentation, and you really think this group of investors are as bad as some of the preceding posts make them out to be, tell them “Good Luck”.
VCs offer an important and very expensive service (access to Other People’s Money). It comes with so many strings attached (high ROI objectives, meddling in your business, etc, etc) that if you don’t like them, don’t take it.
Robert, thanks for your comment. I am not sure that you read the comments by Nicolas and Herwig accurately. Herwig clearly has some sort of chip on his shoulder when it comes to investors. My take is that he believes that they are unsophisticated morons who just happen to have money to invest. Nicholas suggests that VCs are “no different from most investors in the stock markets, they invest without real analysis.” Clearly he has not had much direct experience with investors. After working with a couple dozen of them, I have never met one that even remotely fits his description.
Your point about the nature of companies is very interesting. It reminds me of complexity theory which thinks in terms of complex self-organizing systems. I think you are on to something. Companies – and management teams – are productively seen holistically.
Dr. Smith
Nicolas Saubié wrote:
Investors and entrepreneurs are like men & women, they need each other, they depend on each other. There is no point in condemning one category as a whole, and there is no hate in Herwig or my posts.
We gave our understanding of some things many investors usually do badly, it is meant to advance the discussion and understand them better, it does not mean we “engage in diatribes against investors”. By the way Dr. Smith I have writen less critics about investors that you have about entrepreneurs in your paper, which I found very relevent.
Or is it that Kings should never be criticized ?
Robert Carter wrote:
Nicolas and Herwig, thanks for offering your unique perspectives on the subject and providing some insights.
VCs and investors all focus on the team and how much experience they bring to the company. I strongly disagree. They say that they invest in teams and not in the product/service idea. Teams are important to execute the company’s business plans. If the team is non-cooperative or dysfunctional, it can hurt the company and prevent a successful execution of its business plans. Sometimes, one bad apple (with a VERY Big EGO) on the team can destroy the performance of the entire company and sink it. Besides bringing experience, the team needs to work in cooperation, have chemistry between them in order to be effective. From my experience of working for small, medium and large companies and observing team interactions, every part of the company is important. A company is a complex organism that is similar to the human body. The brain is not more important than the eye or the nose. The nose is not more important than the hand, foot, stomach, etc. Each part is as important as the other for without it the body cannot function optimally. Similarly, a company needs all of its parts to function as a collective. If the team is more important than the product/service, there is no product/service to offer customers and no revenue to make the company successful. All parts of the company are equally important and their importance cannot be diminished. VCs need to take a holistic approach to investing and recognize the equality of all parts of the company.
Robert
Dr-Smith.comDr-Smith.comDr-Smith.com
Chintan, thanks for your comment and kind words. I have built six successful companies, worked with more that two dozen venture capitalist and angel investors and advised well over three dozen CEO and chairman. The real dynamic is that investors have had a real problem finding investment-grade opportunities over the last decade or so. There is much more money than placed to invest it profitably. People who engage in diatribes against investors are generally minor players or, as I put it, old men yelling at clouds. Good founders know how to recognize and accommodate the legitimate concerns of investors. They tend to be successful business builders. In business, the it is not a matter of being right – it is a matter of being successful. Mutterings from the sidelines don’t matter. You will find about 400 articles on a variety of subjects on my website – http://www.Dr-Smith.com . Thanks again for the comment. Dr. Smith
Chintan Tyagi wrote:
Excellent post Dr Smith. You have also made your point very politely. I did not like the post getting hijacked by diatribe against investors… Guess basic demand supply situation – who is chasing whom – and evolution – elimination of bad investors and incompetent entrepreneur – should work in the long term.
Have read only one linked post of yours and its full of very relevant tips..
Thanks.
Herwig Delvaux wrote:
Thanks a lot for your opinion, Nicolas !!
ONE of the reasons, there is allways to few capital to “distribute” among enterpreneurs, is in reality because INVESTORS are constantly throwing away money in dogmatic constructions-of-mind, (Their strongheaded but non realistic templates) , and as such not having the average good profit they believe in, and less profit means less new investments….
It is an eternal “the emperors new clothes” story.
The investors lead this economy with FAILURES.
It is amasing however, how LITTLE we can read about the investors mistakes !!!
Any press is ALLWAYS about investors successes.. and enterpreneurs failures…. So, WHO pays the newsmakers !! ???
LOL
We need a REALLY independent press, who will not spare the investors mistakes…
Nicolas Saubié wrote:
I agree Herwig,
They may claim they are open-minded but in reality many investors want a simple business which follows their own view of succesfull models.
I have seen one of my competitors raise more than €50 millions and … lose it all. I told one of the investors they were wrong, I explained why, but they had eared what they wanted and were so convinced nothing could change their mind. Now they have lost it all and try to go to court claiming they were misled. I think they were misled, but it was their expectation!
Herwig Delvaux wrote:
Hello Nicolas,
What you write ,
just proves once again,
that investors are narrow thinking…. in MOST cases…
….
Investors, all over,
have repeatedly invested in failing businesses….
yet allways BLAME enterpreneurs,
NEVER blame themselves, allthough they pretend to be able,
allways to recognise good opportunities “at once”. It’s a lie.
We enterpreneurs, need investors, of coarse.
But there must be done something,
to find “quality” investors….
Greets, Herwig
MARCO Cardoso wrote:
Dr. Earl Smith,
Thank you for sharing your thoughts.
It is brilliant what you kindly made available.
I will recommend it to our consultants, clients and potential clients.
