Have you heard about the biotech startup pitching a telecommunications-focused VC firm? No? That's because it illustrates a huge problem in the startup funding world: Entrepreneurs pitching without preparation.
Judging by firsthand experience, I'd estimate venture capitalists disqualify about 90 percent of all incoming deal-flow. The reason: A lack of fit between the VC's wheelhouse and the opportunity itself.
Whenever I spend time mentoring the portfolio at Ryerson Futures, where I'm a partner, I remind our entrepreneurs they need to spend less time pitching their deal, and more time selecting whom to pitch. Founders often (incorrectly) see funding as a numbers game, and simply want to pitch to anyone (and everyone) who will listen.
Most founders I meet want to spend 50 hours meeting 50 different investors. It is better to spend 50 hours researching and preparing for the five investors that make the most sense for your startup.
I hear approximately 500 pitches a year. Of those, 90 percent never get a meeting because there's a gap between what we fund and what they do. Here are five reasons I had to reject opportunities just this week:
- We don't fund using cryptocurrencies.
- We don't invest before the founders do.
- We rarely invest is business-to-consumer ventures.
- We won't fund your minimum-viable product. If you can't build a prototype, then I can't fund you.
- We won't fund companies that spend more time with investors than with customers.
Some of these are specific to our fund, but many are not. Founders should already know those things about the firm before they reach out to me. So what's causing this? Lack of preparation.
Most founders have no understanding that investment decisions are not "all about you." In my opinion, at least half of any investment decision is driven by factors that have nothing to do with your startup. Instead they have to do with the fund and the team that invests in it.
So what are you missing? What should you be researching before pitching? Here are the top five pieces of research that most entrepreneurs overlook:
1. Investment thesis.
Every fund has an investment thesis. So does every investor. It's basically how the investor plans to deploy any funds they raise.
Sometimes it's based on an industry, like biotech or AI. Sometimes it's based on a stage. Sometimes it's both: Our fund, for example, is a seed-stage investor focused on business-to-business SAAS ventures.
While not always explicit, no fund or investor will ever hide their investment thesis. Make sure you know it to avoid getting shut out of a pitch.
2. Fund horizon.
Most VCs have a four-year window for writing checks to new companies. That's because most venture capital funds usually last around five to seven years, which means the fund managers must return their investors' money within that timeframe.
Typically, those managers invest the majority of their capital in the first four years, then spend the remainder following on those investments. By year five, most fund managers are out raising their next fund.
You're doing yourself a disservice if you don't pay attention to a fund's lifecycle. Often, pitch investors keep their "dry powder" (unused funds) to double down on portfolio startups that are doing well--not to make new investments into new startups.
3. Manager bias.
No matter the background, each professional investor has internal biases that influence their investment proclivities. These influences are the result of prior investment history and the success to date.
Here is one of mine: I've never gotten a positive return from a founder who was already rich. Any trust fund babies I've funded in the past have lacked the resiliency (or perhaps the need) to succeed. As a result, I'm biased toward the hustler over the debutant.
4. Historical success.
Look at action, not words. Most investors call themselves "early stage," but look to their actual investments to learn the truth. Most VCs publish their deals (or the startups they fund do), so you should have plenty of history to study.
5. Common connections.
Cold calls, random pokes on LinkedIn, and sending balloon-a-grams are not the best ways to connect with investors. The best way is through referrals.
Use the research you've already done to identify founders who have successfully pitched the investor. Reach out to them. We all love to trade war stories, and their information--while subjective--is direct and usually no-BS.
Do the research. Find an investor with an investment thesis that strongly resonates with your opportunity. Then prepare, prepare, and prepare. Remember: A telecommunications VC won't invest in your biotech startup, unless you're literally putting a smartphone inside someone's head.