Fundraising for a startup is never easy, but getting investors to write you a check is particularly brutal at the moment.
CNBC has called the current situation "the hardest fundraising climate in more than a decade," noting that "the shutdown of the IPO market has resulted in a virtual freeze in pre-IPO rounds, and the dramatic contraction of software multiples has stalled private deal flows." While there are plenty of companies still having success raising money, at the moment there is little to no margin for error for founders.
Which is why two recent posts from VCs come at a particularly good time. The Medium pieces from founder-turned-VC Jason Lemkin and early-stage investor Hunter Walk both cover the same basic ground -- missteps they often hear founders making while pitching. You can check them both out for a full rundown, but here are a handful of particularly common (and/or grievous) mistakes you'll want to avoid when pitching VCs.
1. "During my time at Google... " (if you only worked there as an intern)
It's natural for founders to tout their credentials. But it's just as natural for VCs to do some Googling to verify your claims. And when what you said doesn't exactly line up with reality (or even just seems like an oversell), your reputation will take a big and unnecessary hit.
Walk reports he often comes across founder bios dotted with big-name logos like Google and Harvard, "then I go to LinkedIn and see you have eight years of work experience, of which Google was a summer internship in the operations team while you were in grad school. And Harvard was a two-week executive ed course."
He understands the motivation for this kind of résumé inflation, but warns the consequences can be severe: "I get it, you're trying to draft off the social proof of some credentialing, hoping that it at least gets you in the door.... But I truly believe you're doing more harm than good when you push away your real lived experiences for what you think I want to see. At best, you're going to get the investors you deserve (bad ones who care mostly about status), and at worst, you're going to signal lack of self-confidence, when we should be building mutual understanding and trust."
2. "Oh those aren't actually customers, they're trials"
Lemkin warns against deceptive metrics that overstate how well your product is doing for similar reasons. "Be very careful exaggerating metrics," he cautions. "Don't count trials as customers. Don't count deals that haven't quite closed yet...as closed. Don't blend three months of revenue into 'Quarterly MRR' to make your revenue look bigger. You'll likely get caught. And worse, maybe it wouldn't have mattered at all to the VC if you'd been honest and clear upfront."
3. "We hope to sell for $100 million in a few years to a BigCo"
While a $100 million payday might sound fantastic to most people, it's small potatoes to VCs, which is why both Lemkin and Walk warn against telling investors you're hoping for a relatively quick exit unless your company is already on an insane growth trajectory.
Among other downsides, addressing plans for an exit too early makes Walk wonder whether the entrepreneur "is looking for [a] quick cashout rather than wanting a venture partner for a long-term company." Lemkin is even more blunt about why you shouldn't say things like the sentence above to VCs: "While this may be the right strategy, the VCs likely won't make enough money off an outcome like this. You won't sound ambitious enough."
4. "Our product wins because it costs less than the competition"
For customers, the offer of a lower price might be a solid selling point. But according to Lemkin, this isn't the kind of competitive advantage that VCs can get behind. "This almost never wins in SaaS, at least not big. It's not an enduring competitive advantage," Lemkin warns founders, referencing his own investing specialty of software as a service. But VCs investing in other areas are also likely to wonder if some other company won't just come along and undercut your price point (or lure your customers away with a richer offering).
5. "We need X dollars to last us Y months"
Lemkin and Walk address the issue of how much money you're asking for versus how much money you're burning through from slightly different angles, but both VCs agree you shouldn't frame the amount you want in terms of how much time it will buy you before you hit a financial wall.
Walk notes that he often sees founders explicitly ask for enough money to keep the doors open for 18-24 months. Instead, he prefers when founders explain "what you're going to accomplish with my dollars as the headline. Then support this with how long you think it'll take and why this capital is 100-125 percent of what you'll need to get there." In short, frame the money as getting you to particular metrics, not to a particular date.
Along the same lines, Lemkin cautions founders not to say anything like, "We need a lot of money because our burn rate is pretty high." How much you're spending shouldn't determine how much you ask for. "It's not the VCs' problem if your burn rate is too high," he says. Instead, like Walk he stresses you need to show how the money you're asking for is going to get you to the kind of growth benchmarks that impress investors.
Of course, as Walk frankly admits, "There are lots of different investor mindsets and preferences in what they fund," so there's no guarantee these sentences will count against every company with every investor. But given how many pitches Lemkin and Walk have collectively heard, you should probably think long and hard before you say anything along these lines in your next pitch meeting.