The following post was written by Noya Lizor, during her tenure as Director of Content at Viola (2014-2019).
As someone who works with VCs every day, I’ve managed to pick up a thing or two about how the investment process works, so I’m always amused by starry-eyed wantrepreneurs who are confident they can become the next Mark Zuckerberg with nothing more than an idea in their heads and (a sometimes misguided) chutzpah in their hearts. One of the most common questions I hear from these types of budding entrepreneurs is “Now that we have a great idea and a PowerPoint presentation, how do we find investors to pitch it to?” – to which I usually reply “Don’t bother, there’s no point”. Here’s why.
What entrepreneurs don’t always realize about VC firms, is that they don’t just throw money at every entrepreneur who claims to have “the best idea for a startup, like, ever!” – especially since every entrepreneur who ever came up with an idea for a startup thought it was “the best” but a whopping 90% of startups fail (you do the math). Sure, it’s the VCs’ job to meet with entrepreneurs and eventually decide whether to invest in them and if so how much, but most VC funds are also comprised of Limited Partners (external investors, either individuals or organizations) who have a vested interest in the performance of the funds and expect to see a hefty return on their investment over time.
When VCs contemplate which startups they want to invest in, they’re usually only interested in companies they believe have a strong chance of growing significantly enough to generate the kind of sizable ROI that will make their initial investment worthwhile not only for themselves, but for anyone else who’s invested in the fund. In the VC game, all investors are well aware that you “win some, lose some”, but they always aim to bet on potential winners, and the longer they’ve been in the game, the better they are (usually) at identifying the types of companies – even in their very early stages – that stand a good chance of reaching the coveted 10% who “make it” (and make it big, ideally).
Given that VCs always aim to invest in companies that will one day achieve an impressive exit, there are certain things they look for in a startup when its founders first come to pitch it – none of which can be gauged from looking at a theoretical PowerPoint deck, no matter how enthusiastic the delivery. Enthusiasm and ‘theory’ are not enough – VCs expect a certain level of proof that the idea is viable and that the startup has the potential to grow significantly enough to justify the risk involved in investing in it in the first place.
VCs usually consider a few key entrepreneurial ‘pressure points’ before they decide whether or not to invest in a startup. Here are some you should be aware of before you rush to pitch yours:
1) Make sure your startup has the potential to scale in a very substantial way.
Going to a VC for an investment isn’t the same as going to your Uncle Bob for some pocket change to help you along. An investment from a VC is much more substantial, and so is the level of return they expect, so don’t even bother approaching VCs if what you’ve come up with is (yet another) forgettable little app, or something that will probably resemble a small business rather than a company that can ‘go global’.
Whatever niche your product or service is in, investors want to know that your TAM (Total Addressable Market) is significant enough to allow your product to grow and generate revenues on a scale that will yield an equally significant return on their investment. If your potential market is too small, your startup will be less attractive for VCs to invest in.
Not every idea you think of is viable, or good, so be ruthless with yourself in judging every idea to make sure it’s worthy of a VC investment.
2) Make sure that your idea is unique and know where you stand against competitors in your niche.
Many entrepreneurs are so impressed with their own startup idea, they’re quick to proclaim “there’s nothing else like it!” But the reality is that there are now so many startups in the world, it’s highly likely that if you’ve thought of an idea for a startup, it probably already exists. And if it doesn’t exist, you’d do well to ask yourself why. More often than not, if the answer isn’t “because the technology for it doesn’t exist yet”, it’s most likely “because any time this product or service was ever offered in the past, no one wanted it.”
Unless you’ve just invented something so new it’s on a par with the first airplane, smartphone, or something totally novel that stands to profoundly benefit mankind – not having any competitors is usually a sure sign that you’re on to a dud, so you should definitely avoid bragging about it.
VCs need to know how your startup is going to stack up against your competition, so you better know who your main competitors are and be sure that both you and your startup have what it takes to compete against them.
3) Make sure that your idea is innovative, or that your point of difference is substantial.
Not every startup idea is based on a revolutionary technology, although those that are, usually stand a great chance of succeeding (presuming there’s a demand for the problem it was created to solve).
Sometimes new startups are born simply because their founders are certain that they can “do it better”. And that may be so, but If you want to launch a startup in a niche that’s already crowded with competitors, you need to be sure that your startup has a point of difference that’s so unique or original, it clearly sets you apart, even from future copycats.
