The legendary John Doerr of venture capital firm Kleiner Perkins. (Photo: Thomas Hawk)
Total read time: 12-15 minutes.
The Indus Entrepreneurs (TiE) has mentored some of the most successful entrepreneurs in the world, including 7 of the Forbes Midas Touch members.
In fact, I volunteered for TiE when I first moved to Silicon Valley in 2000 to observe some of the best and brightest in action. I’m not Indian, but entrepreneurship is entrepreneurship. Consider this:
Today, TiE events are a parade of the Who’s Who among CEOs and VCs of Silicon Valley, from founding Sun Microsystems CEO… Vinod Khosla to former McKinsey CEO Rajat Gupta to former Hotmail founder Sabeer Bhatia, who sold his company to Microsoft in 1998 for $400 million. “TiE is the best kept secret,” says Bhatia, who in April launched a new startup InstaColl. Others jokingly call TiE “the Indian Mafia”, the invisible hand behind at least 300 startup companies at any given moment…
In expectation of TiE’s annual conference on entrepreneurship, TiECON 2009 (May 15/16), I asked four of its members, all accomplished venture capitalists at some of the world’s most prestigious firms, to answer questions about start-ups and finance that 35,000+ of you suggested via Twitter, plus a few I wanted to add. The questions include, among others:
What is the best pitch meeting that you remember and why?
What are the most common mistakes or assumptions smart founders make in pitch meetings with VCs?
What unfavorable terms do founders often miss or underestimate in term sheets?
How can someone get you to look at a business plan if they don’t know anyone in your network (e.g. outside Silicon Valley elite, didn’t go to Stanford)?
At the roundtable:
– Prashant Shah, Managing Director at Hummer Winblad
– Anil Patel, Principal at Clearstone Venture Partners
– Ravi Mohan, co-founder of Shasta Ventures
…
Prashant Shah, Managing Director at Hummer Winblad
1) What is the best pitch meeting that you remember and why?
The best pitch meetings are those that have real technology breakthroughs applied to solving large and growing problems. For example, Voltage Security showed us how the information encryption market could be cracked wide open by their Identity Based Encryption (IBE). Or, Move Networks’ adaptive HD streaming technology enables economical long form online video. Both of these companies first explained how underlying technology trends were creating new markets – the increase of data theft and the shift to online video. And both had solutions based on hard-to-copy technology. Combined with teams who were passionate and had relevant experience, these were pitches to remember.
2) What are the most common mistakes or assumptions smart founders make in pitch meetings with VCs?
The biggest mistake is when entrepreneurs pitch to us as if we’re customers instead of investors.
It’s nice to see a demo, but we don’t want to dive into every feature. As investors, we want a clear picture of the business, not the product. What’s important is not how great your product is, but why customers will spend money on it.
And, just as important, why will they not spend money on something else. There’s a subtle but important distinction there. For example, it’s straightforward to explain why your killer feature will drive more sales of your disaster recovery solution than your competitors. But, can you also explain why customers will spend more money on disaster recovery in the first place rather than basic backup, or security, or doing nothing at all? Or, to look at it a different way, you wouldn’t recommend buying Apple stock because the iPhone doubles as a music player, has a touch screen, is wi-fi enabled, comes in a different colors, includes a speakerphone, and so on. Instead, you would recommend their stock because they have a dominant share, great management, and the market is still not saturated.
The second biggest mistake is having too many slides. This sounds like a tactical error, but is in fact a strategic one. Too many slides means you can’t explain the value proposition of the investment succinctly. You only need 10 to 12 slides. Having more than this means you’re trying to close the deal on the spot. It doesn’t work that way. The goal of any meeting should be to get to the next meeting. If you have an urge to thicken the deck, pick out a dozen slides to tell the story and hide the rest as backup.
Other common mistakes:
– Spending too much time on the team slide. We want your background, not your biography. Don’t need more than two or three minutes of the team’s highlights.
– Within the first 15 minutes, you should have described the problem you’re solving and how you’re solving it. And by first 15 minutes, I mean from the time we say hello, not from slide 1.
