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| V-Day: Face-to-Face with Venture Capitalists |
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Face-to-face with venture capitalists. Gearing up for the VC interview — what entrepreneurs should know.
If you're going to be knocking on the doors of venture capitalists any time soon, you had better know their hot buttons: the technologies that get their pulse beating faster, the markets they specializes in, the kind of presentation that's likely to knock their socks off. But first, you need to get your foot in the door.
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| Knock, Knock |
The VC screening process is a combination of orderly machinery and gut feel, according to Yair Shoham, general partner at Genesis Partners, Israel's second largest VC fund. VCs attempt to screen just about everything that comes through their door — but considering the sheer numbers, it's a tall order. Deal meetings are held to "kill, preserve and watch or advance." So how do you ensure your submission has a fighting chance? By giving it a good "address" for one thing. Give yourself a head-start by getting the VC's attention via someone operating in the VC's playing field. If you come to the VC's attention through someone they know and trust, they are more likely to give you more than a passing glance. "Cold calls have about one in a thousand chance," notes Shoham.
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| When Diligence Is Due |
Trendlines Top Tips: Some Things Not To Say
"I don't have any competitors." This is never true. Competition can be broadly construed. The first pen manufacturer competed with the quills people used in inkwells. And don't forget pencils and charcoal.
"These projections are valid because the market is enormous: I've only projected getting 5% over the next seven years." Sales projections must be product- and market-based to give them validity.
"I will spend 14% on R&D." You must benchmark against others — if everyone else is spending 48%, you should be prepared to explain why you aren't.
"We need about $8 to $13 million dollars." You have done a cash flow projection — you need a specific sum. Your assumptions will be reconsidered later, but based upon today's assumptions, which you can explain, you need $13 million.
"We don't think patents are important, they are too expensive to defend anyway." Patents are important to investors, which means they are important to you.
"My competitors just don't get it." Don't throw mud at others, stick to the positive.
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Don't go into a VCs office without having done your homework. "Big mistake," says Jonathan Medved, partner, Israel Seed Partners. "We need to see that you know what space we specialize in, our investment portfolio, that you've identified potential synergies," he adds.
VCs expect you to check them out: "we need to get the sense that entrepreneurs have done due diligence on our company, we need to see if they are going to be partners," notes Dr. Reuven Regev, president and CEO, Vectory Investment Company Ltd. Vectory is wholly owned by Europe-Israel Ltd., one of Israel's largest investment firms.
"Entrepreneurs often fail to spend time intelligencing you: drawing a map of who you are, what your business is all about. We are specialized. If they don't take that into account, they bore you immediately," says Dr. Ehud Geller, general partner, Medica Venture Partners, Israel's leading venture capital firm focusing on early stage medical companies. Intelligencing your audience is just basic good sense: finding out who is going to be there and playing to their needs. Chemistry, too, plays a role: the VC will be sitting on your board and in some cases, playing a role in management. If the relationship isn't there, a foundation of trust hasn't been created, things will fall apart the minute the going gets rough.
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| Say What You Know (and What You Don't) |
"Be smart: say what you don't know and what you're not good at doing — that you're aware of your strengths and know how you're going to overcome your weaknesses," says Regev. Show that you understand what the risk factors are, and what strategies you have in place to deal with them.
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| And How You Say It... |
"We tend to get excited about people who can articulate," says Israel Seed's Medved. "People are so pressed for time, that those who can tell a compelling story, win." The ability to articulate in English is key: Medved deals primarily with the U.S. market and relates to what entrepreneurs are presenting with an American mindset. He wants to hear what he knows the US market is going to want to hear: a clear, concise compelling story.
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| Tell Your Story: Presenting "Brand You" |
Medved expects entrepreneurs to kick off by telling the VC about themselves — and what they say, as well as how they say it, has got to attract his interest from the outset. "If you can't tell about your background or life experiences in an interesting and relevant way, how are you going to do it for your product or technology," he questions.
"We expect to hear different things from different people in the team," says Shoham of Genesis, adding that he expects to see the CEO, VP marketing and a technical expert, where necessary. Make sure you've got the right team together when you go into a VC meeting and ensure your presentation is focused, relevant and well-rehearsed. "The issues and content need to be well structured and the various milestones outlined for each phase. The vision can be fluid, but the plan must be structured," says Reuven.
