Meeting and Pitching Investors


Contents:


Bootstrap: Build a Company without Raising Money

Before you raise outside money, see how far you can bootstap the company. The more revenue and traction you can show investors, the less equity you will need to give up when you raise your first round of financing.

Some startups may not need to raise outside money at all.

  • Bootstrapped, Profitable, & Proud. This series from Basecamp profiles companies that generate over one million dollars in revenues, and are profitable without taking VC money.

  • Spanx. Sara Blakely bootstrapped Spanx from a $5,000 investment into a billion dollar business. She owns 100% of the private company with no debt.

  • PlentyOfFish. PlentyOfFish founder Markus Frind never raised outside money. “By the time I found out what VCs were, I was already making millions in profit”. quoted here. That is a nice place to be. Frind owned 100% of the company when he sold it in July 2015 for $525 million.

  • Non-equity Crowdfunding. Raising money from non-equity crowdfunding sites like (Kickstarter and Indigogo, etc.) is a fantastic deal. You raise capital without giving up equity. Have cake, eat it too.

Understanding VC Investors

Before you start pitching your startup, you should understand how VC investors operate. What are their motivations?

A venture capital fund has limited partners and general partners. The limited partners are big-money institutions (endowments, pension funds, etc.) that put up capital, wait 5-10 years, and hope to see a big multiple of their capital returned to them. The general partners do the legwork. They get down in the much with startup founders and decide when and how to invest the LP’s money. GP’s get paid in two ways. They get a fixed, annual payment from the fund, and they take a percent of the profits at the end of the fund’s lifecycle.

Reading Your VC Pitch Meeting. VCs are not great at responding in real time. They often want to think more about your company, by equivocating they preserve option value. Seth Levine, 2017.

Accredited Investors

Generally, startups should only raise money form “accredited investors.” Without getting into the details, you should just know that federal law will treat your fundraising far more favorably if you only raise money from accredited investors.

An accredited investor is someone who is sufficiently rich (under the US securities laws) to risk their money in the world of business startups.

More specifically, an investor is “accredited” if:

  • they have a net worth of over $1 million, excluding the value of their primary residence, or
  • their annual income exceeds $200,000 for the last two years, or
  • their joint annual income with their spouse exceeds $300,000 for the last two years.

  • Notes from the SEC.

  • What is an Accredited Investor? Yokum Taku, 2009.

Finding the Right Investors

Angel Investors / Seed Funds

  • Upside Risk. Angels make their money from investing in rare companies that deliver 100x returns. The the real risk for angel investors is missing out on that outstanding investment, not failing to get their money back on their non-unicorn companies. “And yet angel investors continue to ask for onerous terms to mitigate their ‘downside risk.’ All this does is piss founders off, misalign incentives, and harm the investors’ chance of getting to invest in the best deals.” Sam Altman, 2013.

  • How to Select Your Angel Investors. Don’t reach for the “celebrity” investors. Celebrity investors might help generate buzz, but its better to have investors who will roll up their sleeves and help out when the buzz dies down. Chris Dixon, 2009.

Investor Introductions

How Many Investors?

  • How Many Investors are Too Many? “VC’s are like martinis: the first is good, the second one great, and the third is a headache.” By Mark Suster, 2011.

  • Party Rounds. The rising popularity of party rounds is bad for companies. In a typical party round, no single investor cares enough about the company. Sam Altman, 2013.

For Start-Ups, How Many Angels Is Too Many?. Mike Isaac for the NY Times (July 2015).

Pitching Investors

  • Pitch yourself, not your idea. Tell the story of someone who has been building stuff her whole life and now just needs some capital to take it to the next level. Chris Dixon, 2009.

  • How to Present to Investors. Practical advice on giving presentations: describe a compelling product and get right to the demo; focus on a narrow solution to a widespread problem, don’t waste time on business models or secondary matters. Paul Graham, 2010.

  • How to Pitch Your Startup On Stage.
    How you pitch is important, because investors aren’t obligated to expend the mental energy to figure out what you are talking about. Follow this basic flow: market and problem, your solution, evidence that your solution will work (traction, sales, your team’s expertise, etc). By Y Combinator partner and Twitch cofounder Justin Kan, 2014.

The Pitch Deck

Some example pitch decks:

NDAs and Ideas vs. Execution

Don’t ask a serious VC to sign an NDA before you pitch. Instead, pitch your idea only to investors with a reputation for honest dealing. In any event, the value of a startup isn’t in the idea, it’s in the execution of the idea (or the potential for execution).

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