Venture capital investor SECRETS EXPOSED!

Recently WayAboveDeck.com writer Deckster Jobs (likely not his birth-name) sat down with a prominent venture capital investor, boasting a long list of successes to his credit. However, those successes won’t be named here. Before you take a hatchet to your screen, that’s because the agreement for this interview to go ahead was complete anonymity. Why be so anonymous, might you ask? Simple. Because we wanted to attain a level of transparency and honestly about what an investor is REALLY looking for from an entrepreneur, the business they are pitching and the pitch deck or presentation that they use to do it with. Our anonymity strategy, along with the interview that came from it, didn’t disappoint. Enjoy!

Interviewer:  So, what's a quick overview of your current investment strategy? What are the kinds of investments you often look at?

Investor:  An interesting mix of investments from project investments that have a very short money in and money out component, which are done in the form of an SPV (special purpose vehicle) - typically, around pieces of content. Then through to the complete opposite, which is taking an equity stake in a business and working with that business to grow its value over a four-to-five-year period.

Interviewer: Interesting. We only ever really hear about the first of those two types of investments. Can you give me an example of one of the shorter term investments, without naming the business obviously.

Investor: One would be a piece of content which is a food reality show - a well-known piece of food IP. We created an SPV (special purpose vehicle), which we then used our own capital from the investment fund balance sheet to acquire the rights and franchise, and then to fund the production of the content. We also purchased airtime on a leading broadcaster in the country, to put that piece of content on air and in-front of consumers.

From a risk perspective, it's an incredibly risky investment, because you're not only relying on the piece of content being well produced, but you also need it to rate well on television. If the company's content rates well, the value of the investment, and the value of the real estate on the broadcaster increases and therefore the commercial return is larger. Conversely, the TV network is within their rights to cancel the show after two or three episodes, if nobody watches it. If that happens and you've made a significant investment into the production of 13 episodes, it means you've got a serious hole. However, it's very lucrative when it goes well. And luckily, this one did go well. So, that's an example of short-term investment – which many investors rarely talk about, and entrepreneurs often don’t even consider as an option. For this, the period of time that the money was off our investment balance sheet was only about 15 weeks.

Interviewer: So, it was ‘off the balance sheet’ meaning that it was profitable within only 15 weeks? How did that work?

Investor: The start of production to the receiving of capital from sponsors and the broadcaster was only 15 weeks, yes.

Interviewer: Crazy. Yeah, I think most people only consider much longer-term investor capital deployment – almost like a marriage – so it’s good to hear about another type of deal. And how many pitch decks do you see a year and why that many?

Investor: We have an investment thesis centred around being very, very specific about the areas that we invest into. And those areas are media, leisure and consumer goods. So we don't look at agriculture. We don't look at big tech. We don't look at medical. We look specifically at media, leisure and consumer goods. For that reason, quite a lot of the businesses who we're talking to are individuals who have been in a large corporation and want to launch something themselves. They know the industry and have great experience but have spotted a gap. Because of this, it's often very cloak and dagger with the number of people who they're talking to. That's called a ‘private off market deal’, which are the deals that our investors and I get the most excited about. They’re typically very early-stage businesses. These are centred very much around who the founder is, what the business model is, and what the business is addressing that makes sense of why the business is going to exist. We see around 2000 decks per year, and those decks vary greatly in quality.

Interviewer: Wow - that’s a lot of decks. OK, seeing as you set me up so flawlessly… how important is a good pitch deck to an investor?

Investor: (Chuckles) Nice transition. I think it's very important because they can often form milestones or KPI’s (key performance indicators) which a term sheet (investment agreement) is created against. If the deck states “we will do X”, then ‘X’ will likely become a key component of our investment agreement. So, if the founder is very clear on the milestones that they want to achieve and the capital that they require to do it with, they're often far more likely to raise investment from someone like me. This is something that's very, very important for your readers to understand! This also means that the founder is in control versus the investor being in control. If we agree terms on the entrepreneurs’ set milestones, simply put, if the entrepreneur has been realistic with their ability to achieve them and with our money, they do so, there is minimal chance of us needing to ‘ask serious questions’ later on. If a pitch deck is well presented and extremely clear on what the investment will help the business to achieve – as long as those milestones are actually achievable – you’re always off to a really great start.

Interviewer: How do you find your next potential investment opportunities? Are there any hard and fast rules, and is there one type of approach that you get more than others?

Investor: We rely hugely on personal recommendations. And that tends to be because we like private off market deals. These recommendations, when parties engage with each other and meet up one or more times, are often what happens ahead of any official pitch meeting. And often the meeting or meetings that happen provide a framework for the ‘real’ discussions later, once each side begins to clearly understand what the other really wants to achieve. We're very much recommendation based on the left-hand side; on the right hand side, we're also about seeing not where the market is, but where market is going. So, when a founder perfectly articulates their own vision for the market and how their business fits into the future of that market, it gets our interest instantly. This is actually something where we will actively hunt for those types of founders, and then look for an opportunity to work together – even if it’s not the original business that they pitched.

