What Venture Capitalists Look for in A Pitch
The startup ecosystem is becoming wide each year, and founders face more competition when pitching VCs for investments. With a spike in interest over the years, the time VCs spend assessing pitch decks from founders has reduced from 5 minutes to just 2 minutes. So they are compelled to just cut to the chase and revise their business plans. Founders need to communicate their message more effectively and pique the interest of potential investors.
You’d think that’s all there is to it, but it isn’t. Other important factors contribute to the decision of a VC on any kind of startup that comes knocking. It’s not just the pitch decks and business plans, it’s also about the team leading the company. A founder’s attitude towards entrepreneurship and the due diligence of his team is a huge factor VCs would use to assess if it’s worth investing in the company.
In fact, most VCs tend to focus on the founder before considering other factors such as market size or revenue. A quote widely used by VCs and angel investors goes like this: “We don’t invest in companies, we invest in people”.
Let me show you further proof of what it looks like in the real world.
The VCs receive a pitch from an entrepreneur and they get excited. They do their research on the industry and their enthusiasm grows even further. So they’d invite the entrepreneur for an official pitch meeting and at the end of it, decide it’s not worth their investment.
So you’re beginning to wander. What the hell went wrong? How did a pitch that looked so perfect on paper get thrown out? The problem is not about the proposal, it’s the interaction between the VCs and the founder.
Most entrepreneurs get so hung up on the substance of their pitch and information on their Powerpoint slide that they forget it’s not just about the data. Venture capitalists review pitch decks beforehand. What matters most is the in-person meetings because this is where they ask questions, get clarity, and quantify the personality of the founder.
Some things like having a mutual friend with a VC or being aggressive are obvious in having success during a pitch meeting. But there are other dynamics we need to understand to have a better shot when pitching potential investors.
So I reached out to a couple of VCs to gain some insights and know what makes them tick. Here is what 6 VCs have to say and what they’re looking for in a pitch deck:
1. A good fit for their investment strategy
Most VCs have an investment focus, they represent what they genuinely believe in, and your company must share the same goals as theirs. Some VCs like to invest in revolutionary tech companies, another only accept pitches from female entrepreneurs — while others like Timothy Draper have a huge interest in Web3 and blockchain technology. Make sure you reach out to those VCs that fit your investment thesis.
They also like to target an investment stage (pre-seed, Series A, Series B, and so on), so it’s worth establishing this in your pitch deck.
If you’re a pre-seed startup, reach out to VCs that give funding to pre-seed startups.
“Firstly, we look to see if it fits our fund’s mandate. If it doesn’t, it’s an immediate no. I’m referring to these factors: investment stages (pre-seed, seed, series A), location (some funds invest globally, others are far more restricted), thesis (such as sector restrictions, gender, two founds, SasS/enterprise/deep tech), and portfolio structure (a requirement for diversification, conflict, location, stage).
If the company matches our fund’s mandate, we focus on:
The talent of the founders.
The problem they’re trying to solve and the solution they offer to solve that problem. We focus on those three main criteria, then another 15 other areas we review (IP, forecasts, traction, raise terms, e.t.c). So combine the fund mandate with the second set of selection criteria, and only a small percentage get offers of investment,” says Emlyn Scott, Managing Partner of CP Ventures.
“When you contact VCs, they look for a “fit” with their thesis. I’m looking at cold emails. I just have a higher mental bar for the “fit” to be strong — in cold emails, I expect the founders have done research on me, and tell me exactly how what they do “fits” my thesis, says Niklas Anzinger — the Founder and General Partner of a Startup City VC based in Prospera called Infinita Fund
Many founders complain that VC websites are unclear with their thesis. Getting into VC, I learned this is because of general solicitation rules. Venture Capitalists are fundraising all the time but are not allowed to advertise their fundraising activities or thesis, adds Niklas.
I think general solicitation is a bad rule that prevents founders and VCs from matching more effectively … but something to keep in mind. I try to overcome this by talking about the trends I’m interested in on my podcast — he explains.
2. A product or service that solves a real problem
As a startup founder, you need to quickly and effectively communicate what problem you’re addressing and the target customers facing these problems. This is because people buy or spend money on things that improve their lives — a solution or product that takes them from Point A (problem phase) to Point B (solution phase). This shows VCs that you are addressing a problem in an industry, and they would be able to reap the benefits of their investments through revenue and successful exits.
