Pitfalls To Avoid When Pitching VCs
I met with a first-time entrepreneur this week. He was an affable fellow, passionate about what he was creating — -a new, pure food product aimed at athletes — and prepared with an extremely handsome set of slides.
But he made a litany of mistakes in the fundamentals of what and how to present to an early-stage VC, so I thought I’d use an anonymized version of this presentation to point out some pitfalls to avoid.
Know your investor. Our funds focus on individual health through a science lens, seeking wins of Brobdingnagian proportions. This entrepreneur presented a growth path that had revenue in single digits through Year 4 and just into the teens in Year 5. Even if he hit those targets, this is an outcome far below what our fund seeks. He hadn’t studied us and didn’t know that. He said he had a stronger growth version, but held it back because an advisor told him he should. So now I know that he is also a person of weakly held convictions. We seek strong convictions — he says a mix of what he believes and what he feels he needs to say.
A modest-sized company is fine. An arithmetic growth path is also fine. But they should be backed by appropriate investors. A former CEO of a similar business who did well and now wants to help a new generation is an “emotional yes.” Funds like ours try to avoid emotional yesses.
Know your numbers. This conversation had two major issues related to basic financials. One related to growth: “This company would grow!” said the deck. But the entrepreneur didn’t seem to realize that the growth being shown got slower each year. Year 1 was $1M; Year 2 was $4M. Year 3 was $8M, Year 4 $12M, Year 5 was $15M.
400% growth Years 1–2; 200% growth Years 2–3 150% growth Years 3–4, negligible growth Year 4–5.
Whether the entrepreneur intended it or not, he was showing a business that would hit its peak early, then go steady state, or perhaps even shrink. This is the portrait of a lifestyle business, not of a venture capital company.
Understand how you can gain power while small. This company was going to market, initially through bike shops in order to reach active bikers. That makes sense, but it also carries an inherent weakness: the company will struggle to learn much about its initial customers and how its product works in the market. Getting customer details from busy bike shop owners will be tough. The company won’t have anyone on hand to watch whether it was display, price, clerk indifference, or some other factor that blocked a sale. When companies are small, data rules. Only by studying early customers intensely can a startup come to understand who the customer is; what drives him/her; what the product characteristics are essential for a first sale, and for repeat sales. So, we favor consumer goods companies that startup selling exclusively DTC online. Then, they can use all they learn from those early direct sales to move omnichannel in a way that makes sense for their product and customer base.
Own your key resources. This entrepreneur has an ad background. So does his co-founder, his wife, who was not a full-time team member of the company. Product formulation, manufacture, food science, and all other aspects of the business were in the hands of outsiders on short-term contracts. This can help stretch sparse resources when a company is young, but it stands against creating much value.
Assume that everything these outsiders do is perfect. Can’t they offer exactly the same outcome to anyone who hires them in the future? What if the initial ingredients, formulation, and the like aren’t ideal on Day One? Can the company iterate fast enough, make changes radical enough, and experiment widely enough to find the best path, when it has to compete for time and attention with other clients the outsiders have? How can the company know it is getting the best effort of everyone? We feel strongly that startups must control their key resources. You can’t be a food company without food experts on the team. You can’t be a merchant without experienced product sellers standing alongside you.
To get investment, startups need to tell a story that not only holds together and reflects their wants and needs, but that fits the worldview of the investor at hand.
By Managing Partner Mike Edelhart