Venture Capital – The First Meeting
By Dr. Earl R. Smith II
The Acceleration Lane
I do a lot of work with companies seeking financing. Whether it is a first-round or follow-on, funding for further research and development or marketing and branding efforts, equity or debt financing, a start-up or mid-market company or financing to prepare for acquisition by a strategic buyer, there are strategies which can significantly improve the prospects for success. In this column I want to focus on preparations for and managing the initial meeting with a venture capitalist.
First meetings with venture capitalists present multiple challenges. Many of these challenges are best addressed with guidance from an experienced professional. There is simply no substitute for having been through the process successfully multiple times. Over the years, and as a result of working with a large number of companies, I have developed a ‘first meeting’ checklist. Here are a few of the items on it:
1. Pre-screen the funds you approach: Focus on funds which understand and have a preference for investing in your space and your phase (seed, early-stage, etc.). Most venture capitalists make their list of portfolio companies available on their website. That makes it easy to identify those who prefer to invest in your stage, industry and technology. But identifying the fund is not enough. You need to identify the partner who will be the most interested in your presentation.
2. The rifle is better than the shotgun: Avoid ‘wallpapering the world’. It is certainly a good idea to approach a small number of potential investors at the same time. But you do not want to give the impression that you are shopping for your company on the street. Also, be careful not to get yourself into an ‘auction’ frame of mind before you actually have more than one serious bidder.
3. Avoid presenting to investors who lack a general understanding of your space: I have sat in on presentations by companies whose value proposition was so alien to the focus of the venture fund that I began to wonder if the presenters had not entered the wrong door along the hallway and should be presenting to one of the other venture funds in the building. If your value proposition and technologies are completely foreign to the fund’s investment strategy the meeting will be over early on.
4. Be clear on why you want to raise venture capital: This is one of those ‘of course’ questions that sometime slips through the cracks. You should be able to communicate not only why you are seeking venture financing but also why this particular form of financing rather than any of a wide range of options is most suitable. Your explanation needs to be reasonable and clearly well thought out. You also must make a strong case for the amount you are seeking and how you need it funded (i.e.: if you need it all up front or are willing to take it in tranches based on milestones).
5. Red-team your presentation mercilessly: One of the most important contributions that I make is through arranging red-teaming sessions. I bring together individuals with expertise in technology and combine them with experienced venture fund managers. The client is instructed to approach these meetings as if they were a session with venture fund principals. As practice sessions, these meetings go a long way to refine and streamline the presentation and can radically improve the probabilities of success.
6. Highlight your relevant past experience: Many presenters overlook the fact that their credibility is as much on the line during this initial meeting as the viability of the product/ service offering. Yes, the venture capitalist is highly interested in your value proposition. Yes, they will focus on the potential for monetizing that value proposition. But they will also be deciding whether you and your team are capable of implementing. One way to help them do this is to talk about why you’re past experience and accomplishments make you a good candidate to exploit the opportunity.
7. Be on time: An old girlfriend used to say that there were two kinds of guys she just could not stand – those that showed up early and eager and those that were late and useless. Plan the logistics carefully and make sure that you reliably arrive at the site of the meeting five to ten minutes before hand. Be sure that your team is assembled before hand – and make sure that somebody puts a leash on the one team member who is always late.
The insult of wasting somebody’s time is one of the worst that you can manage. It will become clear immediately to the people who you are meeting that you don’t respect them or their time. How likely are you to succeed when starting off with such an unnecessary liability?
8. Manage the meeting: Time management is critical in the first session. Keep the first 1/3 of the meeting focused on your presentation. That means that questions which might come up should be postponed to after the end of the presentation if at all possible. If you are successful in doing this, you will end up with the second 1/3 of the meeting for discussions.
Now I know what you’re thinking – that’s only 2/3 – what happened to the other 1/3? Well take it from someone who has been through a lot of these sessions, if you’re meeting is scheduled for an hour it will most likely, after adjustments for people being late, cell phones ringing, interruptions of an amazing variety and the general conspiracy against order, turn out to be more like forty minutes. Manage the meeting and your time under the assumption that that’s all the time that you are going to have. If the Fates don’t conspire against you, the extra twenty minutes will be pure bonus.
