Getting financed by a VC is a marriage. When it doesn’t work out it’s a divorce.
Josh Kopelman writes a great post on entrepreneurs pitching him. He talks about Founder Credibility. It works the other way as well – VC Credibility. Both parties (the founder and VC) are looking for partnership – founder: money/business partner and VC: investment partner so chemistry is key.
If the VC doesn’t understand or believe in the founders vision then it will never work out. For VCs they do this all the time- they take hundreds of meeting until they find that chemistry.
Here is Josh’s post.
This past week I had two distinctly different meetings with entrepreneurs. They both were successful serial entrepreneurs. Both were exceptionally smart. Both had good ideas.
The first entrepreneur, however, thought that they were expected to know the answer to every question. There wasn’t a question I asked that he didn’t have a definitive answer to. He knew what their pricing model would be. He knew why Google would never compete with them. He knew what their consumer churn would be three years out (despite the fact that they hadn’t launched yet). Whenever I tried to discuss the different risks in the business, he told me why they didn’t exist.
The second entrepreneur, had a different approach. He definitively stated answers when he had them, but when he didn’t know he said so. When asked about his pricing model, he said “well, we’re considering a few different options depending on the outcome of some tests we’re running…” When asked about cost of customer acquisition, he said “well we don’t know what our numbers will be…but here’s our model based on other comparable companies.” When asked about risks, he identified several — and then we discussed how to reduce/eliminate them.
I’ve come to believe that a key investment criteria is founder credibility. And, I think the second entrepreneur was far more credible. No one expects a pre-launch company to have all the answers. (In fact, we get scared if you think you have them). As I’ve previously discussed, rather than have an entrepreneur sell me on why they are 100% correct, I’d much rather understand how they are attacking the different risks facing the business.
And, by the way, the same applies for venture capitalists. I often feel that during company pitches — and board of directors meetings — we’re expected to have an immediate opinion. Should we double our marketing budget? Should I hire this person? Will this strategy work? While it’s OK to offer opinions and thoughts, I think it is also appropriate to acknowledge uncertainty.
One point in his post that is worth highlighting is how the second enterpreneur views the market. He looks at the market as a fluid dynamic – “running tests” with “base assumptions”. Many entrepreneurs have been scorned for this view (myself included) in being “not focused”. I hate that word. All early stage entrepreneurs are ‘very focused’ on the fluid market how to enter and plans based upon certain market conditions or scenarios. Key is the focus on the possible scenarios – for that there is no one answer.
Josh’s last point is important: VC Credibility – When VCs sit on 9 boards and shows up once a qtr for board meetings with ‘the answers’ then their credibility is on the line.
Early stage is about entering the market with a narrow value proposition that has the opportunity to take advantage of a massive growth trend when in market. For this the entry strategy should be very clear and the answers to the so called ‘billion dollar’ revenue plan should be scenario based.