Winning Hearts and Funds
How to pitch your entrepreneurial ideas to venture capitalists and secure funds to make them real.
You’ve got the passion and the business plan. But, you don’t have the funds to bring that business plan to life…yet.
As an entrepreneur, you have several options for funding your business. You can raise funds from family and friends, and amplify that fundraising through online platforms like Kickstarter. You can bootstrap, which means start small and grow your business by reinvesting revenues as they come in. And as revenues build, business loans may also become available.
Or, you can seek venture capital—money invested in the business by firms or funds.
Who can use venture capital?
Venture capital is good in three scenarios, says Pedro Torres-Mackie, venture capitalist and founder and managing director of Quotidian Ventures in New York City. These scenarios are where “you are in a very competitive industry, and you need capital to scale up fast before you are eaten by competitors; you are in a very new industry, or innovating in an old one, and need capital to be able to experiment and figure out a business model without worrying about revenues for the first year or two; [or] you are in a very capital-intensive business like hardware, or a highly regulated industry.”
If you see a path to develop and expand your business without venture capital, take that path, advises Torres-Mackie, because venture capital comes with strings attached.
“Understand that once you raise venture capital funding, you are locked into a specific focus on growth that might not be the best thing for your company,” he says. “Make sure you are ready and excited to lead this company for the next 10 plus years.”
Let’s say venture capital is right for your start-up. You’re focused and passionate, eager to be at the helm of your operation for the foreseeable future. Then, Torres-Mackie says, “figure out what milestone this round of funding is going to help you achieve in the next 18 months, and work backward from there to decide how much you have to raise to get there. Then, keep that milestone always on your mind.”
Winning over investors
Securing venture capital funding depends on strategic and compelling storytelling. “How you tell the story of your company matters almost as much as the story itself,” says Torres-Mackie. That story, told at the first meeting with a potential investor, needs to contain certain elements like the “opportunity you are pursuing, why it is very big, why now is the right time to pursue it and why you are the right person or people to build a company to own that opportunity.”
It’s also important to demonstrate the value your business will bring to its customers.
“A strong sales pitch for investors is one that convinces investors that somewhere out there, right now, there are lots of people sitting in their offices or their homes wishing they had your product,” says Jeff Hoffman, co-founder of ColorJar, a Chicago-based digital agency that specializes in brand positioning and creating websites and apps. He is also a longtime entrepreneur, whose projects have included co-founding Priceline, a website where users can obtain discounts while booking airline tickets and hotels. “Everybody thinks their idea is great, but investors want to be convinced there are real paying customers who also think so.”
Hoffman recommends incorporating “customer proofs...short videos and testimonials from customers and potential customers,” preferably, before you seek investors.
The right investor at the right time
When Torres-Mackie evaluates an investment opportunity, he considers whether the entrepreneur or company is likely to succeed in the specific market in question. He evaluates the market’s size, growth and potential, and then he asks what sets the particular entrepreneur or company apart in the eyes of possible customers or partners.
Torres-Mackie acknowledges that even though he has defined his process as an investor, for an entrepreneur, locking in venture capital funding involves a certain amount of chance. “The most surprising thing is how much investment decisions depend on factors that are outside of your control, like luck, the way you were introduced to the investor, where the investor is in their life cycle, mood, etc.,” he says.
Hoffman advises entrepreneurs to “research and segment investors with the same detail you do for customers. Pick investors most likely to like your deal.” And, expect that the process might require some legwork. Hoffman once researched investors to the point that he “finally zeroed in on the investor who loved deals like mine, and had invested in lots of similar companies.” But he couldn’t get an appointment until he really put that research to work.
“I had done so much research that I knew [the investor] liked horses and polo. I guessed he might be at a nearby polo match that Saturday, so I bought a ticket,” says Hoffman. “Sure enough, I saw him at the food table and 20 minutes of casual conversation later, I had my meeting set up!”
Carrie Loewenthal Massey is a New York City-based freelance writer.
Pitch it Right
By Deepanjali Kakati
Launched in 2006, Seedfund is an early-stage venture capital firm with offices in Mumbai, Bengaluru and Noida. It has about $70 million (Rs. 470 crores approximately) under management and has invested in companies like RedBus, Chumbak, EduSports, Voonik and many others.
Seedfund receives hundreds of proposals every month from start-ups seeking funding. The task of evaluating these proposals lies with Tarana Lalwani, who also mentors early stage companies and works closely with them to help them move up to the next level. Lalwani has an undergraduate degree in accounting from La Salle University in Pennsylvania and a M.B.A. from Columbia Business School in New York City.
Excerpts from an interview.
What are the main things you look for when you evaluate proposals from start-ups?
We look at these points while evaluating proposals from start-ups:
a) The team, and whether we think they are capable of executing the idea outlined in the proposal. We also take into account the team’s integrity and work ethic.
b) The personality of the people who submitted the proposal. For instance, whether they are likable or not. Ultimately, they are the face of the company with employees, investors and customers.
c) Whether the idea has the potential for expansion and scaling up. Not all good ideas are necessarily “venture capitalist fundable.” They might instead just be good ideas for a lifestyle business.
d) Whether the idea is something disruptive or new. If it’s not, we evaluate what makes this venture better than similar ones already in the market.
e) The ecosystem or infrastructure for the sector to which the idea belongs, in terms of regulations and technology.
What are the ways in which start-ups can impress potential investors?
The focus should be on having a credible idea and building it—let the work speak for itself. Having a well-thought-out plan and having a team, instead of an individual, behind the proposal also help.
What are the most common mistakes start-ups make while drafting and submitting proposals to investors?
At times, start-ups are too focused on working on an optimistic plan rather than a realistic plan, which incorporates an understanding of the real costs associated with the business, and which looks at the business from a bottom-up approach versus a top-down approach.