If you are not well prepared and focused, the venture capitalist will get impatient and take over the pace of the meeting. Many VCs will deliberately jump in with questions and requests which may be on Slide 12, while you are still presenting Slide 4. Here is a great tip: structure the presentation so that all the most important information is in the first few slides.
In an important way, clock management is a test of your ability to manage a process under pressure. One VC recently told me “In our case, if we schedule a meeting for 90 minutes, we terminate it after 90 minutes, even if the entrepreneur is in the middle of a PowerPoint slide.”
9. Layout your value proposition at the outset: You need to present your value proposition within the first five minutes of the meeting. By that I mean a presentation which highlights the problems that the company’s solutions are designed to address, the advantages of those solutions over competing ones, the clientele for which these advantages will be important and a clear statement of how you intend to monetize the value proposition – all within the first five minutes.
I have watched entrepreneurs spend fifteen or twenty minutes getting ready to deliver their value proposition punch line. The problem with this approach is that they lost the attention of their audience long before they got to the most important part of the presentation. One VC suggested the following: “The way I like to see this presented is: Slide 2 is “The Pain” and Slide 3 is “The Cure.”
10. Manage the level of detail: Remember that the initial meeting is designed to give the venture capitalist a first brush description of your company and team. Approach the meeting as an executive summary of the chapters that may follow – or as a first paragraph designed to draw the readers in and make them want to read on. You need to hit the high points and emphasize your strengths – outline your intended responses to important challenges. Avoid the ‘And now for the first of 45 slides …” approach – keep it down to ten or twelve summary level slides. Brief the venture capitalist; don’t bury them in an avalanche of detail.
11. But don’t oversimplify your value proposition: Solutions to complex problems are most often complex. If this is the case with your company, it is important to communicate your understanding of that complexity and how your solutions will reduce its effects to manageable levels. Red–teaming with an outside group of experts can be particularly helpful in refining this type of presentation.
For a first meeting, there is a delicate balance between over-simplification on the one hand and drowning the audience in a sea of details on the other. You need to design your presentation to adequately describe levels of complexity while making sure that the presentation can still be completed (and comprehended) within the time available. It is always good to leave them wanting more.
12. Turn off your cell phone: This is one of those prescriptions that one would think would be unnecessary. But I have sat through too many luncheon events with a moderator who begins by asking everybody to turn off their phone only to have the keynote speaker interrupted mid-sentence by some moron’s custom ring tones. Do yourself a favor. Before you go into the meeting turn off your cell phone. If you can’t trust yourself to do that, leave it in the car. According to one VC, “Personally, I tune out totally the entrepreneur whose phone has rung. I may miss some good deals this way, but I don’t want to be involved with anyone who has no respect for me.”
13. Situational understanding is a key: This is one of the areas where working with a very experienced advocate can yield huge benefits. Situational dynamics is the awareness of what is going on around you – and an initial meeting with a venture capitalist is indeed a complex process. It is important that you understand what is going on within the frame of reference of the venture capitalist. Make sure that you understand what is at stake at each stage, the most likely outcomes, which of them will lead to a next step and what that next step is likely to be.
14. It is their process that you are involved in not yours: One of the toughest things to remember is that you are a guest in the venture capitalist’s house (even if the presentation takes place in your conference room) and engaged in a ritual process which has been designed and is enforced by the occupant. Many entrepreneurs get used to getting their own way by force of will. Some believe that a forceful presentation coupled with an insistence on a positive result will succeed. Both of these strategies are inherently flawed. The decision-making process within a venture fund is collegiate and often highly ritualized and, although the individual you are meeting with may have a major say, investment decisions are generally made after a collaborative process – most of which occurs outside of the experience of the entrepreneur.
15. Every step of the way with a VC has as its primary goal to get to the next step: Many entrepreneurs enter an initial meeting with a burning desire to get through the process and be funded as soon as possible. As a result they try to provide the entire range of diligence requirements within the boundaries of one meeting. The dominant purpose of an initial meeting with a venture capitalist is to decide whether there is going to be a second meeting. In order to decide this, the VC is going to need enough basic information to decide whether to commit resources to doing further diligence. In fact, I consistently tell clients that the only thing you should be looking for as a result of the initial meeting is a request for next meeting. Forget about the platitudes and how nice this person is being to you – how enthralled they seem with your technologies. The only thing that matters is that they want to see you again.
