The last step to raising venture capital is normally a 1 hour pitch to the whole partnership during their weekly monday meeting. This is often described to entrepreneurs as a formality, but at least in my experience, for early stage deals, I would say there is probably a 25% chance of you getting a term sheet afterwards and a 75% chance of you getting rejected (although it will rarely come in the form of an actual “no”) .
The reason the odds of you getting dinged are that high are:
1) In most VC firms all it takes is one partner to say “This is really stupid – I hate it” to kill a deal.
2) Although by the time you pitch, the lead partner has probably told the other partners about you and probably sent around a memo, the non-lead partners probably didn’t pay attention, and only really do when you are presenting.
Good VCs have a much lower post-partnership ding ratio, because they work hard to socialize a deal and really get their partners to focus on it before asking the entrepreneur to present. For example, I used to work for Rob Stavis at Bessemer and he had a much lower post-meeting ding rate. This was because he spent a lot of time talking to his partners beforehand (“socializing the deal”), and if they had good objections he got them early on. (Ps. Hopefully the VC will work extra hard to pre-sell the deal if they ask the entrepreneur to drop everything and fly across the country.)
The very worst thing that can happen in a partnership meeting is what I call the “partner ambush.” Basically this is when the partner who brought you in (the “lead” partner), who you’ve met with for many hours and fully understands your company and is excited about investing in it, realizes midway through the meeting things are going badly and decides to try to save face by turning on the entrepreneur.
I had this happen to me when I was raising money for my last startup, SiteAdvisor. Basically what happened is me and my co-founder Tom Pinckney walked into this big, well known VC firm at 4pm to a room of very tired looking guys (yes, they are all male) who had been hearing back-to-back pitches all day (side note: always try to present in the morning). No one introduced themselves or said hello, which was a bit unnerving. The first questions were clearly hostile to the very idea of a consumer security startups (for a bunch of bad reasons, most VCs vastly prefer enterprise to consumer security – especially on the east coast and back in 2005). One of them literally laughed at the idea of marketing via search engines (this is the east coast – believe it or not many VCs our here still don’t know what (white hat) SEO is and how important it can be). Then the partner who brought me in said “Well, Chris, why not make SiteAdvisor into an enterprise product” basically turning on me and the whole concept of the company. Things went downward from there. To add insult and injury, the lead partner never even bothered to call me to ding me afterwards – in fact I haven’t heard from him to this day.
In retrospect, that would have actually have been a very good investment for the VC if they had actually given our pitch a fair hearing. Which gets me to my final point: I think VCs are making a mistake by putting so much emphasis on the partnership pitch. There is some positive correlation between presenting to a room full of (sometimes hostile) VCs and building a successful startup, but not a very high one.
Besides missing good investments, the emphasis on the partner pitch leads VCs to invest in bad companies. An investor friend of mine was recently talking about a failed startup he invested in:
Toward the end of the company, when things were going very badly, I went in and spent a day sitting with the entrepreneur and watching him work. At that point I realized his one skill in life was pitching investors. He had no idea how to manage people, build a product, get stuff done, etc.
The current early-stage VC process is optimized to favor people who are good at pitching partnerships, not necessarily people good at creating successful startups.
Related posts:
View Comments ↓
Investing, trading – what ever the asset – by committee/consensus is a recipe for disaster imo. You get a lot of bloody camels…
While its good / valuable to have a panel of peers to poke holes / question your trade(s), ultimately one person has to make the call and live with it I think. This would also mitigate the risks you outline here (ie only rarely would the partners get the ‘owner’ of the investment to change his/her mind and the ‘owner’ bringing the trade to the partnership would be extra damn sure this was a deal he wanted to do to avoid insofar as possible needing to make an about-face post his partners’ comments.)
ps would be great if you installed Disqus on your blog.
disqus – I tried! It seemed to remove all my old comments. Is there an easy way to import them?
Thanks for those great posts chris. I think i learned more here on the VC world than by practicing 3.5 years. You just made the top of my VC blogroll
Re: Disqus, yes Chris the WP plug-in should help you w/ the import. Can get to it by following steps at disqus.com. It’s also here: http://wordpress.org/extend/plugins/disqus-comment-system/. If you’re having any trouble, feel free to ping me: ro at disqus dotcom. Thanks, Sean, for suggesting
Chris – it looks like you’re on Wordpress and after I installed Disqus on a Saturday, I went into advanced settings and clicked import comments. Took about 4-5 hours but they came over perfectly.
