by Brian O’Connell
I’ve had something of a backwards career trajectory. I started out as an investor at a US venture capital fund before moving to the ‘other side of the table’, founding a company and raising venture financing. Whilst its been an atypical path, it has given me some unique insights into putting together a venture financing round for a startup. Here are five lessons I’ve learned:
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Focus on the product, not the pitch
At times, working as a venture capitalist can feel a little like an extended episode of The X Factor. You’re taking meeting after meeting with founders that are big on ideas, but low on traction or basic market validation. But just like in Simon Cowell’s world, it’s usually the companies that have spent thousands of hours perfecting their product (not strategizing about how to get on TV) that ultimately win out.
It’s now cheap and easy to ship a product and get it in front of large numbers of people. Prototypes that might have cost millions five to ten years ago, can now be built for a couple of hundred dollars thanks to services like AWS. Therefore it is generally inexcusable to arrive at any fundraising meeting without some level of functioning product and the associated customer feedback. Focus on building something that people want and the pitch will write itself.
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Out-network the opposition
Okay, so you’ve built a product, got some customer validation and now it’s time to schedule that all important investor meeting. But most top investors receive hundreds of unsolicited emails every day. So how do you ensure that yours doesn’t feel the wrath of the archive button?
The best way is to make sure that you are not reaching out ‘cold’. Most VCs will only review business plans forwarded to them from somebody within their personal network. Even then, all introductions are not created equal. The best person to make an introduction is a current or past portfolio company such as somebody that has made the investor money before, or is in the process of doing so. Luckily, in the tech community, there is a culture of helping one another, so most startup CEOs will be surprisingly receptive to a concise email asking for help with an intro.
In any case, avoid “networking events” at all costs. Most of the people that matter are usually too busy to attend, and the weak ties you make after four hours of mindless small talk rarely amount to anything.
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Get on the right side of trends
The next Facebook will not be a social network, the next Google won’t be a search engine and the next Amazon will not be an online store. There are undoubtedly still opportunities in social, search and ecommerce, but if you are truly set on building another “unicorn”, you’d be advised to look further afield.
Before we wrote a single line of code for my company, FirstLine, we spent a significant amount of time thinking about where the next national brands would be built. We eventually decided to focus on digital health, as healthcare spending alone comprises almost one fifth of the US economy. And, with the implementation of the Affordable Care Act (sometimes called “Obamacare”), the already creaking system (in the US) is going to come under even more pressure.
Investors think in similar terms and are actively looking for the sectors that will give birth to the Twitters of the next century. Health, education and energy are some obvious ones, but there are many others.
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Never ask anyone to sign a non-disclosure agreement
First of all, this request will almost always be flatly denied, if not laughed at. There are seven billion people on the planet and a larger proportion than ever before are starting companies. This means that however crazy or insightful you think your idea is, that chances are that somebody else is already working on it.
When I worked in venture capital, I probably met with 20 new companies every week. As a result, it is rare for me to come upon an idea that isn’t at least close to something I’ve seen previously.
By attempting to keep your idea unnecessarily secret, not only are you reducing your potential pool of investors, you are also missing out on the opportunity for feedback (as many investors will have seen other founders fail with similar ideas, and could offer some valuable insights into your market).
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Be lucky, and get the timing right
While it is true that most businesses succeed because of a monumental amount of hard work, and not because of luck, you do need certain external events to go your way.
After the 2008 financial crisis, the capital markets completely dried up and many fantastic businesses shut down because they weren’t able to access capital, not because of any fundamental flaw in their business models.
Right now, the early stage investment market is buoyant, but there are many who predict that ‘winter is coming’. If it does arrive, spending a couple of years on the sidelines might not be the worst course of action.