that provided a steady income -- and had to convince your spouse or significant other that all of this would eventually lead to greater financial security for your family.
In the meantime -- the next 10 years or more -- you are going to live cheaply, take no vacations, work longer hours than ever before, sleep fitfully (my partner, Ben, has said that as a startup CEO, he slept like a baby -- waking up every few hours crying), and beg VCs to finance this glamorous lifestyle. Sounds like fun, right?
There are five things to consider when you’re preparing to make that big ask -- and we’ll talk through each of them -- but first things first: You’ve got to get the opportunity to pitch.
Angel or seed investors, as well as law firms, are an important source of referrals for VCs: Angel investors want the companies they invest in to eventuallyraise more capital, and law firms want their clients to get solid funding and become long-term clients.
But if neither of these routes is available to you, get crafty. You should be industrious enough to find someone who knows someone who has some relation to a VC. It’s a great test of your mettle as a startup CEO, and VCs often use your ability to find a warm introduction as a gauge on your grit, creativity, and determination. Getting your foot in the door is a combination of likability, networking, hustle, showing up, following up, persistence, salesmanship, confidence, experience, storytelling, and
sheer dumb luck.
VCs are looking for a good financial outcome, but most of what they invest in will not yield much -- if anything -- in the way of returns. It’s the few home runs that return 10 to 25 times the VC’s invested capital that will make or break their business.
So once you get that meeting lined up, your job as an entrepreneur is simple: Convince a VC that your company has the potential to be one of those outliers. Piece of cake, right?
Don’t assume the VC already understands the market or its potential size. Paint a picture that enables them to answer the “So what?” question. That is, if I invest in this company, and the CEO and her team do everything they say they are going to do, can that business drive an outsize return to my fund?
We’ll look at Lyft as an example. When the company was getting started, it wasn’t obvious how big the market for ride sharing could be. A lot of people evaluating the opportunity started with the existing taxi market and made assumptions about what percentage ride sharing could capture.
That line of thinking was perfectly logical. But the Lyft founders made the case -- convincingly, at least to us at Andreessen Horowitz -- that that reasoning was too myopic. Instead, they argued that the taxi market was too limiting because consumers made assumptions about the availability, security, and convenience of taxis.
But if you imagined a world in which everyone had a fully networked supercomputer in their pocket with GPS tracking -- a smartphone -- then the market size for on-demand ride sharing could be much larger. After all, drivers who couldn’t afford to purchase a taxi medallion could just use their own cars to increase the supply of available drivers, which would dramatically increase the convenience of the service. Increased supply would drive increased demand, which would in turn drive more supply. You get the picture -- a true network-effects business.
Sometimes as an entrepreneur, you’ll have the hard job of positing the creation of a market that develops as a result of a new technology. For example, we were seed investors in 2010 in a company called Burbn. (That is the correct spelling, and they were not creating a new adult beverage.) Burbn was a photo-sharing application for the iPhone, which had been invented only three years prior; the smartphone category was not nearly the size that it would ultimately become.
So the market-size challenge was built on two assumptions: (1) This iPhone thing would really become a dominant global computing platform, and (2) Photo-sharing would be a killer app for the platform. So for a VC to invest, they would need to forecast both of those assumptions and assume there would be some way to monetize photo sharing. This was a complete unknown at the time, but it was not a crazy hypothesis that if you can amass billions of photos shared among millions of people, there must be some way to make money from that.
Lucky for us at Andreessen Horowitz, we took the leap and invested in Burbn. Two years later, Facebook acquired the company -- renamed Instagram -- for $1 billion.
Once you’ve established the market opportunity, the real question for a VC becomes “Why do I want to back this set of entrepreneurs?” Ideas are a dime a dozen; execution is what sets the winners apart.
As uncomfortable as it may be, you need to spend a significant amount of time in your pitch talking about you as the CEO. It’s not an exercise in boasting, but rather an exercise in helping the VCs assess your fitness for the role.
Perhaps the business requires a certain skill set in sales and marketing that you mastered in a previous role. Perhaps you encountered the very market problem you are endeavoring to solve organically through your own experiences and felt compelled to build a company around this idea. Or maybe you have a special skill that enables you to tell stories in a compelling way and articulate a vision that is likely to make employees, customers, and financiers want to come along for the ride.
We were fortunate enough to see the pitch for the Series A round of Square, a financial services payment company that has gone on to become a $30 billion public company. Unfortunately, we were not lucky enough to make the decision to invest in that round. What did we miss?
At the time of the A round, Jack Dorsey, the cofounder of Twitter, was not the CEO of Square. Instead, his cofounder, Jim McKelvey, was. Jim was a friend of Jack’s from his hometown and had previously been a professional glassblower. Jim was frustrated by the fact that, at the county fairs where his finished products were featured, he could sell his wares by accepting cash only. Jim and Jack thought there should be a way to enable credit card transactions for small merchants. Thus, the idea for Square.
That’s great organic founder-market fit, but we didn’t know Jim, nor did we have a good way to evaluate his skills as a CEO. And so we passed.
