Guest Blogger: Ben Pidgeon, executive director of VisionTech Partners
Recently, I was listening to Harry Stebbings of the podcast Twenty Minute VC while driving my kids to school when he shared three statements that are the kiss of death when uttered by pitching startup founders:
“Once we raise this round, we won’t need to raise ever again.”
“The majority of the round will go into ad spend on FB and Google.”
“We don’t really have any competitors.”
I slammed my hand on the steering wheel – scaring my youngest daughter in the process – Harry had hit the nail on the head. I don’t know how many times I hear those very same statements when screening startups for VisionTech Angels. There must be a script for startups somewhere that lists these lines as “must share” statements for investors.
The reality is these statements are often “deal-bergs” that cause potential investors to shrug and pass, sinking an opportunity regardless of how good it seems on paper. I’ll explain the perception these statements create and then highlight another I find equally likely to cool investment conversations. Avoid these deal-bergs the next time you are pitching for funding,
First, let me set the stage. Most investors look at many, many deals each year. Some have the capacity to review 100. Others will review as many as 400, which is the number we at VisionTech Angels target each year. Unbelievably, I’ve also spoken to investors that have reviewed 1,600 pitches a year. They must do it in their sleep!
Investors don’t look at investing as a one-off transaction. Rather, they’re in it for the long haul. Once an investment is made, the median time to exit via acquisition for VC-backed firms is just under five years, but more like 7 years for an IPO. Angels would have invested 1 to 2 years earlier. So, they are in it for 6 to 9 years. The size of an investor’s early stage portfolio may contain as many as 65 companies, depending on how long an investor or investing group has been building their asset class. So they are managing large numbers of intense and often fluctuating relationships for years!
Finally, as a startup company speaking with investors, you have to understand they’re also looking at other opportunities for investment and have seen thousands in the past. Don’t come into a pitch thinking you are unique. Instead, your focus should be on how to start a long-term, mutually beneficial relationship.
“Once we raise this round, we won’t need to raise ever again.” This statement is one you should avoid like the plague as it’s guaranteed to sink even the mightiest ship. It relates directly to an investor’s history of watching startups. They know fundraising continues through the years post-investment. The probability of the number of startups that achieve exit with only one round of funding is likely less than 1%. The average exit value for this subset of startups is also likely to be very low. This statement contradicts your up-and-to-the-right revenue growth graph. Also, it generally takes longer to reach desired milestones. No one can see into the future. So rather than promise something that’s likely not going to happen, plan on at least one more round of funding, especially if you’re raising a seed round.
“The majority of the round will go into ad spend on FB and Google.” Typically, an investor’s first response to this statement is, “How efficient is your marketing if you’re proposing to spend investment dollars here?” Usually when a startup is at the stage where significant spending on ads is necessary to grow revenue, the startup has identified the market and is getting a good conversion on pay per clicks. The sales and marketing funnel is healthy and growing. You need to be able to talk about the metrics that validate your spend in a way that paints a picture of an ATM—the kind where you put money in the top and more money comes out of the bottom. If you can’t prove ROI on the spend, avoid this statement. Investors know it’s not ideal to put money into an ATM and have less come out the bottom, right?
“We don’t really have any competitors.” This statement falls under the “don’t you dare ever say this” category. There’s always competition. It may not be direct and a little difficult to find, but it’s usually there. Sometimes competition is status quo and you need to overcome inertia. Other times, they use low-fidelity options like Microsoft Excel™ instead of technology. And, there may be substitutes that provide similar functionality. Saying that you don’t have competition can give the impression you haven’t researched the market sufficiently. And if you haven’t looked at the market sufficiently, what else hasn’t been covered?
“We really haven’t discussed financing risk.” This one is a pet peeve of mine. Financing risk is a big deal and all startups need to have this conversation with advisors BEFORE pitching to investors. Investors are looking for a startup’s ability to raise enough capital to accomplish milestones over the next 12 to 18 months that are value inflection points. These milestones allow you to identify the next set of milestones and raise more money at a higher valuation. And the cycle repeats. Walking through your capitalization table and talking about dilution after each round of funding is a practical way to address financing risk. Don’t be afraid; you are likely to gain valuable advice from potential investors who, after all, have seen it all and know what they’re talking about.
These are the main statements to avoid when pitching your startup to investors so your ship doesn’t sink before it sails. There are many more topics you should address in your pitch, like the history of your management team, the market size for your product or service, the stage of the product development, and competitive advantage. But I will save it for another blog. I hope this insight helps you improve your pitch and find funding you need now for your startup.
About the Author
Ben Pidgeon is the executive director of VisionTech Partners I VisionTech Angels, one of the largest and most active angel investing groups in the Midwest. Under Ben’s leadership, VisionTech Angels has grown to five chapters in two states, a membership of more than 130 accredited investors, and a portfolio of over 30 startups from across the country. During the first eight months of 2019, VisionTech Angels has experienced two liquidity events and one exit. Learn more about VisionTech and its investment strategy, portfolio, and people here.