While there is no definitive guide to raising money, there are tactics entrepreneurs can use to make their idea more attractive for venture funding.
In my last two years working at Kleiner Perkins, I’ve noticed that while some people have brilliant startup ideas, they might not know how to navigate the waters of raising capital, and this lack of preparation can put them at a huge disadvantage.
In a recent episode of KPCB’s Ventured podcast, I interviewed my partners Randy Komisar and Eric Feng about how they evaluate startup pitches as well as the metrics they use.
While a variety of quantitative and qualitative factors go into each funding decision, Randy and Eric agree that venture capitalists care most about the passion of the entrepreneur presenting. Throughout the conversation, we discuss what entrepreneurs should include in their slide decks, why business models might not matter, and how VCs come to a collective decision about funding an idea.
There are many ways to pitch venture capitalists
A startup pitch can happen anywhere – formally or informally. Eric recounted a particular odd case where an Uber driver circled Sand Hill Road so that when he picked up VCs, he could spend the whole ride pitching startup ideas to them.
However, a more common way to establish a relationship with a venture capitalist is to go through a trusted friend referral. It has been shown that the longer a VC knows the entrepreneur, the more likely there will be a successful outcome for both parties involved.
Business models don’t matter as much at the early stage
VCs recognize that business models can change overtime. Instead of focusing on the merits of a business plan during the pitch, Eric and Randy use it to understand how an entrepreneur thinks about his/her business.
When evaluating an early stage startup, there usually aren’t meaningful metrics to consider, so careful attention is paid towards traction with an existing customer base. It’s important to prove that a startup has momentum by showcasing anecdotes of people who have tested the product and love it.
Entrepreneurs must be evangelists for their products
Venture capital, above all else, is about investing in people.
Although a product demo helps visualize an idea, it simply serves to supplement the entrepreneur’s passion for that idea.
Randy’s favorite all-time pitch came from Juicero founder Doug Evans who didn’t quite fit the “mold” of an investable entrepreneur when he first walked into KPCB: a graffiti artist from New York without a college degree who wanted to start a juice company. Prior to pitching at KPCB, Doug had walked into pitches with juice samples from Juicero as well as off-the-shelf juices for comparison. Unfortunately, before he came into pitch KPCB at our Menlo Park offices, TSA confiscated his demo samples and he walked into the meeting empty handed.
With no product demo and little sleep, Doug was still able to do two things that won the hearts and minds of investors in the room: he was unapologetically passionate about his idea, and he used analogies to explain his business in a way that made sense to his audience. As an evangelist for his product, Doug compared his business model to the Keurig business model, which was a $20 billion business opportunity at the time. Randy most admired Doug’s ability to share insights he had not heard before, so when Randy walked away, he felt like this was somebody who was would fight for his idea to the death.
The most important slide in a pitch deck is the “Why”
The “why” slide allows investors in the room to understand why the business matters, both to the world and the entrepreneur. Every startup should have a story that articulates the motivation behind the business and the problem it’s trying to solve.
Randy recounted one of his least favorite pitches from the Web 1.0 era when several business savvy folks pitched an e-commerce pet store idea. While they presented an analytical approach to evaluating the market opportunity, the problem was that none of them owned any pets – so it was hard for them to articulate any purpose or direct engagement with the problem and customer. Venture capitalists are not bankers; they want to work with entrepreneurs who believe in what they are doing.
In startup investing we don’t date, we marry
Eric described what it is like to back an entrepreneur: “I like to say that in venture, we don’t date, we marry. We are getting involved with companies that we want to spend the next five, ten years with. We’re getting involved with technology and problem sets and markets that we want to spend a decade with.”
When the Nest founders came in and pitched the concept for Nest, it wasn’t until the end of their 50-page presentation that Randy realized they were pitching him a thermostat business. Randy’s initial reaction was disappointment – knowing that Tony Fadell had worked on the iPod and iPhone, Randy felt that Tony could have worked on anything, so why a thermostat? The turning point in the pitch was when the Nest founders revealed that their goal wasn’t to just reinvent the thermostat, but to reinvent every unloved product in the home. From that point forward, Randy knew he wanted to back these founders. It came down to their passion and their vision of how they would change the world.
In a Q&A, be prepared for the “Why Now?” question
Randy and Eric both love to ask entrepreneurs why now is the right time and place to be starting this business. Eric asserted that “there’s nothing more powerful than a great idea that has found its time.” Even the best product in the world could fail if the market isn’t yet ready to adopt it at massive scale. So the entrepreneur has to be really good about explaining why their idea is ripe to succeed right here and now.
When the entrepreneur leaves the room, the postgame review process begins
After an entrepreneur leaves the pitch meeting, KPCB partners begin white-boarding the positives and the negatives, with the risks as well as outstanding questions all on one board. During that partner meeting, everyone in the room shares their opinions on the pluses and minuses of backing the idea.
This way, the collective intelligence of the group is visually represented on the whiteboard, so that everyone has the exact same context about the company. Some of the questions asked include: What are the strengths and weaknesses of the entrepreneur? How strong is the team? What sort of financial return can we expect over a reasonable time horizon? What are the likely exit opportunities – M&A or IPO? Often, not all questions can be answered in the room and the sponsoring partner has to go back to the entrepreneur to follow up. After the whiteboard is filled, partners are asked for their opinions and cast their votes to reach the best possible outcome.
If it’s a match, VCs will ask tough follow up questions and offer advice the entrepreneur has never thought of before. This goes far beyond writing a check.