"We don't build services to make money; we make money to build better services."
- Mark Zuckerberg, Co-Founder, Facebook (When Facebook went IPO in 2012)
VC companies invest on many promising startups all the year round. As 2012 statistics tell, only 49 IPO deals and 449 acquisitions and mergers came through the 3,723 investing prospects set up that year.
- There are various aspects as to why venture capitalists may or may not fund a startup. Many companies are part of the tech bubble, sustaining on market optimism rather than a good business model.
- As Michael Moritz, Chairman of VC firm, Sequoia Capital mentioned in a recent interview, “There are some companies that don't deserve the valuations they have.” But there are a whole bunch of companies doing well too, as Moritz goes on to add, “Most companies are secure and have sustainable business models.”
- Is your startup a Blue Ocean or a Red Ocean business? This is a key investment aspect that VC companies will consider.
Before the Plunge
Before the startup owners take their propositions to the venture capitalists, they must undergo careful introspection with regard to:
1. Do I really need the VC push or not?
2. If yes, how much money and for what purpose is it required?
3. What percentage of my company am I ready to forgo in return for the capital?
4. Is my product innovative enough to attract investment?
5. In all objectivity, is my product a potential blue ocean investment? To what degree is it true?
6. Who are the venture capitalists I must target?
7. What are the previous startups they invested in and the success rate?
8. What other things could a particular venture capitalist bring into the startup, apart from investment? (Contacts, experience, mentoring, setting up meetings, etc.)
A Below Par Pitch
"In the real world, you basically have 20 seconds to get someone engaged or you might as well go home," says entrepreneur Bill Reichert.
- Your pitch needs to be watertight in every aspect. That is the reason your pitch needs to be reread, rewritten and revised for greater effect. In a similar vein, a pitch needs to practiced, polished and rehearsed for the in-person presentation.
- Spelling and grammar are key facets in the print version of the pitch. Careless errors can be fatal to your prospects. Ensure then that your business plan is error-free and simply presented.
- Stick to your facts and figures. Telling the plain truth adds to the startup's reputation and builds trust, a vital long-term factor.
What makes a Great Pitch:
- The main crux of the pitch is the problem and how your startup proposes to solve it.
- The problem must be real and urgent. The intensity of its pain must get through.
- The solution must be pioneering enough for venture capitalists to relate to it.
- A conversational and interactive pitch with a 'what's in it for you?' take, will keep investors interested.
- You must have enough data to suggest significant traction.
- The live demo is the lifeline of the pitch. Put your heart and soul into its working.
Research & Homework
Your answers to the venture capitalist's queries form the crux of the pitch. It is at this point that VC companies decide whether you are worth the money or not. Be prepared to face a volley of questions, including the ones listed below:
- What is the product and what purpose does it fulfill?
- Who is part of your management team? What management school did they graduate from? What kind of professional experience do they have?
- Who is the customer? What is the potential market for the product/service?
- Where is the market located?
- Do you have plans for market expansion?
- Who are the product's competitors?
- What are the estimated production/manufacturing costs?
- Do you own the copyrights and patent?
- How much profit do you expect in the first three years?
- How much do you value the product/service to be?
- On what factors is the valuation based on?
- How much capital do you require?
- What do you intend to do with the capital?
- What is your exit plan?
- Do you have a Plan B in place or any other alternative plan?
It is not like venture capitalists are looking for the next Google or Facebook, but they are certainly looking for a product or service that promises reasonable ROI. Investment is always a risk; most venture capitalists will be lured by a solid promise of big returns. Here's a look at some successful pitches and success stories.
- ZocDoc, a service that allows its users to search for and then book a medical appointment. Its creators recognized the need for people to reach out to good doctors and dentists instantly and bridged the gap through their service. Last heard, ZocDoc was been used by over 1 million people every month.
- The makers of the mobile app, Loopt, knew who their audiences were. They created an app that lets you communicate with your friends, know where your friends are at that moment and what they were doing. The app was distributed exclusively free with the iPhone and is finding many takers.
- Mobile security app makers 'thatsuspiciousbehavior' started their pitch with "Raise your hands if you have ever used neighborhood watch?” They then proceeded to explain the features of their app, interspersed with humor, keeping audience attention all the time.
- Venture capitalists invested a mammoth $48.3 billion into US startups in 2014, the largest expenditure since year 2000.
- The 2014 VC expenditure was a zooming 61% increase from 2013. About $30 billion was invested in 2013.
- The number of investment deals went up to 4,356 in 2014, a rise of 3.9%, as compared to 2013.
- About 41% of VC investment in 2014 was directed towards software startups. This was the largest share the sector occupied, since 1995.
The most active venture capitalists of 2014 (In no particular order):
- Kleiner Perkins Caufield & Byers
- Andreessen Horowitz
- Khosla Ventures
- Google Ventures
- New Enterprise Associates