How do investors evaluate startup pitches?

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As a reformed serial entrepreneur who’s spent a lot of time pitching venture capitalists, I’m always interested in the perspective from the other side of the table.

This post on the Toucan Ventures blog actually ties in with my latest mentoring activity, working with the MIT Venture Mentoring Service to provide an on-demand pitch scrub service for MIT entrepreneurs. This effort will be announced formally tomorrow at the monthly mentors meeting, but we have already done one pitch scrub and have requests for others. So I won’t steal too much VMS thunder by describing the new service here.

Newbie founders often assume that entrepreneurs are risk takers and that venture capitalists and angels, by investing in their ventures, are risk takers too. But the reality in both cases is risk mitigation or reduction.

The article How do investors evaluate startup pitches? by Oliver Jones of the Angel Investor Network makes very clear the job of the founder pitching an investor: show that you are reducing the investor’s risk or what Mr. Jones call’s each investor’s risk threshold.

He provides a simple evaluation framework for investors on Angel Investment Network. The framework is based on a dozen years of investment experience.

Team

I’ve yet to meet or even read about an investor who doesn’t put team first, with the exception of Don Valentine ,who I read someplace put the concept or idea before the team. This advice from Jos Evans, an angel investor, could have been written by any number of investors:

“Everything comes down to the quality of the founders. If the people are excellent they will succeed regardless of whether the initial business idea works. Meet as many people as possible and cross check your network for people who might know the founders of a company you are considering investing in.”

What is interesting is that Oliver Jones also sees that the strength of the company’s advisory board can be a strong index of potential for three reasons:

  1. If you have managed to persuade impressive people to join your advisory board it reflects well. High profile advisors being credibility to a startup venture.
  2. It adds to the credibility of the idea. Building an advisory board is one step I advise new founders to start with on their path to idea validation (along with finding a complementary partner).
  3. A strong support network, as evidenced by high profile board members means that the venture will struggle to fail.

Just the other day I had a mentoring session with an entrepreneur who has excellent connections in his field and at both Harvard an MIT. When I recommended he start an advisory board to take advantage of these high level contacts the first thing he did was ask if I would join! I had to explain to him that building an advisory board is like building a team, you recruit by position, starting with the chair, who is the quarterback of the team. Given that I had zero domain experience or expertise in his field the best place for me is on his sideline, as a mentor, but not as a formal advisor.

Market

Mr. Jones sums up the potential argument of team versus market by saying that good founders will find good markets. He points out that founders are selling themselves and their market. And that market has to be very large in order to justify institutional investment.

Traction

What is traction? It’s anything that validates your business. But it must be quantifiable. Unlike the soft validation of an advisory board, traction has to be presented in hard numbers:  revenue, downloads, subscribers, and last and least, page views. Mr. Jones recommends that founders follow the North Star metric, the one value that demonstrates that the business is actually doing what it set out to do. I advise founders to measure not only interest on the part of customers, such as site visits, but engagement, such as registering on the site, returning to the site often or using the app regularly. There are too many one and done’s these days since the cost of checking out a new venture is usually somewhere between zero and nothing.

Idea

Mr. Jones admits something about investors that I’ve long believed but had no hard evidence for: that they go by their gut feeling about the team and the market and then spend their time gathering and analyzing data – such as the venture’s traction – that either prove their initial impression correct or disprove it. But here is where cognitive bias sets in, as the investor will tend to find evidence to support that initial judgment. There’s an old saw that you never get a second chance to make a first impression. Founders keep this in mind! I see too many founders hurting their venture and their reputations by premature fund raising. Keep your powder dry until you are confident you can make an aha! impression on investors. In reality investors are not interested in ideas. They are interested in problems. How prevalent is the problem? How serious is the problem? And most importantly, does the venture’s team have a highly credible solution to the problem, known as product/market fit.? Product/market fit was defined simply by VC Mark Andresseen as “… being in a good market with a product that can satisfy that market.” So stop thinking about your idea and start thinking about your customers and their problems. Are they  just mildly dissatisfied or, in the words of the founder I saw the other day, is their hair on fire?

Summary

Finally Mr. Jones makes a very important point about investing. If you are turned down by an investor don’t take it personally. It is a) a huge waste of emotional energy and b) pointless. There are so many reasons why someone may choose not to invest. In my experience most investors will not give you the real reason that they didn’t invest. They usually say your idea isn’t a fit with their fund’s investment strategy, or they have another venture in your space, anything but the truth. Why? Because as an investor you never know, that venture you turned down may turn out to be a winner and as an investor you may want in on a later round. So they are very careful not to alienate founders with strong criticisms of their pitch. Keep in mind that every record label in England but one rejected the Beatles! But if you can get real feedback on your pitch it can be very valuable in helping you improve it. It doesn’t cost anything to ask for feedback and at the least it may impress on the investor that you are coachable and want to improve – two valuable traits in an entrepreneur.

There’s a plethora of information about pitch decks on the web. There are even templates from the likes of Sequoia Capital to guide you. But whatever template or guide you use make sure that you create a lasting positive impression about your team, your idea, and your traction. Yes, if you have been reading this blog you know that I’m a devotee of the power of three. Everything else in your pitch needs to support those three key elements of your business.

 

 

Author: Mentorphile

Mentor, coach, and advisor to entrepreneurs, small businesses, and non-profit organizations. General manager with significant experience in both for-profit and non-profit organizations. Focus on media and information. On founding team of four venture-backed companies. Currently Chairman of Popsleuth, Inc., maker of the Endorfyn app for keeping fans updated on new stuff from their favorite artists.

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