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| Know Your Space |
"Too many entrepreneurs turn up in a VC's office without properly investigating the market space," says Medved. This, he says, is a big issue — entrepreneurs should have detailed knowledge of the space in which they are planning to build the business. If the VC knows more about the space than the entrepreneur does, this spells trouble. Entrepreneurs need to map out the space — have intimate knowledge of the competing technologies and competitors out there — or get eaten alive. Worse still, some entrepreneurs arrive with raw ideas — " not even half-baked!" says Geller, "and then they expect the VCs to fund them on their voyage of discovery."
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| Lend Me Your Ears |
Learn to listen. "Expect the VC to challenge you, poke holes in your business plan, ask tough questions," Medved adds. The trick, he says, is not to get defensive and start arguing — or worse still, tell the VC he doesn't "get it." "It's the kiss of death," he notes. "We're looking to build a partnership so it's important to have the ability to listen and change course in real time. The majority of business plans change fundamentally once we get underway, so flexibility is key." Israelis shouldn't worry about being perceived as being wimpy, he says. Responsiveness — the ability to hear the VC's point of view and respond positively to challenges and criticism can be a "make or break" factor when it comes to striking a deal. "It's OK to come with your hat in hand," comments Ehud, "but don't be snobbish or aloof, or assume that your audience has problems comprehending you when they question the validity of your assumptions!"
Flexibility during the course of the presentation is important: you need to be prepared to divert from the presentation to answer VC questions and concerns. They want answers now: not when you've gone through all 12 slides. Stonewalling of questions or issues is seen as a problem sign. Take the time to address the issues: avoiding them is, quite simply, a turn-off.
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| The Long and the Short of It |
The presentation shouldn't be too long: assuming someone has already read the executive summary, your presentation shouldn't exceed 30 to 40 minutes (about 12 to15 slides), leaving time for questions. Vectory's Regev advises sending the executive summary beforehand and trying to ensure that somebody reads it. "VCs are busy people — put in the effort to ensure that someone has read it before you get there," he says. "It's important to be focused," adds Geller of Medica. "Show that you're not biting the world, just taking it a mouthful at a time." And, he cautions, don't try to dazzle: skip the smoke and mirrors. Try to provide a clear frame of reference — like a black and white photograph, compose your picture around the lasting impression you want to leave with the audience, isolate the focal points, highlight your winning arguments — don't try throw everything at the VC all at once.
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| Cut the Cliches |
Avoid trotting out worn-out phrases that sound like they came straight out of a business template, such as "all projections are conservative." Be natural, tell it like it is. Remember, the VCs have heard it all before! It's important to present real data, put things into context and explain the reasoning (assumptions) behind the numbers.
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| Pssst! (Can You Keep a Secret?) |
"Israelis are extremely secretive — in excess of what's good for them," says Geller. "Remember, I'm not competing with you." They don't want to tell you what they're doing, but they want money for it, he says wryly. Entrepreneurs need to understand that VCs aren't going to steal from them: "we're not going to cut the branch we're sitting on." Entrepreneurs should be prepared to show their patent applications — it shows you have established your priorities.
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| Dollars and Sense |
"Many entrepreneurs fall prey to what we term 'corridor consulting,' taking advice from family and friends," Geller continues. "They need to understand that we've been around the block a few times, and take our advice seriously." Falling into the trap of raising money from what he terms "non-value-added investors" is inadvisable, since they don't have the business expertise to help lead the company through the various stages of development and fund-raising.
Valuing a company is a very foggy issue — it's a gut feeling, according to Regev. Entrepreneurs often want to hold onto as much stock as possible for themselves and try to pump up the valuation, notes Geller, "but it makes meeting that next milestone impossible." Unrealistic valuations come back to haunt you.
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| Cutting a Deal |
The decision to make an investment is a multidimensional issue. It could be that one small piece of info is the final piece of the puzzle that cinches the deal. From your first meeting with the VC until you obtain funding typically takes anywhere from 3 to 9 months. Remember that VCs are working on several deals simultaneously. It takes time to get the information needed in order to make the deal. Legal issues and negotiations are time-consuming. You might also want some "incubation time," according to Regev.
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| People Power |
Management is the #1 issue — even more than products, technology or mega markets. "You need to manage in a changing environment, so the quality of leadership is important," comments Regev. He believes that you can't underestimate the value of the team that leads the company. His viewpoint is underscored by Medved: "We invest in people, not in technologies or products. You can always find another company, but good people are hard to find." This aspect is so important that VCs will help you recruit, if necessary. Beyond technologies, beyond products, it's the people that make the difference.
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| If at First, You Don't Succeed... |
Try again. "If VCs say no it does not necessarily mean the idea is bad. Keep on trying for as long as you believe in the value of your idea," says Shoham. At the end of the day, it's you, the entrepreneur, that makes it happen.
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