– Lack of understanding the numbers. Many founders ask part-time CFO’s to help with the financial model. That’s OK. But as founders, you still need to own the numbers. If you’re a SaaS company, do you know your assumptions on Annual Contract Value? MRR? Churn? Renewal rates? And all companies should know their hiring plan.
Less common mistakes, but they happen:
– Being rude to the receptionist
– Slides showing another VC’s name
– Laptop fails and you can’t explain your business without slides
– Running late but failing to give a quick call to let us know
3) What unfavorable terms do founders often miss or underestimate in term sheets?
It’s not so much that founders miss “unfavorable” terms, rather that they pay too much attention to valuation. Getting the best valuation should not be the goal. You need to look at the terms holistically. What are the liquidation preferences? Who has what control to do what? Create a spreadsheet that shows exit analysis. How would proceeds be distributed at exits of $5M? $20M? $50M? This will tell you what price you need to sell at to make money. If a company IPO’s, everyone’s happy. But most don’t make it that far. And as you take on additional rounds of financing, the exit scenarios get complicated. Different series of investors will have different valuations at which to sell.
4) How can someone get you to look at a business plan if they don’t know anyone in your network (e.g. outside Silicon Valley elite, didn’t go to Stanford)? If the answer is emailing a general email address, how can someone really stand out make it to round 2?
At Hummer Winblad we do actually look at all the plans submitted to us. We are fine with people contacting us directly. We are also active in our own outreach. You can frequently find us speaking at events by TiE, Astia, SDForum and other groups. We enjoy meeting entrepreneurs at these organizations.
5) Are you more interested in huge traction often lacking a well-defined rev model or start-ups who hit breakeven quickly and show the ability to scale but not nearly as quickly? Either type of growth often requires fundamentally different decisions early on — how should companies decide which is best for them?
We want huge traction and a revenue model! But we’ll settle for a revenue model and a game plan for huge traction. In our focus area of infrastructure and enterprise software, it’s very important to understand how much customers are willing to pay. Also important to understand why they’re willing to pay that – what’s their ROI as calculated by them?
Ajit Nazre, Kleiner Perkins
1. What is the best pitch meeting that you remember and why?
Virsa was the best pitch meeting I had in the six years I have been at KPCB. After the first introductory slide Jasvir Gill, the CEO and founder jumped straight to a demo and wanted to show us the product without the typical team, market, etc. etc. He had a real product with real customers and he was proud to show that. That impressed me more than the sophisticated pitches which are high on buzzwords and low on facts and substance.
2. What are the most common mistakes or assumptions smart founders make in pitch meetings with VCs?
Here are common mistakes that founders make while pitching to VCs:
-Most founders don’t want to list a single risk in the business (where as VCs want to know what the risks are and how they can be surmounted)
-Most founders completely undermine and/or downplay competition (competition is good – it legitimizes a market)
-There is no clear ask (VCs want to know what the founder wants in terms of financing)
-Founders dumb down the pitch to make it more businesslike and fail to mention what their key tech assets are
-Smart founders forget that they typically know more about the domain than VCs do and don’t take time to share their knowledge and insights that would impress the VCs
3. What unfavorable terms do founders often miss or underestimate in term sheets?
Smart and experienced founders don’t miss much. They have good advisors and lawyers who have mentored them well.
4. How can someone get you to look at a business plan if they don’t know anyone in your network (e.g. outside Silicon Valley elite, didn’t go to Stanford)? If the answer is emailing a general email address, how can someone really stand out make it to round 2?
Make unbelievable claims that will grab my attention. Keep the email as short and to the point as possible so that it is easy to understand what the pitch is.
5. Are you more interested in huge traction often lacking a well-defined rev model or start-ups who hit breakeven quickly and show the ability to scale but not nearly as quickly? Either type of growth often requires fundamentally different decisions early on — how should companies decide which is best for them?
Consumer internet or consumer mobile companies without traction are hard to evaluate because the main risk they have is consumer traction. That is not the case with semiconductor, cleantech and enterprise software companies.
6) Government policy is a force for every clean tech company – how are you weighing the risk/opp?
It is both a risk and an opportunity: Risk because the stimulus tide will lift all boats (good and bad) and an opportunity because in a credit strapped market, having loan guarantees or grants can be a huge strategic advantage for a company.
