How to VC Pitch (Badly)
Many companies seek venture capital investment under the misguided assumption that they are somehow the newest and best thing to hit the market and that this is the end-all / be-all criteria for VC investment selection.
At Spectrum, our firm is not looking to buy into the shiniest and most novel ideas, for the sake of them being shiny and novel. Quite the opposite, we frequently the view that the more novel the company’s approach the more likely it is to be a speculative idea filled with unknowns. Unknowns in the VC world equate to risk. Greater novelty is generally highly correlated to greater levels of uncertainty. Uncertain viability, risk of acquisition of potential customers, uncertainty in predicting operating costs; the list goes on. The more that a business has uncertain factors the less likely are the chances of that business securing institutional investors — because it is too hard for the VC firm to quantify what the business will need to succeed.
Understanding this should save founders (and the VCs they pitch) an immense amount of time.
We’re Creating the Pintrest for Cats!
An alternate, but similarly misguided, path to seeking venture capital funding is to use a tortured metaphor for the sake of credibility by association. The formula is generally, “we’re the X of Y” which may include describing a startup as the “Birchbox of Men’s Socks”, or the “Tom’s Shoes of Eyewear”, among many other cringe-worthy examples.
A company may very well be the Snapchat of Wedding Planning — a point which may sound impressive to the founder’s friends over dinner. However, this is nearly irrelevant to venture capital firms without a great deal of additional information, which often gets sidelined by founders trying to shoehorn a comparison for the sake of perceived legitimacy. The flawed logic appears to go something like, “VCs invested in Uber, Uber is a transportation app, we are a pet psychic app, therefore we are the Uber of Pet Care.”
This is a counterproductive tactic by the company because it does not take account that the factors that led to the VC’s investment in the X may be completely different than those in the company pitching. For example, when Uber was seeking VC (the first few times), they were solving a problem that was nearly ubiquitous with no widely adopted solution in the marketplace. The Uber of Pet Psychics does not benefit from the ubiquity of people needing a pet psychic (which may incidentally be a pet which is a psychic or a psychic who reads the minds of pets) and therefore trying to draw the comparisons only creates an opportunity for an investor to see the differences and tune out the rest.
Create Value And Focus On That
Focusing on the novelty of an idea or its relation to the past success of others for purposes of raising venture capital is time poorly spent. The best use of time in a VC pitch is to explain how the company has created value. This is done by showing how a company is the most efficient means for solving some problem or reducing some paint point for customers, and that those people are willing to pay for the solution.
Venture capital investment is well spent when it is used to accelerate an already well-defined value creation model, not to fund the wild goose-chase of a vague idea. If a company can demonstrate that it has created a means for value through a product or service and is looking for additional capital to bolster that value, they are likely in the right place.
Just because one spends a lot of time, effort, and money developing a solution does not mean that there was ever a worthy problem. Similarly, venture capital exists for the purpose of bringing great companies to the next level, not as a reward for amorphous ingenuity.