While building and then selling two companies, providing guidance to many start-ups and working as an angel investor, I’ve observed several show-stoppers, areas to avoid when addressing VCs or angels. I have had the pleasure to review funding pitches and/or support probably 200 entrepreneurs over the past few years. It very troubling how many start-up CEOs shoot themselves in the foot with totally avoidable mistakes. This topic reminds me of an old George Carlin skit in which he reflects on why he can’t get a job…the first question he asks the prospective employer is their policy on Monday and Friday absenteeism. He then makes disparaging remarks about the family picture on the interviewers desk. Not sure why he didn’t get the job. So here is my list.
- Don’t say we are another Facebook. There will not be another Facebook for a long time. If you mention Facebook, talk about how you will be different, or how you will provide significant value-add to massive base of Facebook users.
- Don’t describe your product/concept as having NO competition. This is a fast way to lose credibility. Instead focus on your competitive advantage and differentiation, but recognize the competition. It is also great to put a competitive matrix together that shows your product and several key competitors on one axis and desired features on the other.
- Don’t forget to CLEARLY describe what it is you are doing and why it is better than the competitive offerings. You need to show a sustainable competitive advantage, but, also you need to make sure the investor understands your basic product/service concept. I’ve sat through many painful presentations trying to figure out what the company actually does.
- Don’t propose to use most of the funding for salaries for the founding members of the company. An investor wants to see the entrepreneur rapidly scaling the company with marketing, sales expansion, distribution channels…not simply funding the pockets of the owners.
- Don’t be inflexible about valuation, especially in the seed round. Investors are taking a significant risk and you will probably end a discussion if you appear too inflexible early on. I’m not saying you shouldn’t stand your ground for a reasonable valuation, but you want to buy some time to fully engage the investor.
- Do not engage any investor before you are ready. This seems obvious, but a lot of start-ups make a VC tour as part of their learning process. The problem is that you only have one chance to make a first impression and it may be hard to get another visit when you actually are ready.
- Don’t ignore adding advisors and a experienced board of directors. A strong outside team can help offset weaknesses the founders may have.
- Don’t gloss over your exit plan. This is how an investor ultimately gets paid and you should be as specific as possible…list specific companies likely to acquire you and the value you would provide these organizations.
- Don’t confuse overall market size with your total addressable market. While the overall market may be billions of dollars, investors want to see the size and opportunity associated with the specific segment you are addressing
- Don’t forget to build a credible case to support your revenue numbers. While investors will almost always discount your hockey stick revenue growth curve, it is a show-stopper if you don’t have a cogent go-to-market strategy.
Entrepreneurial Playbook 
Gary this is superb! Please do a post on biz models as well. judy@judyrobinett.com
Thanks Judy, I absolutely will do a future piece on business models…often if you start with a unmet need a viable business model you are better off than many start-ups.
Good info Gary. Went through a lengthy process seeking an investor. Many close calls but nothing real. Finally stoppped, finished development, installed a working demo site, now ready to get back to building a team and finding operating capital to deliver our service.
Interested in reading more for that stage.
Thanks,
Don Stefan
What advice along these lines would you have for finding a CFO/founding member?
I’m sure I know exactly what you mean, but I’ll do my best to answer what I think you’re looking for. After the obvious factors such as basic functional skills, I’d look for someone with that is really bought into your company, not just the present product or business model, but the COMPANY. Products may change, the focus of the company may change, but you want someone to stick with you through good and bad times. You also really need to like the person–small founding teams will spend countless hours together and you need to really get along with your co-founders. On the CFO front, most start-ups tend to focus more on the core development team, a senior leader/CEO and maybe a sales person (often the CEO as well) during the earliest phases. An advantage of having a CFO early on is that they can speak the language that investors speak, properly prepare financials and help develop a viable funding plan. The disadvantage is that there may not be a lot of revenue for some period of time or even expenses to manage. My preference (although this varies widely based on how quickly the company can expand and the real funding opportunities) is to have an experienced CEO with the skills to raise funding and develop the early financial/business models until revenue/funding supports a full-time CFO.
