The Three Words No Early-Stage VC Wants To Hear

Aaron Dinin, PhD
Oct 31 · 3 min read
If you’re pitching a profitable company, are you pitching the right investors?

I was pitching a prominent early-stage venture capitalist and preparing to hit the climax of my presentation. I’d spent the prior 10 minutes artfully describing the problem my startup was solving, demonstrating demand, showing traction… all of it building toward the data point I was most proud of. I clicked to my next slide to reveal an “upwards-and-to-the-right” graph and explained: “By continuing on our current trajectory, we should be cash-flow positive within 18 months.”

I’d delivered that same slide dozens of times to plenty of other investors, entrepreneurs, and mentors. While it hadn’t gotten any applause, nobody ever seemed bothered by it. But not this time. This time the venture capitalist laughed. Not a loud or obnoxious laugh. More of a soft snicker. Still, it was enough to catch my attention, so I stopped to ask him what was funny.

“You don’t see why this slide is funny?” he replied.

“No,” I answered. “This seems like the most important slide in my deck. It’s explaining how I’m going to turn my venture into a self-sustaining business.”

“That… right there. That’s what’s funny,” he said. “You’re pitching me — an early-stage venture capitalist — on a self-sustaining business. What do you think it is we do here?”

I shrugged. “I figured you invest in high-potential businesses.”

“Nah, you’ve got it all wrong,” he said while shaking his head and laughing more. “We don’t invest in high-potential businesses. We invest in high growth-potential businesses. If it’s going to be cash-flow positive in 18 months, I don’t care how good your business is, I don’t want anything to do with it. ‘Cash-flow positive’ are the three words I never want to hear.”

“Why not?” I asked. The pitch was clearly over, but I had an experienced venture capitalist willing to give me good, candid feedback, and I was eager for it.

“Think about it this way,” he explained, “any company I invest in at an early stage has to have the potential of giving me a 10x return on my investment. That’s a 1,000% profit. In comparison, if I put my money into the stock market, I might be looking at closer to a 10% profit. So my job is to find companies that can 100x the market. That’s an absurd expectation.

“To improve my chance of getting that kind of return, I need two things: 1) I need your company to grow as fast as possible; and, 2) I need to own as much of your company as possible. But, if you’re profitable in 18 months, then you’re not growing as fast as you can, and you’re not going to need anymore of my money. If you don’t need anymore of my money, I’m not going to be able to buy anymore of your company. So, 18 months from now, you’ll be happily running a cash-flow-positive company, and I’ll be happy for you as a person, but it’s bad for business.

”Instead, I want you pumping all your profits back into the company so you’re growing it as quickly as possible. When you need to grow faster, I want you to come to me and ask for more money. And, of course, I’ll happily give you more money in exchange for more ownership of your wildly successful, fast-growing company.”

At that moment I realized how little I actually understood about venture capital. I’d been so focused on telling my story that I never stopped to think about who I was telling it to and what mattered to them. The story that seemed so compelling to me was literally laughable to the people I was sharing it with.

Lesson learned. I went home and began studying the venture capital industry. I started reading VC blogs, following VCs on Twitter, attending venture conferences, and doing anything else I could to understand the VC model.

If you’re considering raising venture capital for your startup, you need to be doing all of those things, too. By not doing it, you risk a lot more than getting laughed at; you risk wasting your time.

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Aaron Dinin, PhD

Written by

I teach entrepreneurship at Duke. Software Engineer. PhD in English. I write about the mistakes entrepreneurs make since I’ve made plenty. More @ aarondinin.com

The Startup

Medium's largest active publication, followed by +539K people. Follow to join our community.

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