(I am going to try something I have never done. Write a series of posts on a single topic. Lately, I have been really interested in the process of pitching a startup, and so thought I would write about it.)
One of the best parts of my life is listening to pitches from startups. Love it. I probably get pitched 4-6 times a week, and while I am not a professional investor, it has become clear as to what seems to be necessary to nail your pitch.
Lets assume that your company and team pass the smell test. What should you do to be successful?
I am going to break this down into multiple posts, and will start with the “Pre-Pitch.”
So many entrepreneurs fail in their pitch before they even walk into the room. Remember, you have started pitching a potential investor from the moment you get introduced.
Before you start to put together your list of potential investors, ask yourself two questions:
1) What is it we do? At the core of our business, what problem are we trying to solve?
2) Why am I doing it? Do I care about the problem?
If you are unclear as to your purpose or passion, it will come through in your presentation, and no investor will feel comfortable investing in that team. Your presentation could be amazing. Your demo impeccable. Doesnt matter. You are about to spend 80 hours a week to change the world. If you dont know how you are changing the world, or seem to care, why should I?
Now, start building a list of investor targets. Who do you want to raise from? Why? It can be an expansive list. And the reasons can be as simple as “they will hype us up,” or “I like her blog.” It might not be overly convincing when asked why you are pitching the specific investor, but it can work.
After you have your freeform list of potential investors, review their investments. It can be the firm’s investments or the individual investor’s investments – which boards are they on? Remember you are not having a firm invest in your initially. You need to have a partner who champions the investment to his other partners. List two or three relevant investments next to each potential investor. Are any of them competitive? Know that could be a deal killer.
Ok, you have a wish list of investors, with 2-3 relevant investments next to each name. Prioritize the list based on those two data points. And fire up Linkedin. Start checking your direct / indirect connections to each investor. Follow them on Twitter. See who they chat with. Read their blogs. Who do they list in their blogroll. Who do they respond to in the comments. Who do they reference in their posts.
Once you get through that exercise, you should have a first version of a list of folks that you want to pitch.
Take the first five in that list. Folks that you are interested in having invest, have investments that make sense, and operate in your social graph, and send them an email that looks like this:
“Hey dude – I really enjoyed reading your post on XXX (make sure you actually 1) read it; and 2) enjoyed it). I found it particularly relevant because I am focused on a startup in a similar industry/solving a similar problem/etc, and would appreciate getting 15 minutes of your time to get your feedback / thoughts on a particular problem we are facing. Would you happen to have some time next week on Thursday between noon – 4pm PST.”
If you get a positive response, set up a meeting. DONT PITCH AT THIS MEETING. Use it for exactly what you asked for: feedback on a specific problem. Think of it as pre-knowledge for your pitch.
If you are lucky, you will build a relationship with the potential investor that you can cultivate BECAUSE ITS POSITIVE FOR YOU AND YOUR STARTUP. Dont cultivate a relationship just because you want to pitch the person in the future.
Key take aways: How does the person respond to you? What was the advice? Was it actionable? Did they advise or tell you what to do? Did you feel that they cared?
Why is the above important? Because if the person eventually invests in your startup, they will act the exact same way, and you want investors that are supportive and helpful.
Now, a few weeks or so have passed. You have met with 5 – 10 folks that have given you different types of feedback. The ones that are on your list and gave you the right queues (liked the idea, were helpful, were responsive), move to the top of your list. The rest cross off. They will not be good investors and/or may never invest.
Ok, you have accomplished three things at this point: 1) you are solving a real problem; 2) you are passionate about the problem; and 3) you have focused your investment target list.
Think you are ready to pitch? Nope.
Next post: Pitch Perfect – Get Your Story Down.
- Pitching Without a Pitch Deck (readwriteweb.com)
- The Anatomy of a Y Combinator Demo Day Pitch (bryce.vc)
- Be Worth Talking About (philpresents.wordpress.com)
- The Art of Being a Dick (learntoduck.com)
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Yesterday, there was an explosion on twitter and some investor blogs about AngelList. It all started with Bryce Roberts of OATV writing a post about why he deleted his AngelList account, which was quickly followed by tweets and posts by folks like Shervin Pishevar (Angel), Mark Suster (Angel/VC), Jason Calacanis (Angel) and others (I hesitate to include Robert Scoble, who is someone I consider a friend. I consider Robert to be a self-contained hype machine. As someone who has been part of the Silicon Valley startup scene as a reporter rather than operator, his personal lens has become skewed in a way that many times is just not helpful to the discussion. Sorry Robert, I still love you.)
