Chapter #5 — Preparing for the First Partner Meeting
Raising your Seed Round — A Playbook for Israeli Entrepreneurs
After discussing how much to raise in Chapter #1, the various sources of funding in Chapter #2, VC organizational structure in Chapter #3, and securing face-to-face Partner meetings in Chapter #4, Chapter #5 provides guidance on how to prepare for these meetings, the next step in raising your seed round.
By law, VCs value returns above all else. They have a fiduciary obligation to act in the best interest of their Limited Partners (LPs), aka shareholders, which means early-stage VCs want to see that each investment has the potential to appreciate by at least 10x in valuation. VCs have therefore developed and experimented with different models to assess the likelihood your company’s value will appreciate significantly, and sustainably.
Some of the common risk factors included in these models:
- Business Model / Pricing
- Market Size
- Achievements to date (traction)
- Financial and Hiring Plan
- Buyer Universe
- Future Fundability
Different VCs weight these (and other) factors differently. For example, some VCs prefer investing in companies that use technology to improve existing industries, reflecting lower risk tolerance than VCs who prefer investing in companies using technology to disrupt existing industries. Some VCs prefer companies with strong IP, others could care less about IP and focus on other types of defensibilities. However, the common thread across all VCs is the desire to identify qualified teams creating an appealing, monetizable, and defensible value proposition.
In terms of team, you must convince the VC that your team is uniquely positioned to deliver on your promise, and in the first meeting the VC will test you in various ways to better understand your team’s strengths and weaknesses. Beyond presenting your team’s CVs, realize that communication is 7% content, 38% tone, and 55% body language. Practice presenting with a camera and/or friend, and become more self-aware of your tone and body language. Good posture and intonation make a big difference in how others perceive you.
In terms of appeal & monetization, you must convince the VC that there is both demand for your offering and a way to capture the value of the benefits. Some VCs will get it right away, others will drill down deeper to better grasp your thesis. To better explain these elements, you’ll want to highlight trends in your market and demand drivers for your solution, as well as the research and experimentation you’ve conducted to acquire market knowledge. Obviously there’s nothing more convincing than paying customers and/or highly engaged users, but if you have not yet achieved this, you’ll need to convince the VC they should allocate more time to investigating its likelihood to occur. Beyond that, you’ll need to walk the VC through your competitive landscape, go-to-market strategy, business model & pricing, and potential exit scenarios.
In terms of defensibility, equity markets place a low value on businesses which can be easily copied and high value on businesses which cannot be. Thus, you must convince the VC that you have one or more moats, aka, sustainable competitive advantages. The five well documented moats are brand, scale, high switching costs, IP, and network effects. The less well documented, but perhaps most important moat is company DNA, or culture. You can highlight your moat(s) as you discuss your team, product roadmap, IP, technology, business model, competitive landscape, and go-to-market strategy.
By contemplating and preparing these elements in advance, you increase the odds of mitigating the VC’s primary concerns. However, without weaving together these elements into a cohesive narrative, your chances of a deal suffer dramatically.
Stories allow homo sapiens to cooperate flexibly in large numbers, distinguishing us from all other species on Earth. Without a good story, you cannot scale anything beyond a tribe of 150 and are therefore uninvestable. Your company story begins with customers/users in a setting experiencing a struggle. In Google’s case it was an academic struggling to find useful information online. In Facebook’s case it was a college student who wanted to connect with his/her classmates online using real identities (okay actually at first it was a game of Hot or Not, but that wasn’t the story they told to VCs). In Amazon’s case it was a consumer who wanted to buy a book online. The story continues by illustrating how the conflicts, problems, risks, and dangers posed to this character have created an urgent situation that needs to be addressed. Then the story explains how your company will resolve these issues. Your company needs to heroically come to the rescue and save the day.
You need a good story to help recruit employees and executives. You need other people to believe in your story to start working on it for less pay than they could get elsewhere. They have to believe that if the story comes true, the ownership they have in the company will more than compensate them with much greater long-term gains than their short-term pay cuts.
Your investors need to get inspired by the story, to feel like you are in a position to either make a lot of money, and/or get acquired for a lot of money. But not just the seed investors. The A investors. The B investors. The C investors. And so on and so forth. You need to constantly convince investors that your story is the best way to deal with this problem.
Your story must resonate with your customers/users. Especially when they have multiple solutions to the same problem. Your story needs to be polished, refined, practiced, and perfected. Yet at the same time, it must evolve. As the world changes, so too must the way in which you fit into it. Your story also binds together partners, resellers, journalists, corporate developers, bankers, M&A scouts, recruiters, and dozens of other actors.
Which leads to a complex conclusion — the story must be compartmentalized and tailored to each audience. But when it comes to the VC audience the most important elements (team, appeal, monetization, and defensibility) should be woven into the story of your customer/user and their challenges.
If you want to gain a competitive advantage in fundraising, there is no better way than to improve your storytelling abilities. Taking an online course, reading fiction, and even hiring a personal storytelling trainer are likely to be high ROI activities as you prepare to interface with investors.
Final Prep Tips
First, look at who is on the calendar invite. Make sure you do your homework on each attendee and their respective roles within the organization.
Second, see the time distance between the moment you agreed to have a meeting and the calendar invite. Unless there is a stated excuse (travel, vacation, bandwidth), aim to have the first meeting within 2 weeks of agreeing to meet to keep momentum.
Third, even if they already have received your deck, share it again the day before with all of the meetings participants, so that the VC A. has a reminder of who you are and B. the ability to do some preliminary review so you can hopefully dive into the more interesting questions face-to-face.
Fourth, turn your phone on vibrate and keep it in your pocket. Don’t pull it out unless you need it for a demo or emergency.
Fifth, show up 10 minutes early so you can use the restroom, make coffee, tea, whatever, and relax into the environment, rather than rushing up the stairs or from the elevator to make it on time. If you’re running even 1 minute behind schedule, send a text to the office manager or whoever you last communicated with letting them know.
At this point, you’re about to step foot into the meeting. But once you get in the room, what should you say? How should you act? What will happen? In next week’s post I’ll discuss key conversational dynamics to consider, possible outcomes of the meeting, and how to handle each scenario.