Interviewer: Interesting. So, you’re saying that sometimes having a great vision for the future of a certain market or sector can get you further than having a great business plan?

Investor: Yes and no. What I’m saying is that if your vision for where a certain market is going and also, how to place your pitched business firmly in the future of that market – either by a novel twist or approach – you’ll get my attention quickly. Perfectly identifying the ‘problem’ is certainly important, but clearly articulating a solution to said problem is what really matters – even if the original business plan they pitched to achieve it needs a few tweaks.

Interviewer: Because we're going to go into a bit more detail on some of this stuff shortly, in the most concise way possible, what makes a difference between a good and a bad pitch for someone that isn’t a Steve Jobs style visionary?

Investor: Clarity.

Interviewer: I did say concise, I guess. Maybe a few more words? (laughs)

Investor: Clarity and being realistic. I think that we are no longer in a business valuation-based bubble. We’re returning far more to a sense of ‘business reality’, in my opinion. This is actually better for the less visionary, not so charismatic, founders of the world than it was, say, ten years ago. Because of that, businesses need to quickly articulate why they're taking on outside capital in the first place, what they're using the capital for, why their valuation is what it is, and what the clear, next steps are for growth. Style is a great way to hook someone, but substance, or being realistic, is what really gets things ‘over the line’ with me and other investors I know.

Interviewer: Excellent. What are the worst mistakes that either people or businesses make when they're pitching?

Investor: Assuming that the other party is going to say yes quickly.

Interviewer: That’s not what I was expecting. Please explain.

Investor: If you are looking for a real strategic investor, and you expect this ‘strategic’ investor to go through all of their different hurdles and due diligence within just one or two meetings, then they're likely not the right ‘strategic’ investor for you. It’s often just not like the business movies, where the investor hears an inspiring speech from the emotional founder and then gets a firm ‘yes’ within minutes. That may happen occasionally, but it is certainly not the norm. Thinking that it is just sets unrealistic expectations of how quickly things will go, in the mind of the entrepreneur. You really have to ‘date’ each other first (get to know each other), assuming it's a new set of parties talking to each other. And part of that dating is simply the passing of time - really seeing where the ‘value added’ is for both parties in a collaboration. The job of someone pitching is to pitch to an investor what they think the business needs financially and why. A good investors job is to both assess if what the entrepreneur projects is feasible or realistic, but also, to look out for any blind spots they might have - and then ways in which we can smooth out those bumps together. This is hard to fully ascertain from just one, single pitch meeting.

Interviewer: Great. Well, that’s…

Investor: (Interrupts) Actually, let me add something else to that please. I'd also say that another really big mistake people make in relation to time is waiting until the last minute to raise capital. That can come across as you having an unrealistic timeframe or that you're going to rush your decisions later on, but now with investors money in-hand. That's not saying that people shouldn't raise capital quickly from the right parties. But it's more a case of saying that if you're entering into a new relationship with a new party, you have to assume that not all marriages work – so you really have to get to know each other. That’s why I call it a ‘dating’ period. Try and find a way of working together in some form and quickly – even if it’s just arranging regular phone calls and updates. Keeping that process moving with momentum and actually seeing whether the investor is going to give you the ‘strategic time’ that they're promising is vital. As an entrepreneur, you should be dating them just as much as they are dating you!

Likewise, the investor will be trying to suss out from you, you know, are you the right fit to maybe work in their office, for example? The right fit to tap into their existing investor base, supply chain or their media distribution platforms. So, I think time is a really important factor that people just forget about. They often think, “I'm sitting with a venture capitalist - I'm going to close the deal in a week”. I would urge serious caution against that mindset.

Interviewer: With that in mind then, what's the average timeline between pitch and investment?

Investor: There really is no average timeline.

Interviewer: Okay, so if something was taking six months for a deal to get closed for example, would you think that was a bit on the long side?

Investor: It completely depends on what you're doing. Are you selling your company? Are you taking a minority investment? Are you looking for geographic growth, where the investor is actually going to bring you into a new market via their existing contacts and channels? It completely depends on what you want to have the investment for. Are you issuing new shares? Are you are you selling shares? Are you looking for growth capital? Are you looking to finance the manufacturing of a consumer product that you then sell? There absolutely is no one size fits all for this.

Interviewer: It sounds like the variables can be pretty endless then. No wonder you read 2000 decks a year! What should entrepreneurs have absolutely done or prepared for prior to a pitch, to make the process as smooth and timely as possible?

Investor: Be very clear why they're raising capital in the first place, at what valuation and then provide well thought-out or researched evidence to back up that valuation. That way, if someone in the room says, “I don't agree with your valuation, how did you arrive at that?”, the entrepreneur has a very clear answer. And the reason for that is because in an early-stage business, there's really no science to the valuation. Yes, you've got the discounted cash flow model, or you've got, relative market comparables that you may be able to point out. But the reality is that, certainly in the market we're experiencing at the moment, where the cost of borrowed money is high, you need a very clear proposition in order to defend what you're claiming the valuation is and why.

