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.
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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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Agastus Naik wrote:
Thank you very much Dr. Earl, Your article is outstanding among those that I read in the recent time. It’s addressing the challenges faced by entrepreneurs to present their value proposition to VC’s.
I’ve a small group “The President/CEO Elite” exclusively for Entrepreneurs, I’m sure they’d really appreciate your artcle posted in the discussion board. I’d like to invite you to join our Elite group and have this discussion featured.
J, thanks for the rant – but you left out one thing in your list – results to date. A presentation that is built of the premise that ‘we will start the business the day after you fund us’ is dead on arrival with most investors. Investors want to see results – clients – revenue – business relationships that involve payment to the presenter. What they generally can’t stand is a laundry list of excuses why not. Entrepreneurship is first and foremost about an action oriented focus – getting things done. Writing a business plan and putting together a power point presentation do not qualify. In my experience, investors sort out teh two groups fairly quickly and show the non-entrepreneurs the door. Dr. Smith
Erick Chung wrote:
Wow, I like it.
Great Stuff … I will actually use this method and let you know how this goes.
Song Clash wrote:
Great article and post from everyone.
I would like to point out that Angels do have an Angle but I think he meant to type Angel.
Best to everyone,
Juan Carlos
Song Clash wrote:
Great article and post from everyone.
I would like to point out that Angels do have an Angle but I think he meant to type Angel.
Best to everyone,
Juan Carlos
J Roberge wrote:
Okay… here is my rant… further to my first point. Further to Guy’s 10/20/30 rule… make your presentation short and to the point. The ten slides should be as follow:
1. Problem
2. Your solution
3. Business model
4. Underlying magic/technology
5. Marketing and sales
6. Competition
7. Team
8. Projections and milestones
9. Status and timeline
10. Summary and call to action
Once you get into more detail, and assuming you have hooked some interest, there is another road block that entrepreneurs seem to miss. Founders and their shares. Try to keep this to two founders, perhaps three and that is it. Approximately 75% of the founders shares will be vested over 2-3 years. IOW, 75% of your equity will be earned out over this time while you build the business. If one of the founders quits on day two s/he forfeit 75% of their shares. The share capital of the Company (pre-money) should set aside ~10-15% as an option pool. Make sure what ever valuation you are aiming for it takes into consideration this option pool as it is dilutive to the founders obviously.
Valuation. Be realistic. You will find more and more VCs are investing less at lower and lower values. In tech, what use to take a team of ten can be done with a team of two; barriers to entry are coming down and in general so have first round valuations.
Its more about the terms then the money. Familiarize yourself on all the typical terms and conditions of a typical VC term sheet. Understand them clearly and what they mean to your company now and moving forward. It is better to accept a lower valuation, less money on preferred terms. (Two debated ones these days – and they go hand in hand – are participation and liquidation preference).
Last comment. Remember. You need to impress upon the VC or investor how THEY are going to make money. Your real objective once you take someone else’s cash is to make them money FIRST and foremost. Get yourself thinking like them and aligning your objectives.
Oh one more comment. Dont fall in love with your business. What I mean here is if you are a young entrepreneur dont get hung up thinking your company is the next Facebook or Twitter and you are going to become a multi-billionaire. Chances are its not. And chances are you have a number of start-up ventures in front of you. GET A DEAL DONE! Dont let your personal greed skuttle a financing and dont hold on too long thinking there is a better deal around the corner. Advance your project, get financed and build a successful business. Make some money and start another company. That’s how to do it. It builds your track record, credibility etc. And its good for the economy!
Sorry for the long rant… I could go on but we’ll leave it at that.
J, thanks for the comment – and right on point. I have also had the ‘massive slide stack’ experience. One reason I think that entrepreneurs do that is a misunderstanding of the process. They don’t understand that each meeting has a set of objectives and that those objectives are cumulative. Instead of focusing on the objectives of a particular meeting, they present as if all the meetings are taking place at once and the entire decision process for the investors is compacted into one one hour session. Dr. Smith
Frank Bu wrote:
Maybe we can do some work together for your clients in great Nanjing region, Yangtze River Delta, China mainland.
