Interview: Venture Capitalists On Pitching

Story by Benjamin F. Kuo


For this morning's interview, we thought we'd try something different, and put together a virtual panel of venture capitalists to give us a few tips on pitching your company. We brought together Peter Cowen of Groundwork Equity, Mark Suster of GRP Partners, Rick Smith of Crosscut Ventures, and Richard Yen of Saban Ventures -- all of who will be on the judging panel for the Tech Coast Angel's Fast Pitch on February 24th, to give us a their hints and tips about pitching to venture capitalists. They also talked about their outlook on the venture capital market, and how likely they are to be investing this year, given the worried economy.

Hi guys, thanks for getting together. Let's start, and why don't you tell us what you are looking for in a pitch?

Richard Yen: The first thing I look for, is something unique in the product or service--not a me-too. It has to be something I haven't run into before that has great business potential. In this particular environment, I'm looking for a business that has prospects for generating revenue near term--something that isn't just about collecting users and measuring engagement. The proof nowadays is certainly in winning customers--whether that is a consumer or in the enterprise. One thing I like to look for is some barrier to entry, whether that is technology, or partners, or great entrepreneurs who understand the space. If I've seen companies that are similar to them--or half a dozen companies--even if the area might be big and exciting, it will be hard to make an investment.

Mark Suster: First of all, the good news, is GRP has a $200 million fund, which we've only done three investments on. We're really excited about 2009. What I'm looking for in companies when pitching, is, first and foremost--the founders. I'm always surprised how late in the conversation people leave it to tell what their background is. In any sale--and raising money is a sale--establishing credibility early on is important. If you're an industry insider--for example, maybe you worked at Microsoft in its mobile division for eight years, before your mobile startup--the extent you can get that out in a meeting to establish credibility, makes the rest of your ideas more credible. What we are looking for, first and foremost, is the right entrepreneur. Someone who has the demonstrated ability to build a product or service, that probably has done a startup before, and is an expert in the domain. We are not looking to fund people in 2009, who are learning a new market, on our nickel. We're looking for industry insiders, and people who have a team, not just a single, outstanding individual. We often hear from entrepreneurs who say--I'll hire a great team, as soon as I get funded. In that case, I don't think they're a great entrepreneur, because great entrepreneurs figure out a way to attract people before they get the dough.

True entrepreneurs always find a way to move the ball forward, without barriers. It's in the DNA of entrepreneurs. The second thing we look at is the quality of the idea. We are looking at a starting position so that this can be really big. Between 2005 and 2008, there were lots of companies raising half a million, and selling for 15 million. That market has sort of evaporated for the near/mid term, that's not what we're looking for. We're looking for really big ideas. The guys from Bill Me Later came through, to totally change the way credit was offered online. That was sold last October to eBay for a billion dollars. That's what we're looking for--really big ideas, plus I'd echo everything Richard said. Defensibility is also big--we're not interested in the me-too's without some unique IP. At GRP, we don't care about patents--they're nice to have, but not required--but we're looking for defensible IP in an area with an interesting, and big, idea.

Rick Smith: I would say, at a slightly higher level, is passion. We're looking for entrepreneurs who have passion about what they're doing, and can articulate why there's a real need. That's the thing that entrepreneurs usually get, but we really want to be wowed by people when they come in. We want to back people who are excited about what they're doing, understand the need, and can plan how they can fill that void. I think if you look at who has made a successful pitch to us over the years, it's the entrepreneurs who come in excited, are knowledgeable, and are passionate about what they're doing.

The elevator pitches you guys are going to be judging is pretty short, I believe--what are the key things you think you need to cover if you only had a few short minutes to talk to someone?

Richard Yen: I would start off describing your team, and your understanding of the space. Credibility is the most important thing. If you can do that in 15 to 30 seconds, you've done a great job, and that's time well spent. Talk about the problem being solved, why it is a problem in th emarket, and the specific product or solution you have, and why you do it better. To Mark's point--give us a sense of market size, where they are 100 million people who will buy your product, or why there are 10,000 customers who will pay thousands of dollars for your product. It's also good to talk somewhat about the competition, and why this ideas is different from the others. You may make the best spam filter in the world, but let us know why this is so exciting.

Peter Cowen: It is a two minute fast pitch, and it's an amazing opportunity to be in front of several VCs and funds, plus the Tech Coast Angels, an angel group that continues to invest in roughly a deal a month. The thing I think you need to do in a fast pitch, that people haven't done in the past, but should do--is to just gain the investor's interest. You're not trying to make a sale in two minutes. You're trying to give us enough in that pitch so that venture capitalists want to talk about it later with you, that there's something differentiated and compelling in what you've done, to induce them to talk to you further.

Mark Suster: It always surprises me in the elevator pitches how much jargon people use. If you're hiding behind jargon, that much more difficult to understand what you're saying. If it's too much of an idea, or too complex that you have to use jargon, there's not an idea there. I'd encourage simplicity in how you explain what you do.

