Don’t waste your time with unqualified VCs or pitchfests

Jeff Donahue is a good friend and battle-scarred veteran of venture-backed and private equity-backed companies. He has raised over $275M of funding for early and later stage startups and has been CFO of 10 emerging growth businesses. He's worked across the table from leading investors like GRP (now Upfront Ventures), Invesco, ComVentures (now Fuse Capital), Allegis CapitalAlta-BerkeleyInvisionSteamboat Ventures and many more. I'm thrilled that he's offered to write a Venture Financing Series. Without further ado, here's episode three. You can read episode one and two here.

“Qualification” is a powerful and purposeful word aligned with living a life of least resistance. Consciously or unconsciously, we tend to qualify just about every human being we seek to determine who best can heal our bodies, repair our appliances, represent us in court, style our hair, sell us a car, remodel our homes and myriad other undertakings. We qualify virtually all our activities to determine which provide us the greatest satisfaction, from where to live, to where to dine, to where to shop, to what movie to see, to where to go and what to do on vacation, and so forth.

Qualifying VCs you want to pitch your start-up to is no different. Do not waste your time pitching to unqualified VCs. You want to pitch to VCs who know your space and like it, who have invested successfully in it or are committed to doing so, and who bring deep Rolodexes in it particularly in partnerships and domain expertise. By not having a qualified VC, you will forfeit the synergies that a truly qualified VC brings to the table. Sometimes, money is not all green…

If you secure funding from a relatively unqualified VC – which certainly is better than no funding at all – you will be magnifying the risk of future conflict over key elements of strategy and execution. This is because in 6-12 months your start-up is highly likely to be a great deal different from the business plan you originally teed-up and got funded. Twenty to thirty years ago, startups approached VCs with 100-200 page business plans in hand. Today, an elevator pitch, executive summary and PowerPoint deck is all you need. The process evolved as people realized that those business plans had little utility as such an early stage.

At the same time, there is no more satisfying position to be in than having VCs compete to invest in your company. This will happen only if your investment thesis is pervasively compelling (check out my two prior posts for tips). If you have VCs competing to invest, you will be on the path to pre-determining a successful funding through leverage in the pricing, dilution, investor preferences, calendar to closing and just about everything else that goes into a term sheet.

If you do get multiple VCs competing to invest in your company, go with the biggest and the best. It is that simple. But, do your homework on the shortlist. There are VCs that have good reputations in working with their portfolio companies and there are VCs that have bad ones. As CEO, you will be busy beyond your wildest imagination running a company. You do not need to be busy managing your investors.  I will have more to say about this in a future guest post.

Nothing works like personal introductions from someone who knows the VCs you want to pitch to. Cold-calling and submitting business plans through VC websites are very low-probability methods of getting invited to pitch. Use your networks (develop them if you do not have them), including service providers such as law firms and accounting firms to get introductions. Mark Suster of Upfront Ventures and author of the splendid Both Sides of the Table blog, has written extensively about getting in contact with VCs. [Mark was on the Board of EMN8 (now Tillster) while I was CFO there, and EMN8 was the only 2010 Red Herring North America 100 and Red Herring Global 100 company in Southern California.] Instead of wasting your time with unqualified VCs, get out there and create contacts with qualified ones.

Regarding pitchfests and business plan competitions, I believe the pitchfest process is great for refining a pitch. Unfortunately, that’s where the value typically stops accruing. This principally is because the vast majority of pitchfest and business plan competition panelists are not qualified (including having been successful) in your space. I have seen this across the entrepreneurial spectrum in San Diego from pitchfests at the incubation/acceleration stage to pitchfests hosted by service providers, by professional organizations (e.g. San Diego Software Industry Council – SDSIC), by affinity groups (e.g. the MIT Enterprise Forum), and by VC organizations themselves (e.g. the San Diego Venture Group - SDVG). Pitching to an unqualified panel is just as big a waste of time as pitching to unqualified VCs, and it really pushes the needle into the “you won’t get a prize” zone. If you embrace my mantra of pre-determining outcomes, why bother pitching to an unqualified panel when you’d be better off pitching to a qualified investors to whom you have secured introductions and who are truly interested in listening to you?

This extends deeper because the pitchfest sponsors typically have a screening process whereby an array of applications gets shortlisted to a handful of finalists who will participate in the pitchfest. If those screening committees are not thoroughly populated with qualified individuals in your space, the problem is compounded.

I have attended many pitchfests in San Diego, including some very recent ones, where the panels were embarrassingly unqualified. I truly felt sorry for many of the CEOs who were competing, and I felt that the panelists should have recused themselves from opining on companies, products, technologies, market opportunities and the like that they really had no qualifications in.

MESSAGE TO PITCHFEST/BUSINESS PLAN COMPETITION SPONSORS: please make sure your screening committees and your pitchfest panels are populated with deeply qualified individuals in each of the presenting companies’ domains, and please convey this to your applicants. It is one way of really being a service to the entrepreneurial community.  

With unqualified panelists, typically it is the sizzle rather than the steak that wins the pitchfest prize. If you choose to go the pitchfest/business plan competition route, beef up your sizzle by presenting in a compelling/charismatic manner and by having a media-rich presentation. And, remember that pitchfest preparations tend to be very time consuming. Time spent preparing for a pitchfest is time not spent developing and selling your product and finding qualified investors.

As a final word of caution, if your pitch bombs, you likely have encumbered your profile in the local funding community. [“Encumbered” could be a euphemism for “poisoned the well.”] The word spreads fast around town among angel investors and VCs.  I have heard both say, “Hey, that company didn’t make it through the pitchfest. Why should I want to talk to them?”