On the occasion of the 20th anniversary of his firm, Pritzker Group Venture Capital, I hosted a fireside chat with J.B. Pritzker at 1871. It was J.B. who led the group that founded 1871 in 2012. The event drew an enthusiastic crowd of entrepreneurs, investors, and several hundred others interested in hearing the gospel straight from one of venture capital's leading apostles. When you have more than 20 years' venture experience and roughly 160 investments behind you, there's a whole lot to impart--and well worth listening very carefully to. It was especially refreshing to be able to steer away from the clichés and get into some very practical tips about what he and his team look for in considering a deal and how that differs from many other venture firms, which are constrained by the requirements of their limited partnership agreements and other considerations like IRR (as opposed to ultimate return on capital) as well.
We discussed a wide range of topics--while trying to stay as far away from politics as possible. He spoke specifically about some of his more recent deals as well as his firm's particular investment criteria and objectives. For an audience like this, the value is less about the novelty of the information we hear and more about the need to be continually reminded about the pretty basic basics of the business of raising money.
Among the very first things we covered was the necessity of "warm" introductions. Unsolicited business plans tossed over the transom are just as quickly tossed in the trash. I was reminded as we spoke of a great old piece of Chicago advice for patronage jobseekers, attributed to various politicians, that goes: "We don't want nobody that nobody sent." It's the same story for your pitch and your proposal. If no one cares enough to vouch for you and your idea and make the right introductions, you'll never get to first base. And these aren't courtesy intros from the guy next door or someone's brother's brother-in-law-- they're from highly-regarded business professionals whose time is precious and whose advice and opinions are always being sought. It's a small club and getting in the door is the first step to getting anything done.
Next on the short list was the need to temper your confidence with a little humility and a fair amount of listening. This, of course, is a life skill-;not merely a fundraising tool. (See Leaders Learn Best by Listening.) J.B. said that no one knows the answers to every question and, even if you think you do, there's more to the investor- courting process than simply demonstrating that you are right all the time. Investors want to be wanted, needed, and heard (as we all do) and they want to feel that their input, guidance and assistance will be invited, appreciated, and even listened to from time to time. They're looking for a long-term partner, not a game show contestant, or the best college debater. Building a big business is a long, painful process and, while speed and skill are important, so are collaboration and team-building and building that team is as important with your investors and in the board room as it is with your partners and employees.
Without any question, the largest single cause for startup failures (more than 40% of the cases) is the lack of a market for the product. J.B. noted that it's absolutely critical that your pitch: (a) identifies a deep, existing and acknowledged pain point; (b) demonstrates that the "sufferers" are willing to pay serious money to have the pain addressed and remedied; and (c) shows that you have a viable and deliverable solution to the problem. No one wants to pay anyone to develop the cure for no known disease or try to fund and launch a solution in search of a problem. And while you're at it, you need to show that there's a lot of these folks and that the market (and reasonable add-ons and extensions to it) is big enough to support the expected growth of your business and, more importantly, to include a couple of bigger players as well as potential buyers for the business. SMS Assist (the newest Chicago unicorn) was cited as an example of a business that started out serving 3 basic service-and-maintenance needs of retailers (floor care, lawn maintenance, and snow removal) that - even at scale - wouldn't have amounted to a very large and interesting opportunity until you added in the revenues associated with the 45 other kinds of needs and requirements these customers also had, which SMS could grow to address.
Almost 25% of startups fail because they don't assemble the right team and - in our technology-drenched world today-; J.B. noted that it is crucial that your E suite (engineering, design and programming talent) be at least as robust as your C suite. VCs bet on the jockey, not the horse, but increasingly they're betting on the whole team and not just the boy or girl wonder. Things today are so complex that it's rarely if ever a one-person show and-- as often as not-- the real meat of the new business is not the smiles and the sizzle and the showmanship of the CEO; it's the steak and the substance of the people in the pit making the programs sing that makes the difference in the long run. As I like to say, you can't win a race with your mouth. Nothing speaks louder than code. J.B. said that his ultimate decision to make an investment in Signal (which topped Crain's Chicago Business 2016 Fast 50 list) was largely based on his confidence in the experience, talent and prior successes of the CTO recruited to the founding team. It's almost always a good bet to go with the people who've been there before and are looking to do it again rather than the folks who say they can get you there.
Finally, right behind market fit and team problems, in terms of fatal startup failings, comes the substantial risks associated with strong competition (existing or emerging), which drives about 20% of the new companies out of business. J.B. noted that competition is a complicated conversation to have with any entrepreneur. On the one hand, it's obvious that your new business is always going to be replacing or enhancing or improving upon something that is going on now because nothing exists in a vacuum. In addition, if no one else in the world was doing something similar or interested in what you were hoping to do, you might have to ask yourself why. And finally, those potential competitors (large and small) may also turn out to be very helpful in determining and demonstrating the size of the opportunities and the markets you're looking at taking on. In fact, they may also be potential channel partners, strategic investors and, ultimately, acquirers as well. The point is that they can't be ignored and your pitch and your plans have to have plenty of provisions for how you expect to deal with them. And, by the way, it's perfectly okay to argue - as the guys from Netflix often say - that you're not trying to do things differently, you're just going to do them well.
The final thought that J.B. left us with was pretty simple. He said that it was critical to know what you don't know and--having acknowledged and accepted that-- to get busy every day figuring out how to fill those gaps. (See This Common Communication Mistake Destroys Productivity.)