What I didnt see was a post from any founder or startup that is currently listed on AngelList.
The fact that there wasnt one is exactly why I think AngelList needs a bit of rethinking.
My startup, Graphicly, is on AngelList. We came on after our initial round of financing, mostly because AngelList didnt exist when we first went out. According to our profile page, we have had 15 intros and currently are exposed to ~750 investors. We have received at least one investment due to AngelList and have met many awesome folks, some of which I continue to interact with outside of the financing paradigm. (Go David Shen and 4HB!). In total, we have raised $4.2mm, of which 99% have come from folks I know or have been directly introduced to (no unsolicited calls turning into investment.)
When we first were nominated to AngelList by one of our angel investors, I was stoked. I saw AngelList as a great resource to connect to angels (not VCs) in an interesting new way. I was vetted by the AngelList team, where they helped me craft my description and asked all the right questions. To be fair, because we had already raised $1.2mm, I had low expectations in terms of interest. AngelList seemed to be (and in many ways still is), for extremely early startups and for new(er) angels looking to increase their deal flow.
Over the course of the next week or so, we were introduced to several angels, and had many great conversations. Frankly, if any startup gets to talk to David Shen, Ludlow Ventures, Ash Patel or Hussein Kanji via AngelList and you get them to invest, you will be extremely stoked. Trust me. (Of that list, only Ludlow Ventures is currently an investor in Graphicly – and I listed only the angels we met through AngelList, there is a huge list of others that are equally as awesome, I just met them in other ways.)
Now the question is, if I was starting a new company TODAY would I list it on AngelList?
I dont know.
My biggest issue is that its no longer just qualified angels [UPDATE: I spoke to Nivi and I want to make sure I am clear, I am not questioning if the angels are accredited, I imagine they are. To me, a qualified angel is one that is BOTH accredited and active.]. I follow the AngelList twitter account, there are 3-5 new folks being added daily. Some are my friends, and I know their backgrounds as investors (zero to less than zero) and some are associates at VCs trolling for deals (Im sorry, tracking startups). The noise on AngelList has become deafening. I couldnt imagine the influx of introduction emails I would get if I launched a location, gamification, group messaging startup right now.
Its what I like about the Open Angel Forum. You have to be 1) an accredited angel AND 2) an active one.
On AngelList it seems that you just have to say you have money to invest. (Sorry, investing $10-25k in 1-2 startups a year does not an angel make.) [UPDATE: See my comment above around having to be accredited]
Why is that bad for entrepreneurs? Especially young ones?
Imagine, you are a founder. Its your first startup. You have been working 20hrs a day for weeks and weeks to push out the next great thing. You get into AngelList, your deal goes out. Emails start flooding your inbox.
Whats the first thing you do?
You start focusing on the money, rather than the product.
Its not uncommon – shoot, I did the same thing in this last raise. Every founder does it at some point.
But for a service built to help young entrepreneurs connect with experienced angels, AngelList fails at this one thing. Its now connecting anyone who is interested in being an investor with semi-vetted startups. (Sorry, I do know for some like Jason, he views angel investing as a hobby, much like his poker playing. I have no interest in a hobby angel. I want folks that can add support, not just money.)
In many ways, this is what happens when any venture starts to grow. I have seen it with Techstars. It started as a great program to help startups and in an innovative way, allow potential investors see a company grow and work over an intense 3 months. Now 4 years later, there is a book, 3 more locations and a Techstars Network. I have been impressed that David Cohen hasnt allowed the program to lose its initial mentor driven focus – but now everyone wants to be a Techstars mentor. If David allowed everyone to be a Techstars mentor that wanted to be, the companies would get an enormous amount of conflicting advice some which would be quite harmful.
I like that Shervin views AngelList as another information channel. But what happens when that channel is overloaded? Or that there is a false sense of urgency to invest in startups. Mark filters his AngelList email and then ignores most of it. As a founder, who would I rather invest? Neither Shervin or Mark are investors. I dont know Shervin at all – although, I would love to, and expect to some day. I truly respect his world philosopy, and given our similar family backgrounds, I think we would enjoy each other. Mark I do know and consider a friend. He once told me he has 10 mistakes that founders make, and I was making 8 of them. While that is a solid B, it did force me to think through what I was doing and make significant changes.
