What do you really look for, as an investor?
Google the question and a few hundred thousand responses come up. Most take the form of self-help guides for founders to improve their pitch deck and better position their proposals. There are literally thousands of these articles, blogs and even books about how to pitch, how to leverage PowerPoint and how to convey an unbaked concept with confidence.
So I’m not going to write about that.
Far more significant to the outcome of your proposal is not how you’re pitching, but rather the unseen opportunity cost that investment into your venture brings to the funder. This context more meaningfully drives investors’ responses than the level of perfection of your delivery.
Understanding the venture capitalist’ or private equity fund’s context provides you a stronger hand to get a deal done. Or at the very least, narrows your engagement to genuine providers of capital, those who can do a deal at the right time and in the right way.
I’ve unpacked this thinking in four points below.
Firstly, funds cycle through periods.
Institutional capital providers – banks, venture capital or PE houses – are typically closed-end funds. With few exceptions, this means that their mandates are to deploy and return capital deployed within a period of ~8-10 years.
If you are approaching a fund in its first year of operating, it has a large cheque book, and wants to deploy exactly into its mandate. Seldom will a new fund stray into a non-aligned sector or deal type when it has yet to prove to its investors that it is capable of following its original mandate.
To raise capital in this fund period therefore, you need to align your pitch to exactly what the fund is mandated to invest into. Finding this information is straightforward – all collateral will point towards this.
A few years into the fund cycle, some amount of capital has been deployed and the fees that the fund earns will soon switch from a % of capital committed, to % on capital deployed. Fund managers are now incentivised to push deals through until they have invested all of their capital raised – and this results in a slightly less strict range of investments or flexible criteria in order to get deals done. New funds are notoriously loose here; they actively look for non-core investment opportunities, and moonshot ideas have a real chance of being funded. It’s the perfect time to raise into an ambitious entrepreneurial project.
Post-deployment of a fund’s committed capital, there is no realistic chance of being directly funded. This is typically the period in which the fund begins to exit its investments, having held them for 4-8 years. Remaining capital is held to follow-on into already-invested positions, or assist portfolio companies with their own acquisitions or growth strategies. Opportunities that exist in this period of the fund’s lifecycle are typically to be acquired into a portfolio company, scoped for investment in the institution’s next fund / investment vehicle. And yet, the fund will still take your meeting.
It is important therefore to ask the capital allocator where in their fund’s lifecycle they find themselves, so that you can determine whether your proposition is a good fit and whether timelines are aligned. You’re exponentially improving your chances at raising capital by pitching the right fund with a right mandate at the right time.
Secondly, you are a relative proposition.
Founders seldom pitch themselves against the correct measure.
The bar that you need to clear is not set at the failing incumbents you position yourself to beat, but the best of the alternate pitches the venture capital fund has seen. New entrants to the market you’re going after are your real competition – and a good investor has probably seen, read about, or conversed with several. Investment proposals are evaluated not just against the opportunity to disrupt the established status quo, but in comparison to each other as zero-sum opportunity costs.
Understand how to position against the status quo, and then present the funder with a strategy that demonstrates winning against other start-up entrants who present the same story that you do.
Thirdly, do you agree with expectations of the future?
It took me losing a business to learn this lesson. Don’t underestimate how important it is to align key stakeholders’ visions.
Pitching your business is incredibly tough. You are offering an interpretation of the future, placing a value on your unique outlook and vision, and then asking someone to put a price to your executing against that. It takes far less courage to say no to a proposal than it takes to make one.
So don’t go wide. Focus. Your only job in a pitch is to convince the investor that the future you’re building is an inevitability. That what she expects to see in the world will be all the better for your company’s integral presence. And that you offer nothing disruptive to what reality will soon look like – simply a shortcut to getting there. Convince the investor that your painting of the future is more compelling than any version without you in it.
Getting insight into an investor’s world view is the underlying reason that advisors compel founders to build relationships with capital providers. Know what the investor expects to see in future, and then pitch your company as a key contributor of and to that future.
Shown commercialisation.
Give me commercialisation into a known disruption.
I came across this phrase from a podcast series in mid-2023 and it has stuck. Early-stage investors seek to back ventures that are commercialising second-wave ideas reliant on disruption already taking place.
Put another way, institutional capital does not chase ideas that rely on future paradigm shifts.
(The exception is for the role that angels or sector-specific early-stage VC funds play in imagining such shifts taking place through your company.)
Far more often, investors want to back entrepreneurs that are riding the wave of an established disruptive change, by commercialising an obvious idea that wasn’t possible in the old paradigm.
This capitalises on second-mover-advantages; competing where no brand has dominance and new insights haven’t yet been fully understood or commercialised. Convince investors of your perfect positioning to scale into this by demonstrating high unit profitability, and an expansive list of new customers.
No is normal.
Sometimes you haven’t done your homework and a failed pitch is a failure of the founder. But a ‘no’ is often the result of factors entirely outside of your control. Do the work to screen possible funders, build a relationship with them and test out their vision of the future. If for no other reason, network to understand when the right fund can be approached at the right time.
And don’t be discouraged. No is normal.
September 2023