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.