Da Venture Blog
How to score venture capital.
August’s issue of Wired this year was the “How To” issue. How to stop a fight. How to crash a party. How to twitter an event you’re not even at. . . . One of Wired’s how to’s was “How to score venture capital.” Now there’s a topic near and dear to my heart. So I read on with great anticipation and discovered that whoever wrote this did not, in fact, know how to score venture capital — at least not from me. So here is Wired’s advice with my commentary.
1. “HAVE AN IDEA. We’d say it has to be good, but many Web startups demonstrate otherwise.”
Despite Wired’s snark about Web startups, there is a reasonable point in here. It is true that you need to have an idea — you’ve got to build something and, eventually, you even have to sell something. But “good” is in the eye of the beholder. I think you would be hard pressed to find a single startup that managed to get a term sheet from every VC they pitched. One VC’s next Google is another’s wasted hour. That doesn’t mean one idea is good and the other is bad. It just means that venture capital is still more art than science. Trying to pick winners is what we do for a living and some of us are better at it than others.
2. “STICK WITH what you know. If you’ve spent the past few years building MySpace plug-ins, don’t propose launching a chain of bowling alleys.”
On the one hand, it is true that VCs love the idea of “domain expertise.” On the other hand, it is silly to say that you need to stick to only what you know. What if there isn’t a business to be built from MySpace Plug-Ins? Are you doomed to never create an interesting startup just because that’s what you know? Look at Joshua Schacter. What did Joshua know before creating Delicious? He knew how to build huge scale, high performance, enterprise applications for the financial services sector. Does that mean the VCs were foolish to invest in Delicious? Should they have urged him to start an enterprise software company? VCs love passion and energy more than expertise. I probably wouldn’t fund Joshua to create the next generation nuclear power plant. Then again, he’s a really smart guy — if he spent enough time getting himself familiar with the space and thinking differently about the problem, you never know.
3. “SPEND an inordinate amount of time crafting your business plan’s executive summary. It’s the first thing VCs read — and the last if it’s poorly written or long-winded.”
The two things that I look at when first getting up to speed on a company are either an executive summary or a PowerPoint. So it is certainly the case that you would be well served by a concise and compelling executive summary. On the other hand, you may well want to stop there. A full blown business plan is rarely necessary to raise venture capital. VCs tend not to read business plans because a) they are too long and b) your business will likely have changed by the time anyone gets around to reading your business plan So focus on the things that matter — understanding your competition, building great products, innovating on your business model, etc.
4. “SEARCH FOR VC firms that have recently funded startups similar to yours. Then hit those firms’ Web sites, where they’ll likely have instructions for submitting business plans. Don’t worry — the best do actually mine their slush pile.”
If Wired’s advice falls on a spectrum from “sort of right” to “way off the money,” this one is deep in “way off the money” territory. It doesn’t start off terribly wrong. You should definitely do a lot of research on the VCs that you will approach for funding. And the ones who have funded related businesses in the past are potentially good targets for your business as well. But not always. Imagine you are building a gaming startup. Some VCs who have invested in the gaming space may be signaling to you that they are excited about the gaming sector and would be happy to fund other gaming companies in the future. Other VCs may feel that they have made their bet in the gaming space and will be hard pressed to invest in another gaming company. So previous investment can be a double-edged sword.
The place where this advice goes far afield is the suggestion that you should go to a Web site, find instructions on how to submit a business plan, and “drop it in the mail.” Wired claims that “the best” VCs actually look at unsolicited business plans. It may be true that many venture capital firms look at unsolicited business plans. But rest assured that it isn’t Mike Moritz or Dave Marquardt or John Dooer reading these plans — it is the most junior person at the firm. More importantly, the way to get your executive summary read is to have it passed on to a VC by someone he or she trusts. This is a referral business. Your credibility as an entrepreneur will be bolstered by the credibility of those individuals who vouch for you. So rather than spending time writing a business plan, go spend time pitching your business to technology influencers who can help you build a business and can introduce you to the right people to fund your business. My advice would be to never ever submit a business plan through a Web site — if you can’t get it directly to the person who you want to read it, don’t bother.
5. “ONCE INVITED to present your plan, remember that brevity is a virtue: Use no more than 30 PowerPoint slides, and keep your presentation under 45 minutes.”
Yikes. 30 slides. Unless you are Lawrence Lessig, I don’t think the words “30 slides” and “brevity” can possibly be used in the same sentence. I completely agree that you should aim to keep your presentation to about 45 minutes. If a VC gets excited about what you’re working on, they’ll spend more time with you in future meetings. But, as with entertainment, you are way better off leaving them begging for more. Get in. Pitch. Get out. There is no way that should take anywhere near 30 slides. I’ve blogged here before about the 6 — yes, 6 — slides you need to pitch your business. Even if you feel that 6 slides is too spartan, don’t confuse quantity for quality. The fewer the slides and the more discussion the better.
6. “KNOW EXACTLY how much cash you need.”
They waited until the final piece of advice to nail it. I just wrote a whole post about this. Don’t just ask for a specific amount of money, explain precisely what it is you intend to do with that money and why it is the right amount of money. This should be the last slide of your PowerPoint presentation and is your chance to summarize the strengths of your company: you’re building something important; you understand the competitive pressures and how they impact how much money your are raising and how quickly you are spending it; you have the right team to build it (or know where to find the right people to add to the team); and you can make meaningful progress on the very reasonable amount of money you are seeking to raise.