Thank you very much for this post. It is exactly what I am facing. I don’t need a lot of funding, but it is very complicated to explain what about the perspectives.
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Great resource Gary, thanks for putting that together. Something I’ve always been curious about regarding exit strategies: if you have no intention of selling the company (for reasons too lengthy to get into), should you still frame your exit plan as if you would sell, or is it better to be upfront and provide your reasoning along with some other options that could benefit investors? And, in your experience, what might some of those “other” options be?
Thanks Devin…If you don’t plan on selling I wouldn’t “spin it” to make it look like you might sell. Full honesty is the best policy. The problem is that most investors are looking for an exit. While there are alternatives for an individual owner (such as setting up profit sharing, offering dividends for equity stakeholders…) these are generally not the results most angel investors or VCs are looking for. You could look for some working partners with some cash that share the same goals you do.
I agree, honestly is always best, but therein lies the problem; there doesn’t seem to be an abundance of ethically sound, financially affluent people in this world—then on top of that they would need to possess a very specific skill set and share my unwavering vision and passion for this project. Seems unlikely, but it would be the desirable solution for sure. Thanks for the insight, Gary.
Great insight and much appreciated Gary. On item #4, I’m wondering up to what level is considered as a reasonable salary for the founders. Assuming that a few senior level management founders were willing to leave existing jobs with a justifiable compensation level, would a typical investor balk at an ask to match those same, competitve salaries? Or would they be expecting to see some sort of commitment or belief in their company stated by a willingness to work for less than their current market value?
Very informative write up Gary. I’m curious around point #4 and the founder’s salaray ask. What is considered a reasonable ask relative to the market rate for those founders if they worked for another company in a capacity equivalent with their experience? Would investors typically expect founders to demonstrate a belief in their company by taking less than they would, or are currently making, as say senior level management in existing Silicon Valley companies? Or are they tolerant of an ask that matches their existing compensation packages given that is a statement of their true value as foudners?
Zymurge, Great questions and framed in the right way. Most investors are pretty pragmatic in determining direct compensation. Remember that the investor is putting in money and the entrepreneur is putting in “sweat equity” to build up equity in the company. It is a plus if the entrepreneur has put his/her own money into it and has the resources to work without salary or with minimal salary…but of course this isn’t always possible. If founders salaries are in the table, they should be less than typical corporate salaries. But again, if the individual absolutely has to have $150K to participate and this person is key to the success of the company, it may be fine. In What I have seen and what is generally not OK is a founding team that uses a high percentage of a funding round to pay high salaries for the founders that were not getting paid pre-funding. Investors want the money to go towards accelerating the companies growth, not simply doing what they were doing with salaries. In terms of salary as a percentage of market rate…maybe 50% to 80% based on personal needs, equity, and value to the company.
Awesome list, looking for more posts!
Gary, I am also Angel investor but not so directly tech focussed. The advice you have given also applies to other industries and I hope you continue to share your wisdom. It will benefit many entrepreneurs with their pitch. I am looking forward to read:”how to wow the potential investor”. Great work.
I am an inventor having a few patents to my credit.This willhelp me lot while negotiation with an investor.
Gary your post is like legally getting insider information — much of what you’ve shared is logical and not unexpected; taken as a whole one couldn’t find a better blueprint for how to think when thinking about making an attempt to secure venture capital. Superb!
Your information is so useful that I think I am going to use it on my recent business planning proposal for a company. I was lost during the Q&A session even though I manage to pull it through with my client but now I have better confident that I can make things clear and more smoothly.
Very good advice!
I do like all the points of this article. I hope the next addition will include some of the actual steps on how to recognize and approach potential investors in your specific industry. I didn’t find anything in Real Estate software. Any thoughts?