Ten Things That Can Make or Break a Deal

An entrepreneur's guide to pitching early-stage venture-capital firms

Why do only a small fraction of the business plans that are sent to venture capitalists get funded? Most would simply answer that there are too many deals chasing too few investment dollars. Venture capitalists will tell you that the real reason is that there are not enough "quality" deals.

The entrepreneur and venture capitalist often view the "quality" of a deal very differently. The inexperienced entrepreneur often makes the mistake of not realizing that the venture capitalist will judge the "quality" of his or her deal relative to other deals that the venture firm is considering. So the entrepreneur must be cognizant of the fact that raising money is not simply an exercise in selling yourself and your deal to win a scarce amount of venture capital. Rather, it is truly a competition against other startups to win the most "mind-share" of the venture capital investor. Entrepreneurs who are the most successful at raising venture capital financing understand this fundamental point and strategically market their deals based on this knowledge.

Taking a large and growing market opportunity as a given, this guide describes some of the other factors that an entrepreneur should consider when pitching an idea or early-stage company to a venture capital firm - the “ten things that can make or break a deal.”

1. Referrals - will you be on top of the pile or the bottom?

In any given year, a venture capitalist receives as many as 500 business plans - that's 42 plans per month or 10 plans per week. In addition to working on due diligence for new deals, the venture investor is often actively participating in the firm's existing portfolio companies - attending board meetings, recruiting and working with management. Given these other obligations, the venture investor is left with little time to thoroughly review business plans for new deals. However, a new deal that is accompanied by a referral from someone who has a relationship with the venture investor, such as a CEO or senior executive of an existing portfolio company, an attorney or even another venture capitalist, will get attention and will rise to the top.

2. Management, Management, Management - do you have the athletes?

“Location” is to real estate, as “management” is to start-ups. If you don't have or can’t attract the right management team, you'll never maximize the opportunity. Venture capitalists want to make sure that the team has the relevant experience and innate ability to execute on the plan and "turn-on-a-dime" if necessary to make changes or hard decisions in order to get the business on course. The start-up must have, or be able to recruit, the skill-sets necessary to achieve the milestones needed to justify a step-up in valuation at the next round of financing.

3. Sustainable Competitive Advantage - what about the 800-pound gorilla?

Surprisingly too many entrepreneurs direct their competitive focus solely at new entrants and not enough on the "old-economy" behemoths. But these companies usually have the cash, patent portfolios, research programs, distribution networks and relationships that can easily kill off any entrepreneurial dream. The days of "first-mover" as the sole competitive advantage are over - entrepreneurs need to build defensible and sustainable competitive barriers into their business strategy.

4. Business Model – if you don’t have “paying” customers, you don’t have a business!

So you have a great idea and a big market opportunity. Now the question is “how do you make money?” In order to make your financial plan “believable” in the eyes of a venture investor, you can do at least two things – compare your financials to that of a comparable public company in its early years (information that is usually readily available from SEC filings), and prove your pricing structure by demonstrating what end-users will pay and what distributors will charge by thoroughly understanding the value-chain and doing your research by talking with customers.

5. Momentum - are you giving them more reasons to say "yes"?

Don't stop executing while you're raising money. New customers/sales, partnership deals, reports by analysts on the company, etc. help validate the opportunity and build confidence in the management team. If you can make progress and good things happen during the fundraising process, you'll have a higher probability of closing a deal and closing it faster.

6. Recruiting - a measure of quality!

If really good people commit to joining a startup once it's funded, that's a good sign. If really good people join a startup before it's funded, that's a great sign. Anything short of that and the investor will have doubts about the quality of the deal and will be less inclined to invest. It is the entrepreneur's responsibility to build or convince the venture investor that he or she can build a team that can execute on the plan.

7. Executive Summary - your first and often only impression!

Of the partners making a decision on your deal, only one, your sponsor, usually reads the entire business plan. However, all of them will typically read the executive summary. The executive summary should be the entrepreneur's main sales document, while the rest of the business plan should only serve to support the material in the executive summary. A voluminous business plan is a sign to a venture investor that the entrepreneur is spending far too much time analyzing and not enough time executing.

8. Portfolio Fit - Babe Ruth, Ted Williams or both?

Some venture firms, like Babe Ruth, only want to hit home runs - create billion dollar companies - and will accept a lot of big strike-outs - high risk - in achieving a higher “slugging” percentage. Others, like Ted Williams, don’t mind hitting lots of doubles and triples - creating lots of solid $100+ million companies - achieving a higher batting average and on-base percentage. An entrepreneur has to figure out the partners' philosophy in this regard and determine if the deal is the right fit for the firm. The same analysis should apply to the type of deals a firm does. For example, don't send a biotech deal to a firm that only does information technology investments.

9. Partner Politics - are you dealing with a democracy or dictatorship?

Getting approval from one partner may or may not make the deal happen. Most venture firms have a prescribed formula for how deals are approved by the partnership. Some require unanimous consent by all partners, while others only require majority consent. On occasion, a partner may have funds available to invest under his or her sole discretion. Whatever the case, an entrepreneur should understand how an investment decision is made and play the politics accordingly.

10. Location - if it takes too long to get there, I'm not interested!

One well-known venture capitalist actually has this down to 30 minutes. In either case, there is good reason for this. In early-stage companies, where there's a lot of "company building" to be done, the venture investor is actively working with the management team and does not want to spend valuable time commuting. So, if you're an early-stage high-tech entrepreneur, heed the words of Willy Sutton and start your company in the Bay Area, Boston, Seattle or Austin - because "that's where the money is."

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© Peter N. Loukianoff, April 2001.
All rights reserved. The information contained herein has been obtained from sources believed to be reliable but is not necessarily complete, and its accuracy cannot be guaranteed. Any opinions, facts and figures expressed herein are subject to change without notice and should not be relied upon for financial or other material business decisions. This guide can be found on http://www.alloyventures.com. The author is a partner of Alloy Ventures, Inc., a venture capital firm in Palo Alto, California.