Venture Capital Pitch Principles. Part 2

Summary:  This is the second part on VC Pitches, following last month’s post on preparing a Pitch Deck.  Put simply, we said that venture capitalists want a PowerPoint presentation of fifteen slides or so.  This makes sense, if you think about the purpose of the deck:  To get a meeting with the venture capitalists.  That’s it.  They do not want a tome;  they want concise reasons for spending their time to go more deeply into your idea.

In this post, we point out what they want (mainly, a seasoned management team and a robust market).  By the way, this post refers mainly to venture capital funds, although they apply, to a lesser degree, to angel sources.  There will be at least one post.

Start with The Caveats.

For every statement in this post there will undoubtedly be exceptions.  Venture investing is too big and too diverse for most generalizations to apply.  Remember that exceptions are called that for a reason:  They are exceptions to the general pattern.  Just because there is an exception does not mean that other entrepreneurs will be able to replicate that success.

Read the Manual.

OK, so it’s not a manual:  It’s the website for each fund you would like to approach.  You would be surprised at how many people miss this one.  Read it.

One Size Does not Fit All.

If you are reading the websites then we hope you have figured out that not every—indeed, not many—VC funds will match your interests, industry and needs.  Every fund has some degree of focus on sector and funding stage.  If you are a startup seeking Series A, do not send your Pitch Deck to funds that do later-stage funding.  Likewise with sectoral focus:  If your plans are in mobile apps, cleantech VC funds will not be interested.  And don’t even think of a shotgun approach.  Be very selective.

Seasoned Management.

VCs want to see that your management team has some seasoned members.  “Seasoned” means that someone on the team has been with a startup or two before and ideally one that was venture-backed.

It also means that the founder and the management team members have some experience in the space.  It is difficult to catch their attention when you work, say, as a lineman for a utility company and you are proposing to launch a medical device startup.  Sorry, but it is true.  On the other hand, having a CTO who has been CTO in a similar space makes it more attractive.

The team does not have to be complete when you submit the plan.  One could state that funding will be used to build out the team.

The Market.

VCs call it the “addressable market”  Its size has more to do with revenue than it has to do with population.  That revenue should be growing or poised for growth.  If it is a mature market or one with many major players, then, well, skip it.

And keep in mind that your penetration rates are not likely to be very high.  Equally important, penetration takes time and money.  Assume a sales cycle of at least twelve months—and that’s after you have built your sales team.  Create a business model on a penetration rate of no more than 20% after two to three years.  Yes, yes, there are many exceptions;  just remember what we said at the start of this post.  Assume $2-3 million cost minimum for each 1% penetration (and more if you are in the B2C market).

B2C v. B2B.

Many entrepreneurs think that B2C is the market for them, in large part because the best-known success stories are consumer-oriented.  In fact, most of the venture investments have been in the B2B space.  This makes sense:  It is less expensive to sell to businesses.  One uses a direct sales force with industry-centric marketing efforts supporting the direct sales.  Consumer-centric sales and marketing are wildly expensive.  Also, businesses tend to be early adopters of new technologies, provided that those technologies are solutions for mission-critical issues.

Disruptive Technology.

On the websites of venture funds you will see references to matters such as “disruptive technology” or “defensible IP.”  This one gets a little more complicated.  In an ideal world, this may be true, but in the real world, it is not always so clear.  In some markets—biotech, medtech, cleantech—unique technology may be quite important.  However, in the digital and mobile space, successful ventures have used off-the-shelf technology to build good companies.  The key in those cases has been rapid market entry and growth.

Revenue:  Get It Now.

Entrepreneurs are nostalgic for the days when revenue was not necessary prior to funding.  Well, those days are gone.  It is still possible to get VC funding without revenue but that is most often the domain of angel investors, who invest to prove the concept and get it at least close to market.

If it is not revenue then at least have some clients—preferably marquee clients.  They can be clients who are not paying you (yet), but are serving as a kind of testbed for your solution.  Having these clients means that there is a kind of third-party validation.

Let’s put it this way:  If you have revenue when you talk to VCs then you are more likely to get their attention and you are more likely to get a higher valuation.  Enough said.

Next post on this topic:  getting in front of VCs.

James C. Roberts III is the Managing Partner of Global Capital Law Group www.globalcaplaw.com and CEO of the strategic consulting firm, Global Capital Strategic Group (www.globalcapstrat.com). He heads the international, mergers & acquisitions and transactional practices and the industry practices concentrating on digital, media, mobile and cleantech technologies.  He is currently involved in opening the Milan office.  Mr. Roberts speaks English and French and, with any luck, Italian in the distant future.  He received his JD from the University of Chicago Law School, his MA from Stanford University and his BS from the University of California—Berkeley.

The Global Capital firms counsel domestic and international clients on strategic and legal issues inherent in the deployment of intellectual & financial capital—a merger or acquisition, foreign market expansion, a strategic alliance, a digital content license, a mobile deal, foreign and domestic labor and employment policies, starting a new entity or raising capital. Clients range from global Fortune 100 corporations such as Deutsche Bank and News Corporation and its subsidiaries, MySpace.com and Fox Interactive Media, to start-ups.  Industries represented include digital media, Internet, software, medical and biotechnology, nanotechnology, consulting firms, environmental technology, advertising, museums and other cultural institutions and manufacturing.

