Phin Barnes (Principal, First Round Capital) and Brad Burnham (Partner, Union Square Ventures) answer your questions about (almost) everything you need to know about pitching to a venture capitalist firm and startup fundraising along with some insights into their companies’ strategies.
First Round Capital makes investments between $250,000-$1 million, usually in the earliest stages of tech companies. Union Square Venture makes investments between $250,000-$25 million, and invests at multiple stages of tech companies.
The entire video is worth a watch, but to whet your appetite, here are the main points from the Q and A session.
- Don’t Bore Your Audience with Details
Burnham said he has never seen a 50-slide pitch work. If you’re not able to reduce your pitch to 12-15 slides and still effectively communicate your message, then you won’t create enthusiasm in the venture capitalist, according to Burnham.
“The pitch meeting is not designed to close the deal,” he said. “The pitch meeting is designed to create interest.”
Barnes added that you have to get the VC to lean in early with the first few slides. One way to do that is to demonstrate why the problem you aim to solve is a problem that needs to be solved, why it’s the right time to solve it and why your team is the right team to solve it.
- It’s All in the Attitude
Both entrepreneurs said it’s key to interview the investors during the pitch, not just be interviewed by the investors. Burnham warned that you have to be confident and thoughtful, but don’t veer into breeziness or cockiness.
Barnes said the best attitude to have is to be vulnerable and expose your passion during the pitch meeting, and show the investors why you’ve made a decision that this is the single thing you’re going to do with your life for the next few years.
- No Excuses
Barnes looks for “heat seeking missiles,” people who find a pain point in a market and believe they can build something to address it.
“You just know they’ll find the heart of the market, the heat and that signal among the noise and really deliver value,” he said.
He said that the people who wait for funding to get going are not necessarily the people that have the passion and commitment to build a successful company.
Burnham used the example of Foursquare, a company that got to 100,000 users with only $25,000, as an illustration of how it’s easier than ever to start without a huge investment.
“[There is] no excuse for going to a VC and saying, ‘I need an investment before I take a risk.’”
- Commit or Quit
If you’re only in it for a paycheck, then you’re going to end up wasting everyone’s time and money because “doing a startup is by far the hardest, most challenging, most painful, gut-wrenching professional experience anyone can have,” Barnes said.
Burnham echoed the sentiment. He said he’s more interested in startups that are doing it because they think they are adding value to the world, not just extracting value from some unsuspecting person who has the money to pay them.
- Quid Pro Quo
At Union Square Ventures, they usually invest in companies that are not directly competitive with each other. This way, the different portfolios can work together and share. Union Square Ventures puts on events and meet ups that bring members of each company together in their respective fields.
“We want them to talk with each other, trust each other, lean on each other,” Burnham said.
Barnes’ company also tries to bring together their different portfolios into “a community of entrepreneurs all invested in each other’s success.” Barnes said the most efficient use of the entrepreneur’s time is to receive actionable advice from someone who had already solved the problem through a close network like the one they try to create at First Round Capital.
- Valuation Isn’t Just About Money
Burnham said one way to get a more accurate estimate of your company’s valuation is to fine a few comparable companies; they don’t have to be in the same space, but they should have achieved something like the same market position. Then find out their number of users, if they have been valued in private or public markets, and estimate a value on a per user basis.
“It’s definitely, especially as you go earlier, it becomes much more art than science in some ways,” Barnes said. “But valuation will come down to aligning a founder’s funding needs or funding model with the venture capitalist’s business model.”
Entrepreneurs have to decide how much dilution they will accept to raise a certain amount of money and to work with certain venture capitalists.
- How to Negotiate Like a Pro
Both entrepreneurs emphasized that you should negotiate with more than one VC firm at a time to let the “market” decide the worth of your company.
Barnes said it’s beneficial to have each firm at the same stage of the negotiating process because a) it creates a market to understand what your company is worth and you can compare opportunities and b) it allows you to make a decision not driven by the calendar so you don’t have to decide based on your current opportunity and what may or may not happen in the future.
- Be Dilution-Sensitive with Equity
As much as most entrepreneurs would like an easy answer about the percentage of equity they should own in the company versus how much others should own, that’s not the way it works.
“Ideally, you want to be in a position to never need the investor because that gives you the most leverage,” Burnham said.
You can do this in a few ways: organize your business so the burn rate is low, extend the angel round of investing, or find another seed fund willing to invest for a smaller percentage of company ownership.
“The best entrepreneurs we see aren’t valuation-sensitive and aren’t amount-sensitive, but dilution-sensitive,” Burnham said.
Barnes advised that just getting the amount of money you need may not always guarantee success if you and the investors aren’t on the same page. He gave the example of when 10 investors are writing a check for $100,000, but none of the investors are willing to step up and engage with the business.
- Tech Background Not Required
Burnham said it’s unlikely he would invest in a company if at least one of the members of senior management didn’t have a tech background. He prefers that the entrepreneur is the technologist, but he requires the technologist to also have a feel for the human experience and the user experience.
Barnes wouldn’t mind investing in a company where the entrepreneur didn’t have a background in tech if the core insight is consumer-oriented, not tech-oriented. He added that if the entrepreneur didn’t have a tech background, Barnes has to believe the team is smart enough to hire a CTO or a head of operations or logistics with deep expertise to own the company’s vision and execute the nuance of the consumer experience.