Since moving to Silicon Valley to begin work at Oracle in 1989, Matt Miller has continued to focus on his passion for technology. He has held leading roles at Remedy Corporation, Moai Technologies, and for the last 12 years at Walden Venture Capital, a firm which targets startups with mass-market potential and powerful underlying technologies. Over the course of his career, Matt has taught many CEOs What You Need in a VC Presentation, as well as listened to countless pitches as a venture investor.
Here, Matt shares with us some of his industry insights and some candid advice on venture fundraising. He looks beyond the structure of the pitch and talks about the challenges and misconceptions that face the entrepreneur when navigating the VC minefield.
Avoiding the Top 2 Venture Fundraising Mistakes:
Raising private capital has always been hard, and raising financing from VCs or angels these days can be more confusing than ever. There is no "right" way to pitch your company; each business venture is different and there is no simple formula that will put your opportunity ahead of the 1000 others that our firm is likely to consider this year. However, there are some common pitching mistakes that you should avoid:
Spending time chasing the wrong investors
You may think you know who you can raise money from, but do you really? Do you have the best shot with an angel group or VC’s? How many VC firms can lead a round in your industry and have done so recently? Which ones are they? Why would you want VCs instead of angels when they require board seats and more oversight? How do you change your pitch for angels versus VC’s? Unless you have thought through all of these questions and done your homework, you are not ready for your first meeting. And before that meeting, you need to study the firm and the partner you are meeting with to understand how to pitch them and to tie what you are doing directly to their focus.
Most entrepreneurs are under the impression that investors are a homogeneous group, but unlike many angel investors and crowdsourcing platforms, VC firms focus on certain stages or industries and rarely stray off strategy. Furthermore, only a small subset of VC investors are lead investors - willing to lead a round with a term sheet. The rest are followers. A recent study by Flag Capital reported that only 86 tech venture capital firms remained active in 2012 with a low bar of $1 million invested in 4 consecutive quarters. Only a portion of those were lead investors, so you get the point...there are no longer hundreds or thousands of VC’s out there that are legitimate targets for you. There is real work in identifying the few that fit your stage and industry. You need to dig deep and know each firm’s portfolio and partner interest to make the most of each meeting you get. You would be surprised how many entrepreneurs fail to do this.
Much has been written and blogged about the evolving differences between angel invest and venture investing in early rounds. While the volume and availability of angel and new crowdsourcing platforms is unprecedented, the main differences in taking angel money and venture money have not changed much over my 25 years in the valley. Put simply, angels invest earlier than VCs, usually through convertible debt, and typically do not take board seats or exert too much influence over the company. They may or may not participate in future rounds.
Angel firms are a new invention and bend these general statements a bit, but not much. Venture firms by contrast usually start investing after a product has been created, and after angels. They will expect a board seat for a partner who should be able to spend significant time and energy improving your company with you. The VC firm will typically invest in future rounds and play an active role in company building and strategy, bringing in other investors as capital is needed. Obviously venture firms deploy much larger amounts of capital than angels do, but there are merits to each approach at different stages of growth. What is important is that you educate yourself about the different investors and understand where they fit in your fundraise.
Pitching Technology over Business Value
Entrepreneurs love to talk about what they are inventing and who can blame them? Overcoming technical challenges to solve a problem drives us all, and it is natural to assume that when you finally get a face to face meeting with a VC the technology is the star. But it is not. You and your potential business model are the focus for the investor. Yes, I want to hear how your technology solves a problem and I am curious how your tech creates barriers to entry. But we are only going to make money together if you explain the value proposition to a consumer or enterprise and why they will pay.
Before you argue, let me clarify that there are certain areas where if you could build the product you describe, we all see why it is worth investing, but respectfully, it is unlikely that your company fits this category. Some innovations that speak for themselves might be nuclear fusion or dramatic new battery storage tech. Short of those, you should assume that the most important part of your presentation is the value proposition to the customer, not the core tech. I believe that if you can get the investor excited about the problem you are solving and the market potential for extracting payment, you are in great shape, even if he does not fully grasp your technology in a first meeting. That's OK, you will get a second meeting and get to dive deep.
So if you have not invested a better battery or nuclear fission and can show it working on our conference table, I suggest you really spend the time nailing your articulation of the value to the customer and why it is worth big money to someone to solve the problem. Unless the investors can get excited about a market opportunity you have clearly laid out and how your innovation nails it, you cannot move on in the presentation. This “aha moment” can come in many forms, but please do not make the rookie mistake of assuming that if you show me a really cool piece of tech that I will immediately see how it can be monetized. That is your job, not mine. You may not have all the answers in an early stage pitch, but you need to have very convincing use cases and go to market plans.
The views of the authors of these articles do not necessarily represent the views of First Republic Bank.