So you've submitted your business plan and the venture capitalists (VCs) are nibbling at the bait. You arrange a meeting with them, a make-or-break chance to pitch your idea. But how do you handle the big moment?
Uk.internet.com, a sister publication to vnunet.com, asked an internet insider for tips on how the pitching process works and what you can do to come out on top.
Before the pitch
Homework is vital because it's important to make the best possible impression, both personally and on behalf of your idea. Step one is to check that the VC has actually invested in internet businesses before and understands the language that you intend to use. You should also make sure that you have a working knowledge of the terminology that VCs use.
VCs are concerned primarily with scale, and want to know how big the potential market is for your product or service. The person who is pitching, whether it is you or someone else, also needs to know how VCs work and how they decide on what level of investment to make. The pitcher needs to be aware not only of the basics, which don't change, but also of the current perceived wisdom regarding businesses of your type in the internet industry and the financial community.
VCs are driven by public markets and respond to popular wisdom and fears. If the market says that portals are dead, VCs will be wary of investing in them - they will look instead for the 'next big thing'. When preparing the pitch you should be aware of current thinking on what works and what the prejudices are likely to be.
Dress for success
It's important to dress in a way that makes you feel confident. Some people are happier in a suit, but there is no need to wear one if you would not normally do so. The important thing is to look credible and to project an air of success - unless you are technically brilliant, in which case you may have a little more licence.
The pitch meeting
A checklist of key points can help you negotiate a potential minefield:
- Don't assume that the VC has read your business plan or summary. Many VCs book meetings on the basis of an idea and will not read the plan in detail. Remember that they see thousands of them and will not remember all of your details.
- Choose a pitch format that suits the occasion, your proposition and the style of your team. The VC may be used to a smooth PowerPoint presentation, but if you are pitching a concept that has not yet been built, you may be better off using a flip chart which shows off your passion and personality. A formal PC presentation is only needed if you have something to show - beta versions of software or page mock-ups, for example.
- Use the pitch to make key points. It will be followed by a discussion, which is the right forum in which to add to your presentation in more detail. You will typically have 45 minutes to an hour of the VC's time. The pitch should be no more than 15 to 20 minutes long, to allow plenty of time to respond to questions. These are likely to centre on the concerns that the VC has, but they will also show you how he or she is thinking and what they are interested in.
The pitch itself needs to cover:
- The product or service you are proposing. What is it and how does it work?
- The target audience. Who will use it and why?
- A market overview of your sector. How big is it in Europe or worldwide? What are the key trends?
- Scale. How big can the business get? Talk about sales, users and countries, bringing in any sources of research. Remember that you are very unlikely to own an entire market sector. Only a small percentage of potential customers will be reached by your site anyway, and once the market shows signs of promise it will be deluged by 'me too' sites. VCs will want to know whether the site can grow exponentially, as has been the case with some virtual communities.
- How much time will it take to grow, and what is the cost/strategy for growing it?
- Status/assets. Do you have any so far? Do you have any technically innovative ideas or technology, exclusive relationships, patents or content?
- Competition. Who else is doing it? Are you the first or second mover? If not, how will you win market share? VCs believe that only first or second movers can dominate a market. How will you deal with competitors? The options are ignore them/merge with them/partner with them/buy them or be bought by them.
- Exit strategy. What is your plan? Sell to another company or go public? How fast are you willing to make this happen?
- Management. Who is behind the business? Are the key people at the meeting? When will they be able to start? What is their track record? If the team is experienced and credible, it's a good idea to introduce them all to the VC at the start of the meeting.
- Investment. How much cash do you want, and what does the VC want in return? What will the money be used for? Site development, marketing etc? How long is it likely to last? How much revenue do you hope to make in this period? When will money start coming in? How much do you think the business is worth?
Points for discussion
Before the meeting, decide which of your team is going to field questions on which subjects. It's important to give the impression of being organised and that you all agree on the key points. As well as general follow-up questions about the ramp-up strategy, marketing and revenue generation, the discussion should include:
- How much equity does the VC want for any investment it makes and how much does the pitcher want to part with?
- How much equity does the pitcher need to keep hold of to woo good staff? VCs will try and obtain as much equity as possible, especially if they sense that the team is inexperienced in negotiations. You should expect to give up anywhere between 20 per cent and 40 per cent for £1m, depending on specific circumstances. Remember that this is just round one of the funding process. You will need more money in the future and if you give away too much equity now, there will be nothing left after the next round. This should be a key part of any discussion.
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