Have a great weekend.
Nicolas Saubié wrote:
Hello Dr. Smith,
Thanks a lot for these advices,
My experience is that the company seeking funds should have one and only one value proposition. I have been very embarrassed because my company is successful in at least 2 different fields, and it is one too many …
dr-smith.infodr-smith.infodr-smith.info
Thanks for three great comments. Robert: I do not raise capital for start-ups and early stage companies. Most of my work is with mid-market companies with revenues north of ten million annually. Brian: You are exactly right. My experience has been that the icing on the cake for VCs is a team that is implementing as a high rate – if they find that in addition to a great team and strong board, they tend to want to invest. A 4th component of the ‘ideal investment’ is an advisory board focused solely on business development. That addition can get a VC positively salivating. I build these board and have written a book about them – http://www.dr-smith.info/books-by-dr-smith/amazing-pace/ . Ian makes a similar point. the team is the foundation of everything. Their most important characteristic is that tendency to implement – to monetize the value proposition. Investors regularly see ’strong teams’ that seem to feel entitled to funding – a real turn-off. They search for those teams that they have to run to keep up with. Thanks again – add more comments if you feel like it. Let’s keep the discussion going. Dr. Smith
Ian Thomas wrote:
Dr Smith,
As someone who has worked on several “start up” projects over the years, from “local” two man, to Plastic Logic, there sems to be a great deal of correlation between the team and the success.
For me a capable team brings care and experience to the initial planning and operational design, but also brings greater capability to deal with variance as the project progresses – even to the extent of recognising when the team needs to be reconfigured!
Ian Thomas Casmik
Brian Smithies wrote:
Hello Dr Smith,
Very helpful and interesting thoughts in your article.
As CEO of numerous businesess I have spent the last 12 years pitching and presenting to VCs and Banks on behalf of many different ventures – over (400) presentations done.
The thing I find to be the main driver to success is THE TEAM, you have good experienced people in place ready to take the venture forward. (proven)
VCs always want to, and must see a heavyweight board or strong sucessful leadership qualities in those seeking the finance. I call these my Dream Teams.
Just my thoughts.
Regards
Brian Smithies
briansmithies@ULLTRA.com
Robert Carter wrote:
Hi Dr. Earl,
Your blog is very insightful and provides lots of help regarding how to handle the first meeting with Venture Capitalist. Do you also help raise small amounts of capital from Angel Investors for product development and validation? If yes, please send me more information.
Thanks,
Robert
Ron LaFaye wrote:
Dr. Smith, I checked out your blog. Very insightful. I look forward to getting back to it when I have more time. Thanks for sharing your expertise.
Hi Dr. Smith,
I must confess to pitching in terms of capturing a small percentage of a huge market. We are not in revenue yet.
We have analyzed entering our market by noting: It is a mature market with established players. World Bank numbers show the market growing quickly. New technology will allow us to greatly lower cost to the customer. We feel this will appeal to our customers. We know how to reach our customers.
We point these things out when approaching potential investors, as well as the size of the market and our guesses at estimated penetration.
I hear you saying we should not guess at our market share at all. Should we just concentrate on our new technology and how we reach the customer? How can we better guess at our potential revenue, if not based on a percentage of the market?
Many thanks for you thoughts on this.
Bill
Bill, You should begin to generate revenues by converting potential customers into paying customers. Don’t ‘guess at potential revenue’ – generate actual revenue. You say that “We know how to reach our customers”. The only way to prove that is true is to actually reach them and generate revenue. Dr. Smith
Earl,
Comprehensive indeed, and mostly accurate. I would add too that your list assumes the investor has been well screened in advance to have relevant experience in the space the startup is targeting. The reality is that most VCs today are not VCs, but microPE players and that sets a whole new set of expectations.
So, I am not in full agreement with your statement that the startups are their guest (and at their mercy). Remember that the startup is selling its equity and if you are confident it has value, an equilibrium between Startup and VC is crucial to make the marriage work. Money is not king, trust is. And money from the wrong source is a dead-end street.
But your list is a good starting point to get entrepreneurs on the right track.
Best,
Georges
Great article Dr. Smith, very comprehensive, BUT,
Most Vent Cap operations I’ve indulged myself with in funding requests are rather mis-informed, so add to the comments that you the applicant should be very selective in whomever they approach.
1. Most early pre-qual interviews are done by recent grad student employees, the weeder-outs, who know little in experience about the field I am engaged in. They use pre-existing housing finance models we now know do not work anymore. Most housing VCs are burned by credit fiasco.
2. Secondly, they issue broad-based requests that are NOT conducive to the kind of partnership I seek. Once I have 3-15 models built, and on display- the vent cap guys are knocking on my door.
3. The first partnership deal entered into is the most critical relationship. Choosing someone who has similar experience in building and construction, is most likely on the ropes right now- for lack of THEIR foresight and management. I have yet to find that partner I’d really want to JOIN up with now.
4. The product is everything. All this preparedness suggested is not necessary. Be open to proposal modification, as I believe in the Axiom, IF YOU BUILD IT THEY WILL COME. You can’t convince anybody of anything unless the innovation and design are extraordinary, without embellishment.
5. Do the funding on your own, privately, just to get started. Much better in a personal, conducive relationship. People, having been BURNED by the financial advisor ‘experts’, are making their own decisions now, and see their profits without share, dividend or derivatives, LOL!
Common sense dictates an astute sense of reality in this market, and a conservative, cautious approach.
Quentin