You’ve got a meeting with well-established venture capitalists. Everything seems to be going fine. But you present your estimate for your startup’s projected earnings and you see their faces drop. You find out later the VCs thought it was unrealistic, which made them worry you didn’t have a handle on other aspects of the business.
Or maybe your projected earnings were reasonable, but your product demo didn’t go well. Or you can’t get your foot in the door because potential VCs tell you they’ve met other startups with the same concept as yours.
What’s an entrepreneur to do?
“Venture capital is often misunderstood and can feel like a big black box to many people,” say Nicole Gravagna and Peter K. Adams, authors of the book Venture Capital for Dummies. “But getting an understanding of the basics will help demystify the whole process.”
Some mistakes, more than others, can cost entrepreneurs a VC deal. Here, Gravagna and Adams outline 10 of the most damaging mistakes you can make and tell you how to avoid them — or overcome them if they occur.
Being uncoachable. Being coachable means having a personality that allows you to say, “I stand corrected.” In other words, you can take criticism, constructive or otherwise, and use it or disregard it while staying positive throughout. Strive to be coachable, especially if that trait isn’t one you possess naturally.
“People who are uncoachable don’t take criticism well or simply don’t listen,” says Adams. “They are offended by the notion that their company isn’t perfect, even though no company is perfect. The uncoachable person resists change and quickly frustrates all investors he meets.”
Having a critic. You can’t do a lot when someone doesn’t like you or your company, but having someone badmouth your deal, even falsely, can ruin the mood around your fundraising campaign very quickly.
“In an angel meeting of 25 people, if one angel says something less than positive about your deal, the excitement drops, and the deal can die right there on the boardroom table,” says Gravagna. “If a VC asks his advisors what they think of your deal and they dislike it, it’s dead. The best way to avoid this problem is to make friends and don’t make waves for any reason while you are fundraising.”
Quoting an inflated valuation. Quoting an inflated value for your startup is probably the number one reason a deal sours. When your valuation is too high, investors think you are either greedy or you don’t know what you are doing. In both cases, a high valuation can end a conversation. Be realistic.
Pitching an idea. At one time, VCs may have doled out big bucks for an idea. But it’s less common these days for angels or VCs to invest in a concept stage company.
“Now investors carefully balance the risk versus reward aspects of your deal,” Adams says. “If you’ve accomplished very little and are still a few years away from revenue, VCs aren’t going to invest in your deal. It’s simply too risky.”
Instead of seeking venture capital, Adams says entrepreneurs may want to pursue other options. If you simply need capital to grow your business, consider taking a loan, raising money through people you know, talking to angel investors, crowdfunding, franchising or writing a grant proposal. If you are looking to add experienced people to your team but can’t afford to pay employees, look at finding a co-founder or using venture labor (hiring someone you pay in equity instead of cash).
Being invisible. Fundraising is like a presidential campaign. You’ll have more success if you’re more visible. Make sure you’re attending networking events, trade shows and pitch events so that potential investors see you regularly. Ideally, you will have regular updates and good news about your company to share when you are in public.
“Be careful not to give the impression that you are pitching the same old deal for a long time,” Gravagna advises. “Make sure you are giving a message of progress. Most of all, stay in touch with investors after you pitch to them. The ball is always in your court. Don’t ask for information or the investor’s time.”
She suggests sharing good news every month through a newsletter or mailing list. “It doesn’t have to be extensive. Brevity is best anyway.”
Confusing people. People have to understand your deal so well that they can describe it to another person. Everyone has to talk with someone else about your deal before they can invest. Angels talk with their spouses; VCs talk with the board.
“The most effective pitch deck lays everything out simply for the audience,” explains Adams. “After the pitch is over, people should be able to discuss the deal as though they were discussing the plot of a Disney movie. Simplify everything! The details will come out in subsequent meetings.”
Pitching to just one investor. If you went on only one date ever, what is the likelihood that the single date would result in a wedding and a perfect marriage? Although you may find the right investor immediately (the venture capital version of a high school sweetheart), it’s rare.
Gravagna suggests you plan to shop your deal all over your town and other towns.
Having connections in only one town. One of the greatest things about the world we live in is how connected we all are. Use relationships in your hometown or the hometowns of your founders to seek investment from other cities and states – or countries. If you have a female founder on the team, contact the few women’s investor groups. They are always looking for high-caliber, women-owned companies.
“Use your network to get an introduction to VCs,” Adams suggests. “LinkedIn can be powerful to get connected with VCs in other cities through people you know. You can even try to cold contact them. Keep in mind, though, that some investors are local-only investors. Some will talk to you only if you consider moving to their town. Get the details before you buy a plane ticket. You don’t want to have to agree that you’ll move to Milwaukee if you had never considered it.”
Failing to study up on your investors. When you meet with an investor, you should have researched him so thoroughly that you know what his favorite dinner is. (Not really, but you get the idea.) When you ask questions, your questions should be informed ones about things that you can’t learn from the Internet. Investors are turned off when you don’t know what kind of investments they make.
“Get ahold of potential investors’ portfolios to understand the types of companies they invest in and how much they have been investing,” suggests Gravagna. “In addition, most VC general partners have a Twitter feed, a website and a LinkedIn page. From these sources, you should be able to learn quite a bit about the general partners as people before you walk in the door.”
Pitching your product instead of your deal. When you pitch to investors, you are selling equity in your startup; therefore, the pitch has to be about your whole company. If you give the same pitch to investors that you give to a potential customer — one that outlines all the benefits and features of your product — then you’ve missed the mark.
“You have to share with investors all the highlights about your company,” explains Adams. “They need to know how much you’ve accomplished, the plan for the future, and how much money your company can make for them.
“The investor pitch is about money, specifically how you’ll make money, how much money you can make, how much money you need to make money faster. If money isn’t the central theme of your pitch, you need to revisit your pitch deck and see how you can refocus it. The investor looks at your company as a much-needed addition to his portfolio. He sees your company as a whole package with founders, product, opportunity and exit potential.”
Nicole Gravagna, PhD, is director of Operations, and Peter K. Adams, MBA, is executive director for the Rockies Venture Club. They connect entrepreneurs with angel investors, venture capitalists, service professionals and other business and funding resources.