“Are you offering a good solution addressing a real problem or is it “a nice to have?”. Do you a product market fit? Is your product defendable, any competition? The people you are targeting must be willing to pay for your offering,” says Frank Willemsen, President and Board Member at Sand Hill Angels
3. The Team
The team leading a company are the ones who would turn it into a very successful business or ruin it. That is why the founder and the employees running a startup are the most valuable assets. Venture Capitalists review and assess the team’s personalities and capabilities before they invest a dime.
Are they experienced enough to run the company and make it successful? Are they willing to withstand the obstacles while running the business? Are they motivated enough?
These are all but a few questions VCs think about when assessing a pitch deck.
“Most important is TEAM (Hustler, Hacker, and Hipster),” Frank adds.
“The founders and their teams are important. We measure background, passion, dedication, and leadership, among other elements, and make a call on the team”, says Eugene Zhang, Founding Partner at TSVC.
4. The traction of the company
Some VCs prefer to see startups that already have some sort of traction, such as app signups, interest in product demos, or an established customer base.
This also means that VCs like this are not a good fit for pre-revenue startups.
“I am looking for demonstrated traction. How are they addressing the market? Is it working?” says Jean Hammond, General Partner at LearnLaunch Accelerator.
5. The size of the market.
This is also an important factor that VCs look for when reviewing your pitch… they want to know what industry you’re targeting and the market potential.
The e-commerce market, for example, is worth $5.2 Trillion. Be sure to show this early on and the percentage of the market you plan to capture over a period of time with your new company. This makes it easier for them to assess the potential and the ROI of the investment, should they choose to work with you.
The size and scale of the opportunity and the expertise match with the team, or if not, something they think is hot.
Personally, I am much more subject matter-focused. Mostly because, as a small investor, the total opportunity size is less important except for follow on funding risk.
I am happy if the investment is working on an important issue, even if it is hard and takes time, Jean adds.
How big is the potential market? United States VCs like you to ramp up business to $100M in revenue in 5 years (hockeystick), adds Frank.
We measure market potential. Is it big enough? Founders must convince us it’s a big market, and it’s got to be 10x better or cheaper”, adds Eugene.
6. A Product Market Fit
A product market fit means creating a product that fulfills the demand of your target market.
This explains why VCs invest in companies with a product-market fit, as the company satisfies a strong demand, making it a valuable investment.
“If you have a product-market fit, we help you scale”, says Ben Ling, Founder and general partner of Bling Capital.
Now that you know exactly what VCs expect to see in your pitch and have satisfied all their requirements, you’re ready to reach out to them for funding.
But that’s not easy to do either. Most VCs are very busy and will never respond if you reach out to them in a way they don’t appreciate.
Some hate cold calling, and others do not like DMs on Linkedin. It helps to know exactly how they like to be approached. This way, you stand a better chance.
How do you prefer to be approached by founders when raising capital?
This was the question I asked to get some clarity, and here’s what they have to say about it:
1. Frank Willemsen — I like intro’s from a trusted source/warm introductions. I don’t like cold calls.
2. Jean Hammond — I’m open to both … direct attack allows me to push away (for 2–3 weeks), which I like. If it is direct contact, only try twice in 2 weeks … then go away. If I can’t answer, I can’t consider.
I try to say … not a fit fast.
I really dislike LinkedIn … If you MUST try to get through there … BE polite and ask me if I am interested. Don’t attach a ton of junk.
3. Emlyn Scott — We surely prefer a trusted source (existing portfolio company, our network, LPs, trusted accelerators, e.t.c) for three main reasons.
1. They tend to be higher quality companies.
2. There is less volume flooding our inbox, and…
3. We can trust the company/founders more as there’s some level of indirect relationship. That being said, we look at cold outreach as well and have made many investments this way.
4. Eugene Zhang — Both are ok, but an intro will help. In both cases, founders need to craft their message concisely.
So there you have it. Some hate a direct cold outreach, while others hate Linkedin DMs, but there is one thing they all have in common. Something they all have a preference for.
Introductions or referrals from someone they know, like, and trust. Of course, this is obvious and goes a long way… we all trust the people we know and would buy from anyone or talk to anyone they recommend.
So it’s a big deal and would make a big difference to develop stable relationships with the VCs you’re targeting. This should happen before you ever need to fundraise for your startup.
Now that you know all these, go out there and get those VCs to back your company.