Rick Smith: I would say, having an understanding of what they do and why is the most important. It sounds really simple, but I've sat through many things, judging on panels and listening to two minute pitches--and I find it's still hard for listeners to get in two minutes what a company actually does. There's only so much information you can give in two minutes, but let us know if you're selling something, is it a service or a product, and how do you take it to market. Some of the very basic facts can be lost trying to cram too much information into too short of a time.

Let's switch gears a bit. What's your outlook on investments--are you making them, despite the economy, and how hesitant are you to invest in this environment?

Mark Suster: I would say we were hesitant in 2008. We were hesitant in 2008, because we saw a lack of realism in valuations. We saw a continuation of 2006 and 2007, where there were too many "me-too" players. When you would fund a company in a space--say, digital out of home advertising--people would point to Focus Media being worth $6 billlion, and you would suddenly see five companies each raise more than $10M, and some raising $20M, at extremely high valuations. At GRP, our view was that the best time to invest in companies, is in a market like this. Necessity is the mother of invention. People are really entrepreneurs, when they are not racing to get back to their high paid job in consulting, or wherever they came from. The best entrepreneurs come from markets like this, and what we get is fair valuations, rather than overinflated valuations. It's a great time to be investing. In 2009, we will have way more deals than in 2008, and we hope to be able to be announcing some in the next four weeks.

Richard Yen: I completely agree. We are very excited about investment opportunities as well. We're in a unique position, because we just got our fund last year. We have two portfolio companies to date. If a firm has 20, 50, or 100 portfolio companies, that's a lot to think about. That's more of a situation where exercising prudence, and insuring their investments do well. We think we're in the opposite case. We have a total of two companies to worry about, instead of a lot. To Mark's point, valuations have com down, particularly Series B and Series C rounds. It's a great time to be investing. We signed two term sheets in the last six weeks, and are actively looking at opportunities. Looking at the last cycle, in 2002, that's where the best deals were done, at rational valuations, with top entrepreneurs--who stuck it out, and went to a great high. So we're excited to be putting money to work.

Mark Suster: Looking at 2003, that's when we did billion dollar deals. In 2003, we had DealerTrack, which had a 1.7 billion exit. Our best investments were in 2003 and 2004.

Rick Smith: I think it's impossible to say if this will be like a 2003, which was a good year for us, or 2001, which wasn't. It's impossible to say. I do know, however, that the rate of innovation never changes. There's a drive in entrepreneurs to find out how to make something better, and create something new. That doesn't correlate with whether the Dow is up, or down. When the Dow drops 20 percent, entrepreneurs don't drop 20 percent--they keep going forward. In any market, any time, I certainly see entrepreneurs coming out with ideas and concepts which were just as interesting as a year ago, so that doesn't change. If we can find companies that are creating interesting products and services, we can get them funded. But, we have to make sure they clearly create value this year. You definitely don't get a free pass in this kind of environment. We just closed our latest investment yesterday. I know it's a tough time, with uncertainty--but smart folks can make money in any kind of market. The thing I like about this market, is that the entrepreneurs are really here for the right reasons. People who can survive, and can make it out of this environment have the hart, and the passion to build companies. The days of easy money are long gone, and those driven by a greater purpose can get through these times and still create something. There's some interesting companies that show up in times like this, who can do it without a lot of capital.

Back to the pitching--do you think this style of elevator pitch really has value?

Richard Yen: It's tremendously valuable. The elevator pitch is an accurate title--you want to be able to stand in an elevator and get your idea across. In practicality, it happens quite a lot. You might be at a cocktail party, meeting a friend of a friend, or whatever you are doing. The amount of time varies--it might be ten seconds, it might be 30 seconds, or a couple of minutes. But, being able to describe, succinctly, what you are up to, and why you are unique and different is a big business. Entrepreneurs are always selling--attracting team members, getting investors on board, signing on customers--and it's extremely valuable to be able to concisely and clearly describe what you do. It's not rare, if you're an entrepreneur, you should be doing that ten times a day--and that's a great thing.

Mark Suster: Often, the times you have a venture capitalist listening to you, or a potential business partner, is at a conference. You're racing between sessions. If you think you'll get five or ten minutes of unadulterated, focused time from them, you're kidding yourself. You need to spark their interest. The objective is for them to think--that's a clever idea and a clever idea I heard talking with him. They say 80 percent is in the follow to what you do after that. Few people are good at doing that, and it's a tremendously important skill to have.

Rick Smith: It is important. If you think about what an entrepreneur has to do, it's to talk to potential partners, investors, and potential inquirers and tell them why a company matters. To be able to do that succinctly, in a short amount of time, with the right facts delivered, is important for any entrepreneur, or in fact any business person.

Peter Cowen: One thing that the contestants and applicants get are coaching sessions, to prepare them to give a two minute pitch to these venture capitalists and investors. If you're one of the ten finalists, you get intense coaching.