7) How are you factoring government sales and stimulus funds into your evaluations of start-ups (it used to be gov’t rev=0 value)?
Government revenue is still not valued but government grants and loan guarantees are.
Anil Patel, Principal at Clearstone Venture Partners
1. What is the best pitch meeting that you remember and why?
For early stage companies (where you are not pitching demonstrated revenue growth), good pitches rely on either a compelling entrepreneur or a compelling idea. Great pitches rely on both. Notice that I didn’t mention technology – great technology only works if it’s in service of the compelling idea.
A great pitch I heard recently was an ambitious combination of online and offline entertainment. The founding team was composed of one star in each of these categories. They showed their background in entertainment by pitching a storyline, much as a movie would be pitched, as part of their company presentation. Even beyond the storyline, the idea had unique qualities – I had never heard it before, and I know that the likelihood of someone else coming in to pitch this idea at Clearstone next week is pretty close to zero. The team described the risks realistically and didn’t try to hide them, which demonstrates maturity and thoughtfulness. I loved the ambition and the leadership qualities of the founders.
2. What are the most common mistakes or assumptions smart founders make in pitch meetings with VCs?
One of the most common assumptions by founders that I see in pitch meetings is that they have to have all the answers. We know there is uncertainty and risk in your plan – if there weren’t, venture capitalists wouldn’t be in business. The important thing is to define where you think the risks lie and why the potential reward is large enough to justify taking the risks. When you’re answering a question in a pitch meeting, be aware that the investor usually asks a question for two reasons: first, to get an answer and second (and often more importantly) to see how you think.
One more word to the wise: Avoid telling a potential investor that your revenue projections are “conservative”. Of all the early-stage companies that have presented so-called “conservative” financial projections, I’ve seen less than 5% hit their numbers. Supporting your projections with key assumptions and stating why they are “achievable” is far more credible.
3. What unfavorable terms do founders often miss or underestimate in term sheets?
Entrepreneurs will almost always have their attorneys looking at term sheets (often the same attorneys that VCs use on other similar transactions). I don’t see too many missed “tricks” on venture term sheets. As a former attorney who has represented both entrepreneurs and investors, I like to construct term sheets that don’t have any traps for the unwary. It’s certainly better for building trust with your investor if that’s the case.
That being said, the most common mistake I see from entrepreneurs on terms is going through unnatural acts to avoid dilution.
When you make valuation (and therefore dilution) your sole priority, other unfriendly terms can slide in. For example, I had an entrepreneur propose that I invest at a higher valuation, with a downward price adjustment if certain milestones weren’t hit. You do not want to have this kind of misalignment of incentives, where your investor might be hoping that he or she gets more ownership if the company doesn’t do quite so well. Similarly, entrepreneurs will sometimes try to grossly undersize an option pool or grant, thinking that it preserves their personal ownership percentage. Often, this disparity ends up sending a negative signal to the best talent that the company is trying to recruit. Finally, the more that an entrepreneur tries to push valuation up beyond a reasonable range, the greater the chance that an investor will want to insist on less friendly terms elsewhere (for example, on liquidation preference) to compensate.
4. How can someone get you to look at a business plan if they don’t know anyone in your network (e.g. outside Silicon Valley elite, didn’t go to Stanford)? If the answer is emailing a general email address, how can someone really stand out make it to round 2?
With the advent of tools like LinkedIn and other networking sites, you don’t have to be a member of the Silicon Valley elite or a Stanford alumnus to connect with a venture capitalist. Throwing a business plan over the transom and into the general email box puts you in a very noisy place. On the other hand, spending some time to navigate any relationships you might have to get some sort of warm introduction is worthwhile and shows the kind of scrappiness that venture capitalists admire. If that approach is not fruitful, find out what organizations the VC is involved with (for example, TiE or VCNetwork, or an industry group around Cleantech), and attend an event at which he or she is speaking.
5. Are you more interested in huge traction often lacking a well-defined rev model or start-ups who hit breakeven quickly and show the ability to scale but not nearly as quickly? Either type of growth often requires fundamentally different decisions early on — how should companies decide which is best for them?