But we failed to appreciate two things. The first was that Jack would realize that the best way to maximize success was for him to become the CEO, something he effected a few short months later. The second was that Jack’s star power could provide unfair advantages in the marketplace.
For example, Jack secured a spot on The Oprah Winfrey Show and told the Square story to a broader audience. He also was able to get Jamie Dimon, CEO of J.P. Morgan, to bundle the Square dongle with the J.P. Morgan credit card business to generate tons of Square customers at a very low cost. Not everyone is Jack Dorsey, but think about what skills and advantages you uniquely possess that will prove valuable to the development of your business.
From there, help VCs understand how you are going to build the right team around you. We talk a lot at Andreessen Horowitz about storytelling skills and the ability to captivate an audience as a good indicator of potential success in an entrepreneur. Great CEOs find a way to paint a vision for the opportunity that simply makes people want to be a part of the company-building process. These same skills will help you land your first (and future) VC financing partners.
Related: We Raised Money for Our Startup Without an Investor Deck. Here's How.
No VC expects you to be clairvoyant about the precise needs of the market, but they are evaluating the process by which you came to your initial product plan. VCs are fascinated to learn how your brain works -- we want to see the idea maze. What data have you incorporated from the market; how is it more aspirin than vitamin; how is this product 10 times better or cheaper than existing alternatives?
VCs understand that your product plan is likely to change as you get into market, but they want to be confident that your evaluation process is robust. Demonstrate that you have strong beliefs, weakly held. In other words, show them that you will adapt to the changing needs of the market but remain informed by your depth of product development experience.
How will you acquire customers? Many entrepreneurs make the mistake of skipping over this at the early stage because the current funding round is not likely to get them meaningfully into market. But it’s important to include this in your pitch, even if just at a high level, as it is foundational to the long-run viability of the business.
Are you planning to build a direct, outside sales force, and can the average selling price of your product support this go-to-market? Or are you planning to acquire customers through brand marketing? If so, how do you think about the costs of such activities relative to the lifetime value of a customer?
You don’t need to have robust financial models at this stage, and you are not expected to have all the correct answers figured out. But you do need to have theories grounded in reasonable assumptions against which you can then apply real-world experience, and adapt -- or even pivot -- when necessary.
In 2010, Andreessen Horowitz invested in a gaming company called Tiny Speck, run by a great entrepreneur by the name of Stewart Butterfield. Tiny Speck set out to build a massively multiplayer online game called Speck. It was a great game in many respects, but Stewart later concluded that it couldn’t sustain itself as a long-term business.
With a few months of cash remaining from our original investment, Stewart approached the board (Accel Partners was also an investor in the company and represented on the board) with an idea: In building Speck, he and his team had built an internal communications tool that significantly increased the efficiency of their development processes. Stewart wondered whether other organizations could also benefit from this product, so he sought permission from the board to “pivot” into this business.
We were smart enough to say yes to Stewart’s request. That pivot is now Slack, an enterprise collaboration software company that is valued in the billions of dollars.
Not all pivots work out this way, but this story underscores a few important points. VCs understand that most businesses go through some adjustments along the way, whether small tweaks or almost complete restarts. As you pitch, you are not expected to be all-knowing, but you do need to demonstrate that you are the master of the domain you are proposing to attack.
For example, if a VC suggests that your go-to-market plans are all wrong, don’t immediately abandon your plan. That would raise some serious questions about your preparedness and fitness to be a CEO. A thoughtful, engaged discussion on how you came to your own conclusions and a willingness to listen to the feedback would be a far better response than pivoting on the fly.
Related: VC Confidential: Why Investors Say No
A VC is likely projecting ahead to the next round of financing to gauge the level of market risk she is taking on by funding you. Are you raising enough money to accomplish the milestones you set out for this round, such that the next investor will offer new money at a substantially higher valuation? (“Substantially higher” is very market dependent, but in general you want to aim toward a valuation that is roughly double your prior round.)
If you or your VC feels as though the milestones are too much, you’re likely to have a discussion about raising more capital at the current round, lowering the current valuation, or finding other ways to increase the confidence interval around your forecast progress.
Most VCs are building a portfolio of companies as part of a fund, and thus are looking for some level of diversification across a number of investments. While they may be investing $10 million in your current round and reserving some additional dollars to support future rounds of financing, they are not assuming that they will be the only investor throughout your company’s life cycle.
This is why VCs care about the achievability of the milestones you are laying out; in most cases, they don’t want to be -- or can’t afford to be -- the only capital provider at the next round of financing, so they are trying to estimate the risk of your (and their) getting stranded.
If during your pitch, all else fails and you forget everything in the heat of the moment, remember to go back to that first principle: How do I convince a VC that my business has a chance to be one of those outsize winners that can make them look like a hero?
→ Adapted from Scott Kupor’s forthcoming book, Secrets of Sand Hill Road: Venture Capital and How to Get It (Penguin Random House, 2019).