Pitch Deck Principles from the Horses’ Mouth(s). Part 1.

Summary:  Somehow, entrepreneurs seem deaf on what venture capitalists want to see in the initial documents about a new company.  So, we tossed the question out at the (excellent) “Shaking the Money Tree” panel presented by LAVA—the Los Angeles Venture Association (www.lava.org).  And the answer is:

A PowerPoint “pitch deck” of no more than 15 pages and, maybe—just maybe—a two page executive summary.

OK, OK, some entrepreneurs will then respond by taking their 50-page business plan and cramming it into those 15 slides using 10-point type.  Uh, unclear on the concept.

Jim Armstrong of Clearstone Venture Partners (www.clearstone.com) made it clear (and we are paraphrasing here—hey, we’re not stenographers): “Entrepreneurs confuse comprehensive for compelling.  We want compelling.” Jim Andelman of Rincon Venture Partners (www.rinconvp.com) said this:  Remember your goal with the pitch deck—to get a meeting with the venture capitalist.  He put it another way (again, paraphrasing):  “VC’s are like moths to a flame and that flame is PowerPoint.”

True, if the VC wants more then you will have to prepare—and later submit—more detailed plans like your go-to-market plan, etc.

So, we took that advice and mashed it together with other things we have heard from many other vc’s over the gejillion of years we have been involved with startups.

The Details.

In this case, the details are some pointers on what should be included in a Pitch Deck.  In subsequent posts we’ll explain more of the process.

The Pitch Deck: Just remember that you are not trying to get everything—or even a lot—of information in front of the VC.  You’re just trying to get his or her attention.

• 15 slides. Maximum.  That includes the title slide and the “Contact Us” slide at the end.
• Standard formatting—meaning do NOT cram two, three, four five paragraphs of text onto any page.  Usually, a slide has three points with a maximum of three sub-points.  Use one.
• If you ever use any font smaller than 14 points on a slide then we will hunt you down and wag a finger at you.

Why?  Well, as one of the panelists said, it’s like dating.  Would you go out with someone who told you everything about your life in your first meeting?  You need to make it compelling by highlighting the essential points, that is, the points that will get the attention of the VC, so that you can get a meeting (or another meeting).  And only those points—not a dissertation on the points.

The Slides:

OK, so you have 15 slides.  What should they say?

1. Title Slide
2. What Market We Are in
3. What the Market Is and Will Be
4. What We Do & How We Do It
5. What We Do Uniquely/Differently (sorry for the grammar)
6. Who the Competition Is and Will Be
7. How We Differ from/Are Similar to the Competition and How We Beat Them
8. Who our Management Team Is and Those We Will Need
9. Who our Management Team Is and Those We Will Need (page 2)
10. What It Will Cost
11. How Much We Need
12. How We Will Use that Money (including milestones)
13. How We Will Use that Money (page 2)
14. Bonus Slide
15. Closing Slide (“Thank You”)

Now, if you think about it, some of those slides are variations of the same topic and can be combined (e.g., Slides #2 and #3;  #4 and #5;  #5 and #7).  And, you can break out #4 into two slides.  You will notice that, actually, you could do it in something like 12 slides but we gave you two slides for a couple of topics and a bonus slide just because we’re in that kind of mood.

That’s it.  Those are the slides.  Now, each slide does not have to be the exact topic listed in this list.  This is our outline, not one necessarily sanctioned by VC’s, but you get the point (we hope).  You figure out the language, but that language should answer each question (or, more to the point, explain the topic of each slide).  And remember:  nothing less than 14 points and only then if you are explaining subpoints.  Or we’ll find you and wag a finger.

And why is it that entrepreneurs don’t follow this simple approach?

And more to come in subsequent postings . . .

James C. Roberts III is the Managing Partner of Global Capital Law Group (www.globalcaplaw.com) and CEO of the strategic consulting firm, Global Capital Strategic Group.  He heads the international, mergers & acquisitions and transactional practices and the industry practices concentrating on digital, media, mobile and cleantech technologies.  He is currently involved in opening the Milan office.  Mr. Roberts speaks English and French and, with any luck, Italian in the distant future.  He received his JD from the University of Chicago Law School, his MA from Stanford University and his BS from the University of California—Berkeley.

The Global Capital firms counsel domestic and international clients on strategic and legal issues inherent in the deployment of intellectual & financial capital—a merger or acquisition, foreign market expansion, a strategic alliance, a digital content license, a mobile deal, foreign and domestic labor and employment policies, starting a new entity or raising capital. Clients range from global Fortune 100 corporations such as Deutsche Bank and News Corporation and its subsidiaries, MySpace.com and Fox Interactive Media, to start-ups.  Industries represented include digital media, Internet, software, medical and biotechnology, nanotechnology, consulting firms, environmental technology, advertising, museums and other cultural institutions and manufacturing.

Zynga: Online Games Get More $$ & a New Deal Structure.