An entrepreneur should have a reasonably crisp idea of what he or she is trying to build and what success would look like. (This will often change over time, but targets are important). If it is a media property, I have no problem with building an audience in advance of monetization. Many companies that are fundamentally about a new form of consumer communication (e.g. Skype, YouTube, MySpace) have achieved impressive outcomes far in advance of having impressive revenues because they were acquired by companies with established business models that were seeking audience and had the potential to capitalize on new consumer behaviors. This is the likely path for Twitter as well. But, even if it happens later, the entrepreneur should have a plan to scale revenue profitably and exist as a standalone company, because you can’t count on an acquisition happening at just the right time. Your investors should be on board with how much capital may be required to get to this point, because the financial risk could be high.
6) Government policy is a force for every clean tech company – how are you weighing the risk/opp?
I would distinguish between government sales and stimulus dollars. Stimulus money may benefit a company in the form of tax incentives or cheap capital. It may or may not create or subsidize government sales. Taking advantage of stimulus money will require some planning and a lot of tactical work, as the dollars may be unlocked from a variety of places, from federal agencies to state budgets. We know that the recent federal stimulus package has been a boon for lobbyists, and the savvy company targeting significant stimulus funds will hire a dedicated resource to manage government relations and any external lobbyists or consultants that the company engages.
7) How are you factoring government sales and stimulus funds into your evaluations of start-ups (it used to be gov’t rev=0 value)?
Government sales can be difficult to achieve, especially for a smaller vendor, but many companies have very successful operations that rely on continued federal or state government customers, often working with established channel partners with significant experience in this area. We have companies in our portfolio that have been successful in selling to government customers, and I certainly don’t think that those sales are worth zero. The real question is how repeatable the sale is and how much time and money could be spent in trying to close a sale. Specific expertise and deep contacts are even more valuable for government sales than for the typical large customer sale, so hire accordingly.
Ravi Mohan, co-founder of Shasta Ventures
1) What is the best pitch meeting that you remember and why?
I invested in a company going after mobile identity protection and the pitch meeting was the best because the service concept made intuitive sense, the service was validated by a major customer win, the market was large with proof points of successful outcomes [e.g. IPOs, acquisitions], the service was hard to pull off because of the relationships needed to be built with carriers, and the team had the experience of working with carriers to be successful. Despite the huge risks of working with carriers, it was a bet worth making because the team had the skills to potentially succeed and if they succeeded the outcome was large.
2) What are the most common mistakes or assumptions smart founders make in pitch meetings with VCs?
Not answering the question directly and simply. Once a VC asks a question, it is incumbent on the entrepreneur to answer it. They need to give a precise and short answer and keep moving through the presentation so that they tell the full story.
Do not give the stock answer to the CEO question as “I will do what’s right for the company” the second after the questions is asked. Engage in a dialogue and use it to see if you want to work with the VC.
3) What unfavorable terms do founders often miss or underestimate in term sheets?
I think that founders with good legal representation do not miss terms anymore, at times they are fixated on the face value of the pre-money and do not look at the terms of the financial instrument – Participating Preferred – but with good legal help they quickly understand the significance.
4) How can someone get you to look at a business plan if they don’t know anyone in your network (e.g. outside Silicon Valley elite, didn’t go to Stanford)? If the answer is emailing a general email address, how can someone really stand out make it to round 2?
Have some company building success, to get attention for your company. Get some PR to make it on VentureWire, Tech Crunch, etc. and then email and call the venture firm.
5) Are you more interested in huge traction often lacking a well-defined rev model or start-ups who hit breakeven quickly and show the ability to scale but not nearly as quickly? Either type of growth often requires fundamentally different decisions early on — how should companies decide which is best for them?
We are looking for an understanding of a customer and their problem with a service that solves their pain and the potential of a business model to monetize the customer base. The monetization model needs to at least result in a $100M revenue business growing at 20%-30% with strong EBITDA margins.
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TiE’s annual conference on entrepreneurship (TiECON 2009) is May 15 and 16 and is completely focused on how to create tech start-ups that succeed in the current economic climate. I don’t endorse events often, but — if you are near the San Francisco area — you should take a look at the list of all-star speakers (Reid Hoffman and others) and attendees and consider the agenda. For founders and CEOs, I believe it to be a worthwhile investment.