Innovation needn’t only apply to technology, it can also apply to your branding, your business model, your marketing, etc. And if that’s the case, you must always live up to that point of difference, or your startup will either fail or fizzle when an even better version comes along.
4) Validate your idea before you start building anything or approach a VC.
What you may think is a genius idea, may turn out to be something that your intended end-user (whether it’s B2C or B2B) doesn’t consider valuable enough to pay for. It’s all well and good if you offer a product for free, but if no one has any intention of ever paying for it, and you don’t have an alternative way of raking in the big bucks, your startup will never be profitable.
If users are not willing to pay for your product, you must ask yourself some tough questions, like “what is my product lacking that people don’t deem it valuable enough to pay for?” or “is my product unique and does it add real value, or is it a poorer version of something that already exists and is way more popular?”
The best way to validate your idea and confirm that there’s a real demand for your product is to speak to (or survey) people in your target market and ask them not only if they would use it, but also whether they would pay for it. And if they say they wouldn’t pay for it, ask them what the product would need to include in order for them to consider paying for it. Their feedback may cause you to pivot a little (or a lot) from your original idea, but it will save you from putting in a lot of time, effort, and even money into developing a product that was otherwise doomed to fail.
No VC will ever invest in something you can’t prove has the potential to generate significant revenue.
5) Develop an MVP (Minimum Viable Product) in order to demonstrate both demand and growth potential.
By definition, an MVP is the ‘minimum’ version of your product, so it needn’t include all the ‘bells and whistles’ and slick packaging that can obviously be achieved with a big budget, but it does have to exist in an iteration that can at least demonstrate the idea, the crux of the technology, and an active user-base that’s indicative of a genuine interest in the product.
VCs want to be sure that there’s a real demand for the product, and that your team is capable of growing both the user-base and revenues. This isn’t something you can convey with a mere PowerPoint deck, or even with an untested MVP. A more sensible idea is to launch an MVP and give it at least a few months, so that you can gather data that actually demonstrates an “upwards trend” in the key performance metrics.
Allowing an MVP to run for a few months before approaching VCs also has the added bonus of revealing bugs and getting precious user-feedback that can help you optimize the product and fine-tune your pitch.
6) Take advantage of developing an MVP to validate your team as well.
The process of planning, building, launching and operating an MVP – or in other words the entire process from ‘idea’ to ‘live product’ – is also a test period for your team. It’s one thing for 2-3 like-minded folks to declare themselves “co-founders” having never created anything together before besides a PowerPoint deck, but quite another thing for each co-founder to take ownership of their domain and be accountable for making things happen both individually and as part of a team.
It’s crucial for your team to prove not only to VCs but to each other, that you are capable of working well together and can see yourselves working together for a long time to come. The journey from early-stage startup to global powerhouse is guaranteed to be laden with all manner of ups and downs, and if your founding team isn’t qualified, driven or committed enough to deal with it from the very beginning, your startup probably won’t succeed.
In order for VCs to feel confident about investing in you, they like to see that the team they’re investing in is strong and committed for the long haul.
7) Don’t just have a go-to-market plan – demonstrate that you can carry it out.
Often when a startup’s founders hail from either a technical or business background, they rely on either their technological or business prowess to entice a VC to invest, but they don’t always consider the challenges around actually reaching their target market in order to generate awareness, interest, and revenues.
It doesn’t make sense to create a product if you have no idea how you’re going to market or sell it.
Whether you have a co-founder who can develop a sales and marketing strategy or whether you engage an external consultant, you need to demonstrate to VCs that your plan for reaching potential customers is sound, and that you will be able to carry it out in order to meet the kind of ambitious growth milestones expected from a startup that’s destined to rise to that “top 10%” I mentioned earlier.
As you can see from the list above, VCs must consider several key entrepreneurial ‘pressure points’ in order to make an informed decision on whether or not to invest in a startup. Of course, there are always exceptions to the rule, but they are few and far between.
Even if you’re somehow able to secure meetings with potential investors armed with nothing more than a PowerPoint deck and a charismatic pitch – unless you’ve nailed most (if not all) of these pressure points, the most you can expect to receive from the VCs you’re pitching to is polite feedback and (if you’re lucky) an invitation to return once you have nailed them, but not an actual investment.