Regards, Frank
J Roberge wrote:
One of the more common problems I see, is that many companies have a product plan and not a business plan. And often the reason for this is because that is what they have. A great product, but not a business.
In terms of the actually presentation, I recommend Guy Kawasakis’ 10-20-30 rule for a presentation. 10 slides > 20 minutes . 30 font point. This forces you to get to the core of your value proposition. An entrepreneur recently sent me a powerpoint presentation in a very interesting business… it was 59 slides. Our interest died right then and there.
For Guy’s 10 20 30 Rule of PowerPoint go here:
http://tr.im/ERxC
To see Buy present this on You Tube go here:
http://tr.im/wQGB
Eric, Thanks for the comment – right on point. An additional comment on Google – almost every VC I know Googles a space well before each presentation – to see what companies are in it and how they might represent competition. They take key words from the value proposition descriptions in the submitted presentation. If during that face-to-face session, it becomes clear that the VC has done more diligence than the management team, the meeting can come to an end very quickly. I was in one session where the CEO stated that his start-up had ‘no direct competition’. The VC responded with a list of a dozen companies that seemed to him to be potential competitors. The CEO was familiar with none of them. You can guess the outcome of the request for funding. It’s OK to be wrong – we all are more than we would like to admit – but it is unforgivable to be ignorant on purpose. Dr. Smith
Eric Klein wrote:
Great article.
Your points about the management team being important is dead on.
And as you point out Biggest questions are who are the potential competiors and what are the barriers of entry for competition.
Most people seem to discount the competition, and try to downplay their skills while trying to find ways to say “we are so different that no one will ever be able to compete with us on this.” You know it is not true, the investor knows its not true, but getting a real view and answer is what they are looking for.
At some point you will need to lay the cards on the table and explain who can compete and what they will need to do once they have seen you do it once – the second company always has a shorter time to market as they have your idea to copy and you have educated at least a little of the market.
Look at Google, they were not first to market with search, but they came out with a better product than Yahoo and they now own search.
Bill, Thanks for the comment. I agree with you on both points. Lack of preparation is a terrible waste of opportunity – mostly driven by laziness and a lack of professionalism.I suspect that most people in these situations fail because they really don’t want to succeed. The tendency to skate on the surface and avoid the details is often a sign of shallow mindedness or the same kind of laziness. Taking for granted that they have got it right – not putting their ideas to the test in front of an independent and sophisticated panel are indicators that they are not really serious players. Dr. Smith
Bill Morrison wrote:
Excellent article. I would place particular emphasis on the idea of a thorough Red Team phase. Having sat through a number of pitches I was astounded at the lack of preparation and the failure of presenters to view their pitch from the recipient’s perspective rather than their own. Find a coach, seek clear feedback and take note that it is the audience who counts not the prestenter!
I would also say that people are have a terrible tendency to show a deep love for their concepts but a lack of concern for the more mundane business side – the go to market strategies I have seen proposed are often very poorly thought out.
Roland K. Orlie wrote:
Dr. Smith,
thank you that is a very good summary of the sanity approach. the only one I can add that there should be a solid plan as part of the presentation. Nothing is more annoying than a back of the envelope plan or none at all. A good plan has rhyme and reason and backs up the logic. One can disagree with the assumptions but reasons for thoughts have to be there.
Thanks again for the great checklist.
linkedin.comlinkedin.comHerwig 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
NOTE
I wrote about the quality problem, in another group:
http://www.linkedin.com/groupAnswers?viewQuestionAndAnswers=&gid=1932802&discussionID=9030464&sik=1257621516577&trk=ug_qa_q&goback=.ana_1932802_1257621516576_3_3.ana_1932802_1257621516577_3_3
Group: http://www.linkedin.com/groups?gid=1932802&trk=myg_ugrp_ovr
Discussion titled :
The eternal bleeding wound: Gaming investors ! ??
To all money seekers/enterpreneurs:
give your opinion from this discussion opener !
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 …
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 CasmikLtd@aol.com http://tinyurl.com/nyuvo6
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
e-mail: robert_carter_95070@yahoo.com
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
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
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.comChintan, 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.