HOW VENTURE CAPITAL WORKS
Venture capitalists (VCs) are people, too—most of them anyway. And as such, while insanely ambitious, competitive, and hopefully intelligent, just like anyone else, they aren’t looking for more work to do.
A blind business plan hurled over the e-mail transom has as much chance of being read as an e-mail starting out with “Dear Sir or Madam.” A top VC might receive 500 to 1,000 e-mails a day, so cluttering up the inbox without an edge is only making you the enemy of the assistant whose job it is to delete e-mails. You might think you have the best idea since Travis hitched a ride on Uber, but without a warm introduction from a trusted person in their network, your idea will die an anonymous death.
LinkedIn can be a start to finding out who you are “linked” to, helping you build a path toward your VC target. Unfortunately, many people are LinkedIn whores and send and accept LinkedIn invitations from people they barely know. Affinity groups are a good way to get your foot in the door. Going to the same college or high school as the targeted VC is super helpful. VCs will be courteous to somebody who comes from their hometown (they don’t want to be called the rich jerk who forgot where he came from) or from their alma mater.
Networking through past business affiliations of the VC is one of the best ways to get a meeting. If a VC worked with someone who can attest to your brilliance or your startup’s potential, you now have provided the VC the trusted shortcut to finding the next big thing.
Don’t send a business plan. That takes too much time to read and is often impossible to understand without an interpreter. A short deck describing how your idea is going to transform the world is what will get their attention. Include the 4P description of your business—who are the people, what is the product, what is the potential, and what is the predictability on execution. Once you’ve got the meeting, the pitch is all about precision and passion—don’t speak in vague generalities or like a professor. No VC wants to understand how to build the clock—they want to know what time it is.
The beginning of the pitch basically sets the stage for success or to be sent packing. The first two minutes are about getting the VC engaged and establishing credibility. Recognizing that they reject 99.9% of the investment opportunities presented to them, you need to create the impression that what you have is revolutionary and that you are Marc Benioff’s better-looking clone.
Next you need to explain the market opportunity that you are going after. What is the TAM (Total Addressable Market)? What are the megatrends that your idea benefits from? Who are the competitors?
Now it’s time to explain your plan for world domination. What is your go-to market strategy? How does this disrupt the status quo? What kind of people and partners do you need to execute against your opportunity?
Finally, explain the financial model. What are the key metrics that will drive value and how are you focused on achieving success? List the key milestones that will provide confirmation that you are on the right track to take over the industry.
After going through your presentation, don’t overstay your welcome. Make sure you give the impression that you are tight on time and you are on your way to your next meeting, whether you are or you aren’t. Back to VCs are people, too—they want something that others want or can’t have. The harder you are to get now, the more they will want you. We just solved all your dating problems, too.
GSV’s 4P’s
Investors aren’t always articulate on what they are looking to invest in other than “making money,” but actually, we believe that 99% of the characteristics investors want are captured by the 4P’s—PEOPLE, PRODUCT, POTENTIAL, and PREDICTABILITY.
The first “P”—PEOPLE—is by far the most important component to the investment equation. While startups don’t have long histories, the people do. Winners find a way to win and also know how to get you to believe in what something can become.
The second “P”—PRODUCT—is critical, with investors looking to back companies that can be the leader in what they do. With technology in general and the Internet in particular, there is often a disproportionate advantage to the leader in a category.
The third “P”—POTENTIAL—is what investors need to envision. They want to believe that the fledgling enterprise could be HUGE. Megatrends pour gas on a fire for startups.
The fourth “P”—PREDICTABILITY—might seem like a challenge, since there is nothing predictable about a startup other than its unpredictability. However, creating confidence that a company can deliver against its plan (see first “P) is the difference between a startup being funded or failing.