The 10 Commandments for Raising Venture Capital
During the last 20 years that I have been involved in the tech industry — as a venture capitalist, an angel investor in startups and the former CEO of MSN Israel — I’ve had the opportunity to meet thousands of founders both in Israel and around the world. After hearing so many presentations and pitches done by passionate entrepreneurs, I want to share what I believe are the most important things to think about and be aware of when pitching your venture to potential investors. These “commandments” are what I believe investors are most interested in (apart from the business elements such as the business model, the business plan, the go-to-market strategy, the P&L and the budget).
1. Thou Shalt Challenge Conventional Wisdom and Think Big
Investors are looking for “the next big thing.” The venture capital business is a high-risk business, and the only justification for its existence is the high multiples it can return to the investors in a successful case. These huge successes usually come from companies that had a big and innovative idea, executed well and managed to scale the company to be a significant one. Thus, investors are not looking for a “me-too” company, for a safe idea or for a modest success. Keep this in mind when you share your mindset, your hypothesis of why you think your company could do what you claim it can and why your ambitious goals are realistic.
2. Thou Shalt Take Risks, but Be Responsible With How You Manage Your Venture
Innovative and bold ideas are always risky. If your idea is not, it probably will not be a significant company. Having said that, you should make sure that you do everything within your power to mitigate risk by having a detailed plan, by executing properly, by managing the capital in a responsible manner, by hiring the right people and by creating the right strategic connections and collaborations. Your potential investors know they are taking a risk, and once they have invested, they become part of the company. Make sure they know you will treat their investment responsibly.
3. Thou Shalt Be Passionate
Investors are not only looking at your PowerPoint slides and Excel sheets. They want to see your passion and the fire in your eyes when you talk about your company. Passion is hard to fake, so don’t try. It is also very contagious. When it’s real, people want to be part of it. Be the passionate leader they want to see and are eager to invest in.
4. Thou Shalt Be Transparent With Your Investors and Your Board
As the leader of the company, make sure you build the right relationships with your key stakeholders; they are part of the company. As any healthy relationship is built on trust, the initial step of building these relationships begins in the very first meeting. Make sure not to hide any data you have, fearing it will harm you. If they find this data by themselves and learn that you purposefully kept it from them, it will be much worse. If you don’t have an answer, don’t invent one. Simply come back to them once you do. However, you should be prepared to answer any questions regarding the core aspects of your company, its market and competition on the spot.
5. Thou Shalt Focus on Your Mission
Your investors must know that you are fully committed to your company and that you will do anything it takes to make it a success. They should know about your mission-command mindset and that completing your mission is on the top of your list. Tell them you believe in showing results, not giving excuses.
6. Thou Shalt Have a High Sense of Urgency
You should always assume that someone, somewhere, right now is working on a product very similar to yours. Thus, even if your company and the other startups like yours are all in stealth mode, there is a race against time to be first to the market. Being first is not the main thing, but since the goal is to gain as much market share as possible, being the first to introduce the product could be an advantage in terms of media coverage, novelty effect and getting the target customers first. That sense of urgency is a mindset that your potential investors will highly appreciate. They want to know that you are not only running fast now, but also that with their investment, you can accelerate and run even faster. One of the best techniques to be fast to the market is by developing a minimum viable product (MVP). Make sure to share how you came to define the MVP of the company — as well as how you are testing it based on quantitative and qualitative data.
7. Thou Shalt Build an Unstoppable Team
Many investors say that the team is the most important component of any investment decision. Investors usually prefer a team of founders — anywhere between two and four — over a single founder. It is a good practice for founders to have different backgrounds, managerial techniques, technological capabilities, marketing acumen, etc. If any major discipline is missing from the founders’ team, there should be a recruiting strategy to fill these gaps. The best way to introduce a team is in a face-to-face meeting. Make every effort to have this meeting. If an investor is requesting a prior phone call, accept it, but make sure you don’t reveal everything on the call. Rather, use it as a teaser to schedule a face-to-face meeting. For example, you can tell the investor you’d be happy to show your working product or a demo when you meet in person. Remember that investors will not only evaluate your team’s professionalism but also how brightly your passion burns about your venture, how good your team’s personal chemistry is, how well you interact with one another and how attentive you are to questions and ideas.
8. Thou Shalt Know Your Competitors Inside and Out
Knowing the competition and other significant players in your space is paramount, and presenting it in the right way is crucial for the pitch. First and foremost, it shows your team’s professionalism and demonstrates that your team knows the market. Second, it’s the best benchmark for your product and is a great tool to show investors both the companies that already exist in your space and their current solutions. Therefore, when presenting your product, you can clearly show why it is a better solution that can win the market. Third, it gives investors an initial feel of the market and the space: how big the market is, how fast it is (or is not) growing, what the current business models look like and who the main potential customers are. Lastly, it gives the investors a good picture of the investment scene in this space: who the other investors are, how much was raised by the various competitors, if there were corporate VCs who have invested in the space and so on.
9. Thou Shalt Have a Real Competitive Edge
The competitive analysis is a great set-up to introduce and emphasize the advantage and the differentiating edge of your company. This is a key component of the pitch, because, in many cases, introducing something new to the world is the sole reason for the company to exist. Also, this is the key product differentiator that will justify the funding and financial support of an investor. Make sure the competitive edge is presented in a simple, focused and clear way. A demo is the best way to prove the product and its features. If the investor does not fully understand the competitive advantage presented, or they have doubts regarding its significance, the chances of receiving their investments will diminish.
10. Thou Shalt Have Chutzpah
Chutzpah can be construed by three things. First, it’s a way of thinking. You and your team should be bold enough to present a real challenge to the conventional wisdom in your space. Bring a new paradigm, demonstrate a hypothesis for a different future in which your solution is a necessity, provide quantitative and qualitative data on why customers will buy it, show how your proposition will redefine the space it’s in and display your proven potential of becoming a category leader. Second, it’s a way of doing business. You and your team need to clearly present what you will be doing differently that will make your venture a success, including why your mission-command doctrine has a direct and highly positive effect on how you manage your team, how it operates and how it will bring results. Finally, it’s a way of interacting with people. Chutzpah should always be grounded in a nucleus of truth and decorum. Use it to connect with the right people, to tell them about your vision and to earn their trust.
Your company’s way of thinking — its strategy, products, partnerships and goals — should all be thick with chutzpah. But chutzpah is in no way a license to be rude or arrogant. Your team should have just the right amount. Adopt the following advice from Rabbi Tzvi Freeman: “To be a good person, you do need these two opposites: a sense of shame that prevents you from acting with chutzpah to do the wrong thing; and a sense of chutzpah that prevents you from being ashamed to do the right thing.”