Summary:  The New York Times today reported yet another investment in online games, this time with an interesting structural twist. http://www.nytimes.com/2009/12/16/technology/internet/16game.html. Digital Sky Technologies, from Russia, made yet another investment in the online world, after its $200 million investment earlier this year in Facebook.  They are leading a group that will invest $180 million in Zynga, purveyor of wildly popular Facebook games like Mafia Wars.  (Venture investors had already invested about $39 million in Zynga.)  This deal follows EA’s acquisition of Zynga’s competitor, Playfish, for $300 million.

Most interesting is the deal structure.  While it is similar to the deal cut with Facebook, it vastly differs from the usual venture investment.  DST bought common stock from employees and, in spite of the size of its investment, did not request a seat on the board.  In addition, we see the virtual micropayment model as something that could be applied in online “rental” of digital content—itself a potentially large market.  Once users get accustomed to paying for virtual tools, they may be willing to pay for digital content.

The Details.

Digital Sky Technologies, a Russian investment company known for its patience with its investments, has done it again.  After stunning the world with its investment in Facebook in the middle of 2009, DST has just announced that it will lead an investment team that will invest $180 million in Zynga, a recent startup that has seen explosive revenue growth from its online games such as Farmville and Mafia Wars.  Marc Andreesen’s fund, Andreesen Horowitz, and Tiger Global are part of that team.

The Deal Itself. What struck us was the deal structure.  Normally, venture investors receive preferred stock that comes with substantial controls on the future of the company.  DST plays by different rules.  They buy common and preferred stock.  Moreover, they are buying Zynga’s common stock from existing employees.  And, they have chosen not to take a seat on the board.

Such investors usually expect a return—either through an IPO or a sale of the company—in a relatively short period.  Evidently, DST differs;  they are said to be patient with their investments.  Given that DST does not have any limited partners with their own short-term needs for returns, it looks like a good move.

So What?

It looks like a prescient move by DST.  Zynga’s annual revenues were reported at $250 million, coming from the online game players purchasing virtual products with real money.  This model has been astoundingly successful elsewhere in the world, most notably China and other parts of Asia.  People playing these games seem willing to fork out a few bucks here and there to buy a virtual tractor or seeds for their online garden.  A few dollars here , a few dollars there and pretty soon you are talking real money.  $250 million and growing.

We also like Zynga’s space.  The model for these types of games has been around for a long time:  Think Sim City.  So also has the virtual economy, fueled by micropayments for virtual goods:  Think SecondLife.  The virtual micropayment model has proven to be a durable and sensible model in China for quite some time.

Sure, such games are subject to potentially fickle behavior of online users.  If Facebook loses its “cool” factor, the decline in online usage could hit Zynga.  No doubt user growth will taper off with Facebook (what is it now?  In excess of 360 million?) but it will take awhile for the user base to decline in any significant way.  Plus, those users might become accustomed to such micropayments, which behavior could then translate to increased revenue for digital content providers.  Hello, newspapers and magazines!

James C. Roberts III

http://www.globalcaplaw.com

Why the Online Ad Model Will Succeed–after a dip.

The online ad model is taking a pounding because some of the major names in the biz are not hitting their numbers and CPMs–and other metrics with which to make money are plummeting.

Here’s the prediction:  It will dip for a while and then climb–fast.  And here’s why:

1.  The current dip comes from these sources and, if you ponder them for a bit, you will see that they reinforce each other:

Source One:  The contaminated economy in general.

Source Two:  The te3rrible ad-spend market, related to the lousy track record of large media companies in hitting their numbers.  (And in particular, companies with a big Internet or mobile play)

Source Three:  Advertisers still “don’t get the web.” (OK, let’s expand our brains and start saying something like:  “Advertisers don’t get the digital platforms.”)

So, you have the ad people unwilling to stick out their necks:  What they really want to do is preserve their jobs while all around them are losing their heads.

2.  The upside?

2.1 (love this numbering system, huh?):  The reach per dollar spent is pretty enormous in the digital markets.

2.2 The demographics are changing–of the ad buyers and ad placement people:  They are “digital natives.”

2.3  The production costs are nearly nil.

2.4 You can change ads on the fly and according to market response.

2.5  And the main reason:  The granularity of the demographics and the data.  It is soooo good (and getting better every day) that people do not know what to do with it.

3. Advertisers really are finally getting the opportunity to run campaigns across three (some would say four) screens/platforms.  That’s powerful.

2009 is one of those transition years–the shift of more money to new media platforms.  Ad agencies will look like geniuses because “now they get it.” But, …

It does not follow that this is advice for new investments.  A lot of people are not sanguine about start-ups and the ad-driven model.  IN other words, the fortunes have been made there.  Now it is the spread of the model to the established economy.  Advertising needs scale or depth–breadth of audience or depth in a niche audience (which, when you think about it, is really the same thing).  Venture capitalists are not looking very closely at startups with the ad-driven model.  So even if you think you are the next Google, please be prepared for a lot of rejection.

Please be prepared for a lot more going on in the new media ad world?  Digital platform ad world?

And where will that take us with the digital transformation occurring in February????