You’ve managed to get the attention of well-established venture capitalists. You’re finally meeting them face-to-face, and everything seems to be going great. But then disaster strikes. You present your estimate for your company’s projected earnings and you see the VCs’ faces drop. You find out later they thought it was unrealistic, which made them worry you didn’t have a handle on other aspects of the business. Or maybe your projected earnings were reasonable, but your product demo went horribly wrong. Or maybe you can’t even get your foot in the door because potential VCs keep telling you they’ve already heard about other businesses with the same concept as yours.
Cue the panic. You’ve spent long, tedious hours working on your business, and now it may seem that it was all for nothing.
Not to worry, if you’re having trouble navigating the mystical world of venture capital, you’re in good company. Venture capital is often misunderstood and can feel like a big cloaked, black box to many people. But getting an understanding of the basics will help demystify the whole process.
Of course, nobody’s perfect, but when you’re seeking venture capital, some mistakes, more than others, can cost you the deal. Here are ten of the most damaging mistakes you can make and tell you how to avoid them—or overcome them if they occur.
Being uncoachable. Growing a company from a team of one or two into a thriving business is hugely difficult, but you will learn a ton along the way. Being coachable means having a personality that allows you to say, “I stand corrected.” In other words, you can take criticism, constructive or otherwise, and use it or disregard it, while staying positive throughout. Strive to be coachable, especially if that trait isn’t one you possess naturally.
People who are uncoachable don’t take criticism well or simply don’t listen. They are offended by the notion that their company isn’t perfect, even though no company is perfect. The uncoachable person resists change and quickly frustrates all investors he meets.
Having a critic. You can’t do a lot when someone doesn’t like you or your company, but be warned, having someone badmouth your deal, even falsely, can ruin the mood around your fundraising campaign very quickly.
In an angel meeting of 25 people, if one angel says something less than positive about your deal, the excitement drops, and the deal can die right there on the boardroom table. If a VC asks his advisors what they think of your deal and they dislike it, it’s dead. Horrifying, but true. The best way to avoid this problem is to make friends and don’t make waves for any reason while you are fundraising.
Quoting an inflated valuation. Quoting an inflated value for your company is probably the number one reason a deal sours on the investor’s plate. Adams points out that when your valuation is too high, investors think you are either greedy or you don’t know what you are doing. In both cases, a high valuation can end a conversation.
Pitching an idea. At one time, VCs may have doled out $4 million for an idea (or maybe they never did and some people just like to tell tales); nevertheless, angels or VCs investing in a concept stage company is not common these days.
Now investors carefully balance the risk versus reward aspects of your deal. If you’ve accomplished very little and are still a few years away from revenue, VCs aren’t going to invest in your deal. It’s simply too risky.
If you’re not ready for venture capital, you have other options. If you simply need capital to grow your business, consider taking a loan, raising money through people you know, talking to angel investors, crowdfunding, franchising, or writing a grant proposal. If you are looking to add experienced people to your team but can’t afford to pay employees, look at finding a cofounder or using venture labor (hiring someone you pay in equity instead of cash).
Being invisible or forgotten. Fundraising is like a presidential campaign. You’ll have more success if you’re more visible. Make sure that you’re attending networking events, trade shows, and pitch events so that people in the investment world see you regularly. Ideally, you will have regular updates and good news about your company to share when you are in public.
Be careful not to give the impression that you are pitching the same old deal for a long time. Make sure you are giving a message of progress. Most of all, stay in touch with investors after you pitch to them. The ball is always in your court. Don’t ask for information or the investor’s time. Share good news every month through a newsletter or mailing list. It doesn’t have to be extensive. Brevity is best anyway.
Confusing people. As the saying goes, a confused mind says no. People have to understand your deal so well that they can describe it to another person. Everyone has to talk with someone else about your deal before they can invest. Angels have to talk with their spouses; VCs have to talk with the board.
The most effective pitch deck lays everything out simply for the audience. After the pitch is over, people should be able to discuss the deal as though they were discussing the plot of a Disney movie. Simplify everything! The details will come out in subsequent meetings.
Pitching to only one investor. If you went on only one date ever, what is the likelihood that that single date would result in a wedding and a perfect marriage? Probably very slight. Although you may find the right investor immediately (the venture capital version of a high school sweetheart), it’s rare. Plan to shop your deal all over your town and other towns.
Having connections in only one town. One of the greatest things about the world we live in is how connected we all are. Use relationships in your hometown or the hometowns of your founders to seek investment from other cities and states. If you have a female founder on the team, contact the few women’s investor groups in the country. They are constantly looking for high-caliber, women-owned companies.
Use your network to get an introduction to VCs. LinkedIn can be powerful to get connected with VCs in other cities through people you know. You can even try to cold contact them. Keep in mind, though, that some investors are local-only investors. Some will talk to you only if you consider moving to their town. Get the details before you buy a plane ticket. You don’t want to have to nod and agree that you’ll move to Milwaukee if you had never considered it.
Failing to study up on your investors. When you meet with an investor, you should have researched him so thoroughly that you know what his favorite dinner is (not really, but you get the idea). When you ask questions, your questions should be highly informed ones about things that you can’t learn from the Internet. Investors are very turned off when you don’t know what kind of investments they make.
To study up, get ahold of potential investors’ portfolios to understand the types of companies they invest in and how much they have been investing. In addition, most VC general partners have a Twitter feed, a website, and a LinkedIn page. From these sources, you should be able to learn quite a bit about the general partners as people before you walk in the door.
Pitching your product instead of your deal. When you pitch to investors, you are selling equity in your company; therefore, the pitch has to be about your whole company. If you give the same pitch to investors that you give to a potential customer—one that outlines all the benefits and features of your product—then you’ve missed the mark.
You have to share with investors all the highlights about your company. They need to know how much you’ve accomplished, the plan for the future, and how much money your company can make for them.
The investor pitch is about money, specifically how you’ll make money, how much money you can make, how much money you need to make money faster. If money isn’t the central theme of your pitch, you need to revisit your pitch deck and see how you can refocus it. The investor looks at your company as a much-needed addition to his portfolio. He sees your company as a whole package with founders, product, opportunity, and exit potential.
You can derail your own deal pretty quickly if you aren’t careful. Your own behavior is important. If you are uncoachable, quoting an inflated valuation, or pitching too early, work to change those things. You can keep the people around you positive about your deal by pacifying critics and spreading updates and good news at networking events. Connect with people outside your own city and remember to pitch the whole deal, clearly, to investors who are likely to care about it.