Do’s and Don’ts of Raising Venture Capital

Past Monday (Jul 27 2020), I had the pleasure of teaching a class on “Do’s and Don’ts of Raising Venture Capital” for 未来创投家 organized by Y-City.

There you go. Do’s:

  1. Make it a conversation
  2. Start with your team, and why you are doing this startup
  3. Situation, Complication & Resolution (SCR) to answer “Why now?” and “Why you?”
  4. Show how you will pitch your customer
  5. Share how you view competition and your strategy to differentiate
  6. Explain unit economics of your business

Don’ts:

  1. Be defensive when challenged
  2. “Talk down” at a VC
  3. Declare “Market Size is Huge!”
  4. Say “we have lots of interests from other VCs” to seem hot

Make it a conversation

To engage a VC and not lose interest, have a conversation with him/her.

This means share your story, market opportunity and strategy. Pause, have eye contact and encourage questions when you sense a question is brewing. When interrupted and asked a question, answer it right away, even if it means jumping forward in your presentation or agenda. Do not say “I’ll cover that later”, and continue with your presentation.

It is OK to prepare and use a powerpoint presentation. But refrain from making it a “sales pitch.” It is OK to do some research about the VC, but try not to make too many assumptions and tailor your story to “hot buttons.” Instead be yourself and share your real story.

Start with your team and why you are doing this startup

To a VC, the team is one of the most important things in a startup. VCs want to know what will motivate the team through thick and thin.

Hence, provide the biographies of your team and the link between their experience to your startup. Highlight if you have worked together.

Share your story of why founders decided to do this startup. It will help VCs understand what motivates you and your team, and if you have a strong team that will stick together.

It is OK if your team is incomplete or imperfect, but never lie about your experiences. Think of how you can strengthen your team through future recruits or advisors.

Situation, Complication & Resolution to answer “Why now?” and “Why you?”

VCs want to know “Why now?” and “Why you?”

Situation, Complication & Resolution (SCR) is a framework used by consultants to build “storylines.” It turns out that it can be an effective way to build your business plan too.

Situation – this is a recap of the industry that you operate, but focus on why VCs should care. Usually, this means its an area that’s witnessing high growth and major disruptions.

Complication – something is broken. There is a pain point that customers are facing. In addition, big corporations can’t tackle this and smart people have tried and failed.

Resolution – my startup is uniquely positioned to tackle this pain point. I can do it because of my experience. My startup has technology break-throughs that big corporations and other smart people do not.

By structuring your business plan storyline this way, you answer two key questions for VCs, “Why now?” and “Why you?” For further details, read: https://www.oakseedvc.com/situation-complication-resolution-and-other-thoughts-on-business-plans/

Show how you will pitch your customer

VCs want to know you can acquire your target customers.

Talk about your target customer profile, what motivates them to use your product (if they have a pain-point, what is it), your plan to catch their attention and the customer benefit you are providing.

Good entrepreneurs must also be good salesmen. Be as charming, persuasive and compelling as you can.

Even for something very technical, you can boil it down to the difference to a customer between having your product versus without, and versus having a competitor or substitute.

Share how you view competition and your strategy to differentiate

Competition includes startups that are trying to do a similar thing, big corporations who are providing an alternative, and also what economists call “substitutes.”

Share how a customer will view your startup’s product or service compared to your competition. What customers or markets is your startup differentiated.

It is OK to have formidable competitors.

However, do not say there are “no competitors”, simply because there isn’t another startup doing exactly the same thing as you. Remember big corporations providing a “substitute” is competing for your customer’s money too.

“Market is big enough for multiple players” is a terrible response to how will you beat your competition. Because if you’re not differentiated, you may end up with zero market share. VCs are looking for winners that will dominate a market, not yet another player.

Explain unit economics of your business

Besides preparing a detailed financial forecast, explain the unit economics of your business.

Unit economics looks at the direct revenues and costs associated with the most basic element of a company’s business model.

Unit economics helps a VC understand what drives your startup’s revenue, its gross margins and helps sanity check your assumptions. VCs want to know how you price, customer acquisition costs and other direct costs in serving your customer.

It makes it easier to understand the link between operations and financial performance, run scenarios and talk about what this round of financing is intended to achieve.

Don’t: Be defensive when challenged

Why do VCs ask challenging questions?

I do that to go deeper into an entrepreneur’s view of the market, the competition and the startup’s strategy.

I also ask challenging questions so I know how an entrepreneur performs under stress. Can he or she take set-backs? Can he or she take criticism?

Instead of dismissing the question or giving a “non-answer” that doesn’t answer the question, consider doing the following. Show that you are listening and that you understand the question. It is OK to say “I don’t have the answer right now, let me get back to you.” It is OK to say “let me know if I understand your question or if this answers your question.”

Why? VCs are looking for entrepreneurs who they can work with, who are sensitive to discussion points and are able to respond in a thoughtful, mature way.

Don’t: Talk down at a VC

Sometimes, you will meet a VC who has little knowledge of your field and you may be tempted to show that you’re an industry expert.

You can do so, but do so professionally and with respect.

This is not about embarrassing someone you are looking to write you a check. VCs are not just looking for industry experts, they are looking for someone who actually understands why things are the way they are, so they can do something different when things become different. By responding to questions in a dogmatic way, you run the risk of being seen as someone who may know a lot about a field but do not have a deep understanding.

Instead of saying “it looks like you may not be familiar with this industry”, say “here’s my understanding of some key aspects of our industry.” Instead of giving over-generalizations to “dumb things down”, provide perspectives, facts and examples, and easy-to-understand explanations of your observations.

Don’t: Just declare “Market Size is Huge!”

Wait, I thought the whole point is the market size is huge!

Yes, but you need to show credibility. Make sure you are qualifying the number, for example, is it Total Addressable Market (TAM)? Be careful of citing a certain report that says the market is huge now, because if it were indeed large, then you have large incumbents that you need to take market share from.

More important than citing a dollar market size value, is providing statistics of the drivers for the market, for example number of target customers.

Don’t: Say “we have lots of interest from other VCs” to seem hot

You may be tempted to give VCs a nudge to move things along.

Yet, whether you startup is compelling or not is seldom affected by whether you claim you have other VCs or term sheets. Even if some VCs were lemmings, they don’t want to hear that you are hot from you.

Instead of saying you have lots of interest or other term-sheets, consider saying “we’re looking for a partner in our next growth stage of our startup.”

Why is this better? VCs are looking for startups that they are going to work with. If you are just shopping for “the best” term-sheets, and don’t care for the type of VC you’re bringing on-board, may be you’re not the best startup to back.

What are VCs looking for?

Here’s my list:

  • Can I trust you?
  • Can I work with you?
  • Your general abilities — commercial savviness, sensitivity, maturity and logical thinking
  • Market opportunity and why now?
  • Why you?

Notice I didn’t start with market opportunity and business plan. Because if I can’t trust you, then I won’t believe anything you say.

Also notice I care about your general abilities more than the market opportunity. Because your general abilities as an entrepreneur is going to drive you to success, not a fantastic business plan.

The Do’s and Don’ts of raising venture capital is more about “Can I trust you?”, “Can I work with you?” and demonstrating your general abilities than your business plan!

Synopsis and feedback from the class: https://mp.weixin.qq.com/s/b7KqFjUDr1ONmAjHHuCN5g

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