16. Be prepared for the obvious questions: One of the great benefits of red-teaming is that these questions are surfaced and dealt with during these practice sessions. I can’t tell you how many times I have sat in on presentations that have gone wrong very quickly simply because the presenters did not have these responses rehearsed. In one case, the business plan included projections of operating results which started in January. The presentation was done in April. One of the venture capitalists observed that, if the company was on target, they should have a year to date revenue of X dollars. Of course they didn’t and the meeting was purely perfunctory thereafter. Another entrepreneur was asked a rather standard question “Who are your principal competitors?” He glibly responded, “We are unique and nobody does what we do.” The venture capitalist was a pro in their space and casually reeled off a list of at least a dozen companies that competed either directly or indirectly. As before, the meeting was over and the rest was just professional courtesy to the person who had sponsored them.
17. Present with passion: There is a fine line between presenting with passion and inappropriate (messianic) exuberance. You need to communicate that this is a business that you passionately believe in and have committed to. The venture capitalist needs to come away with the feeling that you will do what is necessary to make the company a success. VCs generally don’t like to invest with entrepreneurs who are out to ‘change the world as we know it’. Recent experience has graphically demonstrated the risks that this approach can entail. They invest with teams who understand how their advantages can be turned into a viable business – and how to make money for the investors along the way.
18. Establish credibility: Once a venture capitalist has come to the conclusion that your value proposition is a good one his/her attention will then turn to another question which often does not occur to entrepreneurs. “OK, these guys have a good idea but are they the team to make it happen?” Most venture capitalists will tell you that if they face the choice between investing in an A-level idea with a C-level team on the one hand or a C-level idea with an A-level team, the A-level team will get their vote. Assume that, if they are involved in the space, they will have seen others with similar approaches. Your team may be the most important differentiator. The credibility you establish in the first meeting may be your best asset.
19. Speak part of the time from the point of view of the customer: “Amateurs have markets while professionals have clients.” Those words are tattooed on the inside of many venture capitalists’ eyelids. Make sure that you spend part of your presentation talking about your company from the perspective of your clients. And stay away from the ‘this is a billion dollar space and if we can get just 1% …’ crap. It is the kiss of death for presentations to VCs and a clear indication that an amateur is presenting.
20. Remember that the decision is theirs and not yours: You are providing information. The venture capitalist will decide whether or not they are interested in arranging a follow-up meeting. That is their decision, not yours and most likely he/she will want to make it after thinking about your presentation and discussing it with their partners. Your deliverable in this first meeting is a concise description of your company, senior team, value proposition, competitive advantages and the purpose to which you are intending to use the proceeds of an investment. Accomplish those goals, ask for an estimated schedule for their response (when are you likely to hear from them) and feedback as to whether you accomplish them (how well you did in presenting). Finally, indicate that you are prepared to respond if the venture capitalist decides they want to go to the next level.
And don’t call or e-mail the VC after the meeting except to thank them for the time and attention that they gave you. Pestering will not improve your chances – if they have something to say to you, they will initiate the contact.
21. Don’t take ‘Not Interested’ as a condemnation: A rejection can carry a number of meanings. It may simply be a reflection that the interests of the venture fund are not well aligned with your company. The fund may be fully invested in your space and want to diversify. Or they may have decided that you are not the person to exploit the opportunity. But a rejection is a matter of judgment by an individual fund not a demonstration of truth. Learn from your experience, process the feedback that you are able to get and work to improve your presentation – sharpen your message. Then get back out there and present to another fund. Persistence cannot carry a poor cause to victory – but timidity and lack of persistence can condemn a good one to a premature extinction.
Like most journeys into the unknown, an efficient search for venture funding is best done under the guidance of an experienced professional. Sure, you can go it alone – but time and tide will tend to work against you. Most professionals will work with you for a small retainer – with most of their compensation coming through a success fee and an accumulation of equity in the company. You would do well to follow the example of the ship’s captain who, upon bringing his charge safely to the mouth of the harbor, acquires the services of a harbor pilot in order to arrive safely and quickly at the quay.
Dr. Smith is SafeGuard Guaranty and Executive Director of Longview, a strategic advisory and executive coaching firm based in the Washington DC area. He serves on Boards of Directors, Advisory Boards and acts as Strategic Advisor to senior management teams of emerging companies.