Watching entrepreneurs pitch venture capitalists, after a while, you tend to notice some consistent behavior patterns. Here are ten common mistakes that you might want to avoid, and tips for how to increase your chances of a successful meeting.
1. Failing to understand how VCs work
Tip: Prior to your pitch meeting, be very clear about what VCs do in general – make equity investments in startups – and what they’re looking for – equity returns through liquidity events (IPO or sale of the company) within 2-5 years. They don’t lend money that you can pay back with interest; so once you’ve raised VC financing, you are on a path to be sold.
2. Not doing your homework on the specific VC
Tip: Do some research on the firm prior to your meeting; most VC websites are excellent and clear about explaining what they do and where they invest. Make sure you’re targeting VCs who invest in your geography, your industry, your stage of growth and your size of deal. And make sure they’ve got investable funds.
3. Showing up too early
Tip: If your project still requires years of university lab research, you’re too early for VCs – they don’t like to invest in science projects. And if it’s just your shining faces and a pitch deck, you’re too early for VCs – they expect to see a product and, ideally, customer traction.
4. Displaying symptoms of founder’s disease
Tip: VCs will be scared away if you come across as uncoachable, inflexible, unwilling to share control and unwilling to consider bringing in new executives at the right time. They can be great to work with when they find a great idea, led by a team that’s coachable and puts the company first.
5. Lacking customer input
Tip: How much customer discovery have you engaged in? Do you have a first-hand understanding of their pain (their unmet need)? How are they addressing that need today, however poorly? Have you developed a sense, through customer interaction, that they would switch to your solution were it to become available? Can you document input from customers? Better yet, can you show customer traction (read: actual sales)?
6. Dismissing your competition
Tip: Don’t get caught claiming, “We don’t have any competition,” because it belies a real lack of business and market savvy. Granted, your solution may be better/faster/cheaper/cooler than the customers’ current way to doing things, but make no mistake: all new market entries – even truly disruptive innovations – have competition, and it’s the way things were being done before they showed up.
7. Failing to articulate a compelling value proposition
Tip: Is the customer problem you’re addressing an urgent issue (a shark bite) or a minor issue (a mosquito bite)? VCs invest in startups that solve shark bite issues.
8. Lacking a clear business model
Tip: Do you have a clear plan for how your business is going to generate revenue? Too many entrepreneurs, particularly in the Internet and mobile spaces, when asked how they plan to make money, respond, “By selling to Facebook or Google.” That’s not a business model, it’s an exit strategy – and probably an unrealistic one if you don’t have a realistic revenue-generating approach in the first place.
9. Having a weak (or non-existent) go-to-market plan
Tip: “If we build it, they will come” screams naivety, as does, “If we capture only one percent of the market, we’ll still be successful…” VCs want a grounded go-to-market plan, including a clear operational roadmap detailing headcount, geography, product introductions and promotional tactics. If you adhere to the 4Ps (product, price, place, promotion) with your marketing execution, you can’t go too far wrong.
10. Pitching financials that lack credibility
Tip: Are your revenue forecasts realistic? Use logic checks such as: Are year four and five sales a reasonable share of the total addressable market? Are you accounting for competition? Do you allow for sufficient lead-time to launch the product and the marketing campaign, and to reflect reasonable sales cycles? Are your profit projections realistic? Use comparable companies’ financial ratios as a reality-check – for instance, expenses for R&D, marketing, sales, etc. as a percentage of revenue; and gross profit and operating profit and a percentage of revenue.
Finally, remember that as VCs listen to your pitch, they’re not looking for some magical “right answer” (for there is none), but rather the thought process by which you arrived at your plan, and to engage you in a conversation. VCs tend to be thoughtful, flexible, logical, evidence-driven and fast on their feet. They like investing in teams with the same traits – along with passion and strong execution bones. So come prepared, then relax and let the intellectual sparks fly.