Interviewer: What traits make an entrepreneur either un-investable or too good to ignore?

Investor: I think this will not directly answer your question. Again, there is no one size fits all, but certainly the traits that we look for, are (pauses)… it's really about the founder. Does the investor believe that the founder has what it takes to bring people with them on the journey, whether that's a team or the community buying into their service or product - all the way up to their business partners and even other investors? As companies are made by and used by people, we want to know, can this entrepreneur really drive those people forward? So, we look for passion. We look for track record. We look for, ‘real’. We basically look for that USP (unique selling point) of the founder and not just the USP of the business that they are pitching.

Interviewer: Great sound bite, that. And is there anything that makes them completely un-investable?

Investor: I think somewhat, it comes back to how real and believable is it that this founder is going to be able to deliver on what they're pitching. If they’re saying, “I'm going to have a billion-dollar business in one year's time”, they will get some attention, sure. However, if they achieved $15,000 of revenue in year one, $35,000, in year two, and $100,000 in year three, and now they're saying that in 12 months’ time it's going to be a billion, then you've got to question their credibility. I think not being ‘realistic’, is an early red flag to an investor - because I think we've all seen a lot of (chuckles)… unrealistic return promises.

Interviewer: I’m sure you have. For those that get investment yet still fail - are there any common traits in those businesses?

Investor: It really depends on the state of the business that people are investing into. For us, as I said, we like early stage. So with early stage investments, you've got long hours, you've got risk associated with whether it's a product being developed, the reaction of the market to their product etc. There are so many more unknowns, than you have with say, an established business doing their first capital raise. And as we've seen with a lot of businesses in the past, a key trait for success is the ability for the founder (or founders) to realise that the current model isn’t working, be adaptable enough to pivot (change in direction), occasionally making some really difficult decisions in the process - yet still being able to bring people with them on those decisions. So we often see people fail because they're just not able to bring people with them on the new journey that they're now forced on, to successfully execute that much needed pivot. That’s why I mentioned earlier just how important that type of leadership talent in founders is and why I look for it during our ‘dating’ period.

Secondly, they can fail if they don't have enough capital to actually execute the required pivot and thus, they lose the backing of the investors. Thirdly, on hardware particularly, we see businesses where the product has some fundamental flaws with just 5% of the product. But that 5% is such a significant flaw that it leads to the business running out of money to drive the entire project or product launch forward. This can actually be quite a common reason for something failing, even if 95% of the product works exceptionally well.

Interviewer: Knowing what you know now, if you were pitching a business to investors yourself and wanted to ace the presentation stage, what would you make sure you focused on? What would you avoid? And do you have any idea of what kind of sector you might pitch in right now?

Investor: (Big chuckle)

Interviewer: Yeah, I’m flipping the script!

Investor: The area I would look at is actually the crosshair of our three sectors - media, leisure and consumer goods. So, I'd be looking at a property with an authentic story. Something that doesn’t need to buy media or much advertising, but that earns the right to be in the mind space of the consumer or target customer, perhaps through great in-house content. Secondly, it has both online and on-ground touch points too. I think post COVID, many people want physical engagement like live events for example, but they also still live their life on a mobile phone, so merging the two makes sense to me. That's what I would be looking to pitch personally but that’s not for everyone.

Interviewer: And if you wanted to ace the presentation stage, what would you absolutely make sure that you had in your presentation?

Investor: I would have a very clear articulation of how those three areas of media, consumer products, and the leisure angle all joined together. Too many people over-complicate their offering by throwing in areas that they ‘could’ or ‘would like to’ explore, and this lack of focus can be off-putting to investors. However, if you can succinctly articulate the obvious and achievable synergy of a multi-faceted approach like that, not only can the opportunity become more exciting to an investor but also, the person pitching it becomes far more credible too. And for me personally, one of the best ways to illustrate this would be with a video in a pitch deck, alongside a live demonstration of the product itself when the time comes.

Interviewer: Fantastic. And what would you avoid?

Investor: I would avoid talking too much about the financials until someone's actually interested in the product itself. And if it was right at the beginning stages of the process, I’d also be asking what the investor is going to bring to the table to help grow this and who is in their existing network that can help with that too. Just because an investor has the money to invest, it doesn’t always mean that they are the right fit – especially if you are just going to spend that invested money on a team, which another investor might already have ‘in-house’ and give you access to. Sometimes entrepreneurs are so focused on just getting the money, that they overlook the importance of getting that money from the correct investor for them.

Interviewer: Fantastic. Any final words or last bits of advice?

Investor: Never take no for an answer. And if you've identified a strategic investor, make it very, very clear as to exactly why they are the perfect investor and partner for this project. They’ll occasionally appreciate your extensive research into them, just as much as your research into your own pitch deck. Then, really take the time to get to know them. As the old adage goes - only fools rush in.

Interviewer: Brilliant stuff. Thanks so much for your time!