Tell me if this sounds familiar: you start a company, build a product and try to sell it to some customers, only to find out that you need more money. You need to hire more staff; perhaps you can’t afford to build the product the way that you originally imagined; or maybe, you are simply running out of money.
I have launched a few companies and found myself in that exact situation: i.e., needing investors. If you need to raise money to keep going, you can’t afford to make a mistake — but many entrepreneurs do anyway. Before you get started, here is a list of the three biggest mistakes I made when first pitching to venture capitalists (VCs) or angel investors:
#1: Opportunity Size
How large is the potential market for this? There are “neat” businesses, and then there are high-growth, disruptive businesses. The latter are usually the kind investors are looking to invest in. But it is hard to be passionate about your idea and still have realistic perspective about how much success potentially awaits, and what’s worse, its hard to get your mind around what VCs are looking for. Even if you are sitting on an opportunity to make millions, it might surprise you to realize that a few million in profit would be a horrible business investment for a VC.
A profit-generating business is a beautiful and amazing thing all by itself, but that doesn’t mean that investors are going to dump millions into it if it doesn’t have industry disruption and explosive growth potential. You shouldn’t be embarrassed by profitable 10-20 percent annualized growth, but don’t expect a VC to get all worked up about something that will just make millions.
#2: Customer Validation
Are you building something that a meaningfully large numbers of customers will purchase? I remember walking into our first big VC pitch with a couple huge enterprise customers already signed, feeling like we were on top of the world, only to walk out stunned at hearing that we needed further customer validation. They were right, we were wrong, and we showed our lack of experience by presenting it that way.
Every business is different and legitimate customer validation looks different for each business. But because I didn’t look at the investment from the VC point of view, I failed to see how much risk they were taking and how more customer validation was needed to justify such a huge investment on their part. We eventually got more customers, but we went to the VCs prematurely and discredited ourselves in front of them by being more impressed with our progress than we should have been. Don’t make this mistake.
How quickly, costly and complicated is it to scale the business? If signing up new customers is time-intensive, expensive, requires specialized talent or is generally complicated, then you might be the owner of a cool business that isn’t very scalable.
Having a complex business isn’t necessarily a bad thing and often it is unavoidable, but investors are looking for companies that can scale with minimal complexity and as few barriers as possible. Entrepreneurs regularly underestimate the complexity of scaling their vision, and my first pitch certainly didn’t reflect industry experience for customer acquisition or realistic growth rates.
We ended up changing the business model to address the concerns with scale, but to be honest, I didn’t really understand how important it was until much later. We changed because we “had to” in order to please the investors, but we really should have been changing it because there was a problem with the business model. Unfortunately, it took longer than I would care to admit to see that.
How to Avoid the Same Mistakes
All three mistakes came from the same fundamental problem: I didn’t understand the VC side of the table as well as I should have. I didn’t stop and think about how many amazing business ideas they have seen fail. In short, I should have known better — but frankly, first-time entrepreneurs suck at this. We get too excited about how our idea can change the world, and we are supremely gifted at ignoring the Mount Everest climb ahead of us.
You can do better. Demonstrate that you have shaped your company around principles that give you the best shot at surviving. Do everything that you can to better understand the investor’s side of the table so that you can position yourself in a way that addresses their concerns before they mention them. Spend time on YouTube learning from well-known investors and study other startup failure and success stories so that you know ahead of time how to not look like previous failures.
Showing up at an investor pitch unprepared is like showing up at the base of Everest in a Speedo and flip-flops and expecting someone to take you seriously. Learn to think like a VC now, and maybe you will also get your business in better shape along the way.