As a complete aside, I have been saying for the past six months that 2011 would be the “Year of Intimacy” where smaller more private networks will reign supreme. My friend Dave Morin‘s startup is the first of these to appear in scale, but it certainly wont be the last. Since my days at Lijit, I have strongly believed and advocated that trust has to enter the online conversation at some point, and in many ways, Dave has done a great job exploring trust relationships with Path.
AngelList has the ability to be another trusted resource for entrepreneurs. If the angels that are accepted to it are truly vetted for accreditation (I believe its pretty simple, just a net worth north of $1mm — UPDATE: According to Nivi, they are vetted for accreditation, which is awesome) and activity; and the startups are vetted for quality (In essence AngelList becomes their first “investor” by providing resource) then AngelList has the ability to become that trusted resource. Its goal should be to reduce noise and allow founders to focus less on the fundraising process and more on building amazing products. AngelList should allow angels to increase their deal flow and connect with founders that they can really help and support.
As it is now, it is becoming a hype machine that is driving undue pressure and creating a potentially toxic relationship between investors and entrepreneurs.
[UPDATE: I am getting some personal emails asking if I would recommend AngelList to a new founder. The answer is yes, I would and do. I also make sure that they are educated to the noise, and give them some tips on how to handle it. Research, dont take all intros, and research some more. I also highly recommend Open Angel Forum to all founders.]
- Why I Deleted My AngelList Account (bryce.vc)
- As Angel Investing Booms, So Does the AngelList (gigaom.com)
- What’s The Real Deal With AngelList? (techcrunch.com)
- My response to @bryce crying about @anglelist (calacanis.com)
- Robert Scoble: The new Silicon Valley hype machine: AngelList (scobleizer.com)
- New AngelList Feature Lets You Control Which Investors See Your Startup Pitch (readwriteweb.com)
I just finished reading the book Grumby which Brad has mentioned reading while in Homer. Its a decent book, fast read, humorous. It covers the rise and fall of an entrepreneur in a really smart kinda way.
There is a section in the book, where the lead character is meeting with his lawyer, and they are discussing corporate structure. To that point, every time he got someone to help him build the product, he gave the person 10,000 shares. He let his first employee / co-founder take 10,000 option slugs almost at will.
Once they run the numbers, he has given away most of his company to his co-founder and the various pseudo-employees that have been helping on the product. All in all, he had granted 1.4 million shares.
“If you only have 2 million shares, then they own the majority of the company.”
“Oh, I didnt realize,” he tells his lawyer.
This is not an uncommon thing among young entrepreneurs. Its just stock. Its just paper. You want everyone to have equity and feel excited about the company and its future. Whats 25,000 or 100,000 shares? Right now nothing. Just numbers on an excel spreadsheet.
Then later financings come. Or acquisition offers. Or any of a hundred different ways for the founders to exit positively. And when the cap table is reviewed, all of a sudden all those option you gave out like candy are staring you in the face.
“I gave Billie 200,000 shares? Jane has 100,000 and she isnt even with the company any more!” Suddenly, bad feelings begin to grow. You resent the people who you gave large share allotments to. You kick yourself for making bad decisions. After all, it was just paper.
Its important as a entrepreneur to understand what stock options are. Similarly to financing. In both cases, you are using YOUR COMPANY as leverage to either get money or get work. The more you sell/give away, the less there is at the end, or to give later stage employees.
My dad used to tell me all the time, “You can always go up; you can never go down.” He wasnt being supportive of my dreams, but rather being observational about the negotiation process. Its a simple thing: you cant take back stock options.
Early on, dont talk in percentages. Over the life of the company, and the financings taken, the percentage that people own (including the founder) shifts. Talk in raw numbers. Let people understand what 10,000 or 1,000,000 share mean. Explain outstanding shares, dilution, etc. Don’t hide what their options are worth today, or what they may be worth in the future. But start small.
Let the option grant grow with the person, as the company, and they themselves grow.
Being fair isnt about providing someone more than they are worth. Being fair is providing someone the ability to prove their worth and be rewarded for it.
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- Issuing stock options? Here’s what you need to know (entrepreneur.venturebeat.com)
- Grumby (feld.com)
- Finding the Right Co-Founder for Your Startup (readwriteweb.com)
- Founder Agreements – Vesting, Vesting and more Vesting (simeonov.com)