What do you need for a VC to properly evaluate a pitch?

One of the most difficult conversations I have with founders is when they haven’t quite given me enough of a story for me to make a proper evaluation. A VC’s default is “no”, so without enough information to be convincing, it’s going to wind up being a pass. If I wind up asking for more info, it might result in a founder feeling like they’re getting the runaround, given what the founder believes to be an obviously good idea.

One important thing to note is the difference between the following:

1) A great idea.

2) A big idea.

3) A big enough idea for venture dollars to be the best way to fund something.

For example, I ride a hornless bike seat. I’m on my 8th one of this same brand and I can’t see riding with anything else. I think it’s great. That being said, it’s specifically a product for men, and I think at most only one out of four men would ever feel comfortable on it, tops, because you wind up leaning hard on your arms instead, and you do sacrifice a little stability. You only need to buy it once and it lasts at least a few years. There are maybe 20-25 million male bicyclists who bike enough for this to be useful. So, really you’re taking about a total addressable market of $450mm, but that’s not even annually—that’s total market size. If this thing lasts 2-3 years, then you’re dividing it in half to a third. So, basically, even if they sold every potential customer (which they won’t, b/c it has competitors), it won’t generate enough capital to be a standalone, VC backed idea.

It’s still a great idea, and I’ll bet a great team could drive it to a few million dollars in revenues—and that’s still a big idea.

Just not big enough for what venture needs to make its money back.

Figuring out how much to show a potential investor, and how realistic it is to show predictions about the future, is difficult for a founder. Pitch deck outlines are ok, but they don’t say much about what you’re trying to convey besides particular categories that may or may not be relevant.

First, you should tell me who you are—but not simply in a bio form. A bio just gives me the resume—it doesn’t tell me what about your story is relevant to this. Am I to believe that having an MBA automatically means I should believe everything you told me about this problem?

How did you convince yourself that this was worth investing all your time in? That’s the key.

Then, an investor needs to understand what it is that you would like to build at its most interesting near term point. Why do I say it like this? Well, sometimes you’ve built a little MVP which doesn’t tell the whole story of what you want to be when you grow up. Other times, you build something that doesn’t really get interesting until eight years down the road after a billion people are on it—this is too far out.

You need to pick that sweet spot in the middle to talk about.

For most people, just sharing what you’ll believe you’ll have before the next round will suffice. Too often people only pitch what they have, not where they’re going—and they forget that fundraising is selling tickets to the future, not asking for rewards for the past. This is often the case for founders who assume they won’t be taken seriously—they believe that somehow what they’ve done previously “earns” them the right to a meeting or a pitch, when really most VCs are happy to just discuss interesting ideas no matter how far along you are.

I get that some things are very technical and complex and require many steps to get to the end goal, so if that’s your plan, walk me through it milestone by milestone, telling me how each milestone is going to be interesting enough to get a next round of funding.

If you’re going to try to pitch metrics and momentum as the main feature of your pitch—make sure they’re as great relative to other startups as you think they are. For example, a pre-sale of $50,000 might be very exciting for you, but there are lots of pre-sales that garner a million or more in sales, and not all of those companies wind up being successful. To a VC, $50,000 a pre-sale isn’t really that much.

One item founders often miss is explaining the “flywheel”—or the idea of how to make this thing take off and not stop. VCs are less interested that you sold 10 customers, 20, or 100—they want to understand how many you’re selling per week and whether or not that kind of pace would be profitable for your sales & marketing efforts. If you’re pulling in $5k/week in sales just dialing for dollars in a third of your time, that’s pretty great. It shows that if you hired a salesperson and optimized the process, it makes sense to raise money to hire salespeople.

This also relates to unit economics—is it profitable on a unit basis (for each thing you sell) to be in this business? High level will do here.

Size of the opportunity and your plan is often a tricky area for founders. Many founders are hesitant to try to predict the future and others are much more likely to pick a plan they know they can hit, versus something where everything needs to go just right.

The key is understanding that VCs want to see what could happen, and how not what will most likely happen. We realize that half the startups we fund in the early stage won’t make it. That’s why we invest in a portfolio.

A financial plan isn’t a promise—it’s a starting place for conversation. First off, it’s a test to make sure venture capital is even right for this model. If no amount of funding could push this past being a $10mm per year revenue company, then you shouldn’t raise venture—because we’ll never see a big enough return off that. So, if nothing else, we all want to be on the same page that this thing can make it to a certain size.

Most VCs want to see a path to at least $100mm in annual revenue, if not more. Can you show a plan that gets there?

Second, we want to make sure the founder has done the work to figure out how that might happen—and that there are no glaring assumptions we don’t believe. If you want to build the next Facebook, but your assumption is that 3/4 of the users are paying customers, that might not be so believable. We’d want to understand how you’re getting to that number.

We don’t take these numbers at face value. Sometimes, we’ll push you in certain areas where we think you could be more aggressive. Other times, we’ll ask you to tone down some assumptions, and the plan still works quite well. Either way, it’s all about showing your work and making sure you did all the customer calling, peer comparisons and firsthand research necessary to be eyes wide open on this idea. Otherwise, it’s going to be hard to trust that everything you’re telling us is likely to happen.

The last thing I’d like to see is an understanding of why each customer signs up. Why will they be convinced? What are they doing otherwise? Why are they going to take time out of their day or carve out a portion of their budget? There are lots of ideas out there that don’t focus enough on the consumer problem—or the problem simply isn’t really enough of a problem to motivate people.

Let’s say you haven’t done all this work yet. It’s fine to ask an investor a specific question about direction, or how they’ve seen companies solve something. I’m not saying you have to be 100% done with all your work to talk to an investor—but if you really do want to be prepared, being complete about the story is the only way to make sure you’re properly evaluated.

If you’re not sure where all the plot holes are or what investors might believe, you may want to check out Feedback.vc.

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