Answer? It’s a good time to be focused.
Chicago venture capitalists say inconsistent returns have pushed some investors out and made those remaining more choosy about the startups they support, while angel investors say their smaller investment pots make them selective to begin with. The retreat of individual venture capitalists has meant fewer investments and more frequent funding gaps between investment stages — and more competition for the investment dollars that remain.
Larger firms may have more leeway for the size and type of investments — but more guidelines for building particular portions of their investment portfolios. Smaller firms likely play in a particular investing “sweet spot,” looking for similar-sized, similarly positioned companies time after time.
Here’s some advice on pitching from recent panels and interviews. As always, your mileage may vary.
Karin O’Connor, Managing Director, Hyde Park Angels
- Is your business investable — to us? There are terrific businesses that just aren’t high-return enough to attract institutional or even angel investors, many said. “We need to be able to see 10 times our money back over a five-year time frame,” O’Connor said. “We’re looking for high-growth potential. Not something that’s going to be a nice, mid-market business.”
- Do you have the “Three Bigs?” The Hyde Park Angels’ 100 or so members are the equivalent of a $25 million fund, with investments in about 20 companies. When recommending a new company to the rest of the group, a Hyde Park Angel will be searching for a company solving a big pain for customers, in a big market, “and one that is big and ripe for disruption is also good,” O’Connor said.
- Teamwork matters. Everyone agrees having an experienced team matters. But the key is identifying a team that understands the market convincingly. “The investments I’ve had the most success with, you could tell that right off the bat with them.”
- Investors want a relationship, not a sales pitch. The first presentation isn’t to convince the investor to invest, O’Connor and others say. “It’s to convince us this is an interesting story we want to do some more work on. What you really want to do is say ‘Hey, I really want to know more about this.’ Not ‘Hey, let me write you a check.’ That’s not going to happen.”
Before entrepreneurs walk into an initial conversation with Lightbank investors, Adam London offers this advice:
- Make sure you match the investors. Be sure your company is aligned with the fund’s areas of interest. “You should be able to say your company fits in our portfolio because it does what Lightbank does — and do that in 30 seconds,” London said.
- Get an invitation. “Random pitches? I love the energy, but it’s better if you get introduced, say by a member of our portfolio,” London said.
- Know your business model inside and out. “This is business 101 stuff. Be able to discuss this fluidly in meetings,” he said. Know your industry, and what your business will look like at different stages.
- Build a solid deck. A slide deck is the first impression an investor will have of you. Make sure it does what it needs to do and conveys the message you want to get across.
- Know your story. Have a clear and concise one-line explanation of your company. A compelling story about a problem being solved. A compelling story about why people are willing to pay.
- Look for involvement, not money. “I always feel like a really good meeting is to have a good discussion both during and after reviewing the slide deck,” London said. “If you can get away with it, don’t make the first meeting about investment dollars.” Instead, he suggests, let investors get to know you, your story, and how you plan to earn money. It’s better to have subsequent meetings and discuss the several milestones you’ve already hit before asking for money.
- Hit those marks. Cash flow projections? Not so much. You haven’t earned anything yet. Instead, VCs consider whether you’ve set and met milestones. The more of them the startup has hit, the greater the potential valuation.
- Don’t overdo early investment. Follow-on investors will grow suspicious of a company with too much early investment, Pauker said. Later investors may fear the company will never make that early money back. “If you say you need $10 million, that implies the company should be worth at least $10 million,” he said. “On the other hand, if you’re raising $100,000, we can be more flexible.” Besides, he added, it’s stressful for an entrepreneur with an overfunded startup. “If you’re way out of market, you have to grow into it, or if you don’t, you’re going to feel like investors coming in are crushing you.”
- Show what’s possible. If proposing an idea without a physical product to show people, you need to be able to demonstrate it is plausible, possible and probably going to work now. Having a sample video as part of your pitch helps.
- Do your prework. “If you go to potential companies who say ‘if you could satisfy these criteria, x, y and z, I would pay,’ and you can satisfy x, y and z criteria,” Di Biase said, “that is like having a virtual letter of intent, and should be mentioned in the pitch.”
1 comment:
I agree on the advice mentioned, I want to thank you for posting those. It's very helpful.
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