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- Tell a compelling story about the market you’re expanding into
- Demonstrate Jaw Dropping customer value through a Competition Crushing business model
- Focus on why your team is the best fit to do the job
Recently, I took a gap year from college to work more on my startup, The Internship Initiative, and found myself gravitating towards the mysterious world of Venture Capital. While VC is frequently mentioned online, I struggled to find any good sources on what investors are really thinking.
Since I profile entrepreneurs on my blog, I thought it would be cool to branch out. How do today’s top VC investors make their decisions?
You can easily find great VC investment tips online, or watch videos about them (this one by Gary Tan was great). But if you don’t want to spend ten hours digging through Google’s archives to find that one game-changing pitch strategy, I’ve compiled my top three favorite pieces of investor advice here for you.
Here are the top three pitch strategies that I discovered during my interviews and couldn’t find anywhere else on the internet.
1. Tell a compelling story about your market, not just your company
Dennis Kim and Archie Stonehill, two investors from two sectors provided complimentary pieces of advice on maximizing value out of the market you’re going after.
Dennis told me that “a very big red flag [is] when a business is trying to create a market that doesn’t exist…That’s an external variable that you can’t really control a lot of times.” In other words, you can create a new category of products, but you’ll potentially alienate your investor. You might not be able to answer their questions because there often isn’t even an answer yet.
I’ve actually faced this problem myself. My company, The Internship Initiative, is operating in a brand new EdTech space that just doesn’t have many competitors: work-based learning platforms. And whenever my co-founder Oscar and I pitch our business model and product to others, the biggest question we often get is: is there a market for this?
It may seem like there isn’t an easy way around this issue. How do you determine a market when your product is different from anything else being offered? One strategy that fits well into Dennis’s advice is bottoms-up market analysis. You start at the micro-level. Where is your product being sold? Who’s buying it? What are the components of your market?
Instead of taking a giant industry and spouting the typical spiel of “tiny piece of a huge industry,” looking at your market bottoms-up can often give you much more realistic estimates. This micro-to-macro strategy can also reveal potential customers where you didn’t anticipate. And in my experience, it makes it easier for you to show exactly what market exists for your new product.
Archie adds an important nuance to this market-size idea:
“A lot of founders don’t understand…the big difference between a venture-backable and a good business. A good business is going to make five or ten million dollars a year, so [it’s] highly profitable. That’s great for the founder. They can make a lot of money that way. But in venture, particularly us in the Series A stage, we can’t make that. We need a larger scale exit. So often we’ll have to pass on companies, not because they’re bad businesses or bad founders, but because they just can’t grow to the kind of scale that we need as a venture capital funded company.”
So even if you did the analysis and can generate lots of revenue, you might not be a viable business for VC investment. This one is tough to crack. VC firms expect to lose out on many of their investments, so they need to ensure sure that every company in their portfolio has the ability to be another AirBnB, Twitter, or Facebook.
In essence, you have to be the unicorn in their portfolio.
These two pieces of advice linked together incredibly well for me. Yes, great pitches focus on their teams. Yes, great pitches show amazing business models and perfect timing. But great pitches also tell a compelling story about the market they’re entering, present realistic growth numbers, and show that they can be the ones that make it big.
2. JDCC (or Jaw Dropping customer value through Competition Crushing business models)
This one tip made a huge difference in my perception of good VC pitches. Truthfully, anyone with a decent product and Zuora-esque sales deck could scrap together a pretty convincing pitch. But VC investors see thousands of these pitches every year, and pass on most of them. What your friendly neighborhood angel praises may not pass the bar at a major VC firm.
So how can you break past the scores of other hungry founders with exquisitely designed pitch decks and polished resumés? You present Jaw Dropping customer value through Competition Crushing business models, also known as JDCC.
I first learned about this idea through Nextview’s Rob Go, and he summarized quite handily what makes a company worth investing in. “Basically, is this an extraordinary product offering that has the potential to be 5-10x better, faster, or cheaper? And is there an accumulating advantage? Is there a reason this company is a compounding machine? As it starts to win, will it be in a better position to keep on winning and win more?”
In other words, does your company have a viable long-term time horizon? In fact, Archie Stonehill confirmed this same idea in our interview. “The broader direction of the company is important…Companies that do well tell a story that stretches for five to ten years, not two to three.”
You show viability not only through your product, but also through your ability to maintain top-dog status and get better over time. A good example of this is the Network Effect. Online marketplaces demonstrate this principle: increasing usage leads to more data on customer buying behavior and improved recommendations and item selection.
Many founders can prove that they have Jaw Dropping customer value, but that’s only half the equation. Your business model must support this growth to expand faster than any potential competition.
3. Sometimes Your Team Matters More Than Your Product
This one seems counter-intuitive at first. After all, weren’t the first two tips all about your product? Yes, and no. Yes, your offering matters a lot, but as an early-stage company looking for VC investment, you might pivot.
Travefy, who I interviewed 4 years ago, pivoted when they realized that big data was more valuable than consumer travel planning. Instagram started as Burbn, a cluttered check-in app, before it became a photo-sharing titan. And AirBnB pivoted from conference room-and-board to consumer-led travel accommodation.
Today’s biggest companies often bear little resemblance to their early-stage selves.
That’s why VC investors often take the quality of the team as a proxy for how likely they are to succeed. In fact, this sentiment was voiced through every single interview I conducted.
Rob presented to me the following: “Would I work for this person? If I was an investor, would I be excited to work for this team? Is the founder inspiring?” Dennis told me that investors “want to feel comfortable with your ability to execute with your team.” And Archie explained that in his industry, “Funding in games has been project-based, so all you had to do was pitch the project. So often companies I think neglect to talk about the founders, their background, and why they’re the right people to do this.”
Basically, an investor might invest in a game-changing product today, but they also have to know that the founders and their team can maintain that growth over five to ten years, and execute on necessary pivots.
Talking about just what you do isn’t enough, you have to explain why you’re the exact right team to do it.
These tips might be straightforward to you if you’re familiar with the pitch process, or they might be completely new, but I hoped you got something useful out of this article. If you’re interested in reading more about entrepreneurship or investing, check out my blog. If you want to get the inside scoop on today’s biggest founders, read our stories!