If I had a nickel…
By Ron Weissman
When we last tuned in, a first time CEO had struck out in his latest attempt to pitch his networking company to a jaded VC. Why? The entrepreneur didn’t have a clue as to how to tell the story the investor needed to hear.

How should the entrepreneur proceed? With 5 battle-tested rules about telling VCs his story.

Rule #1: To succeed with VCs you need to think like a VC. Understand the VC’s motivation.

VCs invest to make money for their investors (aka limited partners/LPs). If they don’t, they’ll never raise another venture fund and will have to find real jobs. LPs need to make ‘supernormal’ returns to satisfy their pension or university endowment obligations. That’s why venture capital exists. Period.  Changing the world is nice, but it isn’t the main reason why VCs get to play with other people’s money. They need to see a way to make 3x – 10x + on their investment in your company over the next several years or they won’t invest.

Rule #2: Explain why your technology or product will create a great business.

Most VCs want to invest in great businesses, not just great technology. Great businesses address large markets, grow fast and ultimately make boatloads of money. A great technology isn’t always a great business. You need to explain why your great technology will create a great business.

Rule #3: Explain the pain.
You are an unknown startup with zero credibility. Nobody, not even your Mom, cares about your company. So the pain from existing solutions must be pretty severe for a customer to risk buying your product. Why would customers risk their career or budget to buy from you?

Rule #4: VCs back winners. Explain why you’ll win.

Like a horse race, typical markets will see, at most, three winners. If you’re not a “win, place or show” company, you won’t be the one who partners with market makers, gets market buzz and ultimately drives a high value exit when you’re acquired by an industry leader. What is your world domination strategy? How will yout gain market and mind share before the other guys do? Can you do it on a less than US government stimulus program sized budget? And why YOU? What is it about your background that makes you the right person to make this business a market leader?

Rule #5: Explain the gain.

VCs fund you to make money for their investors. They do so when you are sold to a bigger, more successful company or you IPO (chances are, you won’t). Who are your potential buyers? What is the exit scenario for investors? (Hint: lots of buyers is better than only one conceivable buyer.)

Takeaways

  • VCs are investing in your business, not buying your product.  A VC pitch is different than a product sales pitch. It should describe how you build a successful business.
  • There are lots of great businesses, but not every good business fits the VC profile. Tell the story that VCs need to hear: describe how you will turn great technology into a great business, how much cash it will take to get there and whether this is a business capable of generating 3x-10x returns.
  • Get help to fix the gaps in your story. If you have game-changing technology, but a weak game plan, find a mentor or recruit a business-savvy co-founder to develop a real business plan.

Image sources / copyright:
http://www.godinchief.com/
http://www.yourpooltips.com/winter
http://www.heritagecompound.com/painmanagementsportsmedicine.htm
http://www.theintellectualdevotional.com/blog/category/modern-culture/page/3/?page_id=0
http://expertaccess.cincom.com/2009/09/the-success-mechanism-create-what-you-want-in-your-business-and-your-life/