Great blog, btw — it’s become a must-read for me.
Hey Chris, love the nuggets of gold on how to pitch to a VC.
How much did SiteAdviser sell for?
I feel a little jerkish talking $, but I will say it was >10x for VCs (and the amount is publicly available).
Chris,
Are business plans with financial projections and plans mandatory, when pitching to VC’s? What about when pitching to angels? The reason I’m asking is because I will need to raise some capital for my start-up in the near future, and I’m not sure how to go about the whole how-will-my-company-make-money thing in the business plan, especially considering the fact that I’m more focused on building a great product first and figuring out the best monetization opportunity later…
Please advise what I should do, in this situation!
Thanks,
Stan
At the early stage, no one takes financial projections seriously, but you should do them just to show you’ve thought it through.
Re: “The current early-stage VC process is optimized to favor people who are good at pitching partnerships, not necessarily people good at creating successful startups.”
Brilliant and (tragically) accurate. Great to see someone come out and say this as succinctly.
Great post. Thanks for writing it.
Got it. Thanks!
Great post, Chris. Keep them coming.
[...] First Tweet 1 day ago cdixon chris dixon Highly Influential Pitching the VC partnership http://www.cdixon.org/?p=452 view retweet [...]
Nice article.
One additional point: When pitching the partnership, it’s helpful to do some homework and know which of the partners are in your sector (in a large fund, there might be software partners, media partners, life sciences partners, etc.)
[...] From cdixon.org [...]
Had the same thing happen to me at a very reputable firm in Boston. The guys were more interested in hearing themselves speak than in actually listening or acting respectfully. I never understand why VCs act that way even if they don’t like the idea. Do they forget that entrepreneurs sometimes actually do become successful and that they don’t ever forget these things? why burn bridges that way? if the entrepreneur is in front of the partnership to begin with, it’s not likely they are a moron. It’s more likely that the VC – who has spent about zero minutes thinking about the specific issue in question – is clueless. Even if the entrepreneur is not working on an idea you are interested in investing in, maybe one day he will be? or maybe one day he will be the sibling or best friend of someone who is sitting on top of the next Google. My current investors – Bain Capital Ventures – really gets that. They passed on the opportunity to invest in my previous company but we always stayed on good terms. It was costless investment for them and a good decision.
As for VCs who don’t do their homework and socialize the deal internally prior to the entrepreneur showing up – they are being disrespectful and worse, wasting not only the entrepreneurs time but also their own. That’s not a good long term strategy and if you observe a firm doing it, try to find a way to short it.
I worked for a period of time for Jon Farber who runs the very successful Lime Rock Partners (an energy focused private equity fund). One of the first things he ever said to me was “our reputational capital is precious – don’t waste it. Pissing people off is never accretive.”
Hi Elie- Yeah, I agree it’s a really bad long term strategy. I think maybe controlling 100’s of millions of dollars just goes to some people’s heads…?
Bain guys have always been respectful to me and my friends’ companies.
Totally. Imagine them briefing their LPs at a yearly update meeting with the powerpoint slide “how your money makes us think we are smart and why we act disrespectfully as a result”… It strikes me that no sane person would willingly have their LPs know that they do that and yet these kinds of things tend to be the rule rather than the exception. It would serve these folks well to remember that just like entrepreneurs, the majority of them won’t be doing this in 10 years. The long term success rate on VCs is low though mgmt fees can make it somewhat lucrative – and certainly low risk – regardless.
Yep – management fees kill the incentives. If you are interested check out http://www.cdixon.org/?p=443
[...] Pitching the VC partnership (cdixon.org) [...]
[...] VCs they won’t deal with. (Often because of horror stories like the “partner ambush“). There are so many VCs out there that you can do this and still have plenty of VCs to pitch [...]
Elie – sounds like you got dicked around by Fidelity, er, Volition Capital. they’re real jerks to entrepreneurs.
[...] This post was mentioned on Twitter by Martin Soorjoo, Martin Soorjoo. Martin Soorjoo said: Chris Dixon (Skype, SiteAdvisor , Hunch) on the VC Partnership Pitch http://bit.ly/bcMZMY [...]
Leave a Comment