Inside the mind of a VC: Navigating the early-stage pitch
- For early-stage entrepreneurs, venture capitalists are looking for the right mix of vision, data and team.
- Storytelling is important, particularly the ability to clearly explain the product and market to a non-specialist.
When Matthew Cooper, co-founder of personal finance platform EarnUp began pitching his idea to investors last year, he thought the strength of his idea alone would stand up tall enough to sell investors outright. Instead, he got sent back to the drawing board. He was convinced it was a great idea, but the ‘so what’ question sent him on a rethink of the concept.
“I got asked ‘what is your massive pain point from an average borrower’s perspective, and what problem does it solve,'” said Cooper. “We were convinced we were solving a problem — we just didn’t know how to communicate that, and part of that is most venture capitalists are not average American consumers living paycheck to paycheck to paycheck.”
What led to a successful pitch involved going back to beta users to get more concrete details on what types of real-life problems the tool was solving. To Cooper, whose platform just closed its Series A round of financing, a successful pitch involves getting into the mind of the venture capitalist while making sure it’s understandable to anybody. Tearsheet spoke to venture capitalists and entrepreneurs in financial technology about how to perfect the pitch.
Team is important
Compared to follow-on funding rounds, early-stage investors are largely selling a concept without a trove of information to back up how the platform resonates with customers. So the team question is high up on the criteria evaluators use.
“For early stage it’s much more qualitative — it’s really about the team,” said Nyca Partners Principal David Sica. “In fintech, it’s kind of hard to find the perfect person who understands everything about the problem and how the financial system works, has a very crisp product vision for the future, is also a technologist that built it, and is a really good business person.” It’s a combination that’s nearly impossible to find, Sica said, so he looks for people who are as close as possible to the buckets.
Leadership ability also figures into the equation, particularly if the person can inspire others, including potential employees. “Is this a CEO that I think can lead a 100-person plus organization and do they have what it takes?” said 500 Startups partner Sheel Mohnot.
Do your homework
Moving beyond just the team is technology and a carefully crafted product story.
“The second thing thing to me is ‘where is the tech in fintech; and the third is the ‘so what’ question, or the ‘WTF,’ what is it that you’re doing that’s so interesting or important, like ‘why bother’?” said Propel Ventures Partner Ryan Gilbert.
Knowing your numbers as the CEO is also important, he said, something he learned firsthand as the CEO of a startup pitching a venture capitalist. “I punted [to the CFO] on a very important financial metric, and the dressing down I received was amazing,” he said. “At the time I thought ‘what a jerk,’ but it was a great lesson — as a CEO you’ve got to know what’s going on in the numbers, and can’t outsource everything.”
The story needs to stitched together well enough to resonate with someone not familiar with the tool. “At a very high level, the most important thing is clarity of vision — can the founder explain to me very clearly what it is that they do and what they hope to accomplish, and where they want to go,” said Mohnot.
Evaluating a future founder involves seeing how they’ll fit into a future context of financial services, so funders look for any clues they can find.
“You’re trying to figure out whether or not to invest, and you’re trying to figure out what part the founders play in the world ten years from now,” said Y Combinator Partner Aaron Harris. “The best you can figure out is if you can envision a world where the founders can reasonably hit the mark — you need to try to find some evidence of that happening.”
The investor community is small and it’s easy to develop a reputation.
“You see a lot of founders lie about the interest they have,” said Mohnot. “People who lie about how interested another party is don’t realize that we’re literally all friends in my world — I could text any of the other investors and understand if someone is bullshitting.”
Don’t use irrelevant jargon and metrics
Funders come from a variety of backgrounds, so language can be crucial. Industry jargon can easily throw off an otherwise good pitch.
“It’s not an automatic killer when a company starts their pitch and reaches for technical or marketing speak, but it’s a bad sign,” said Harris. “One example that sticks out to me is when someone used the term ‘perceptual space’ and I had no idea how it related to what they were doing.”
Others say it’s important to keep metrics restricted to those than advance the product narrative.
“One thing that comes to mind is who people compare themselves to,” said Mohnot. “They may say ‘we’re growing faster than AirBnB at this time’ or the ones that drive me nuts are those vanity metrics, like ‘we were voted such and such’ by some dumb shit organization that I don’t care about.” Contrary to what some may say about being the “Uber of XYZ,” Mohnot said that’s actually helpful, because it may be a useful way to explain what a product is doing in a sentence.
Practice makes perfect
To Zor Gorelov, co-founder of Kasisto and three-time startup entrepreneur, though founders may have a short list of top investors to pitch, they should never start with the top names.
“Intuitively, I know five top firms to go to, but don’t immediately start pitching to them; it’s probably not the smartest thing to do,” said Gorelov. “You need to practice, and you learn something all the time — how do you learn and apply it to the next meeting?”
Some investors may give startups a second hearing if the idea is good but the pitch needs a little work.
“In a seed round, I didn’t do a good job presenting the [market] size of the app, but the next time I got through to them,” said Harris. “One of the things that’s important for everyone to remember is that you never get just one chance.”