As a seed stage investor I’m often looking at an incomplete picture when trying to assess an opportunity. Inevitably there will be a question where the data I’m seeking isn’t something the company has yet calculated/tested, or haven’t thought to research or maybe even not as important to their business as I’m suggesting it might be. For founders, these blank spaces are great moments to stray from your standard pitch and really connect with an investor. They’re also pitfalls where I’ve seen some entrepreneurs mess up and hurt their credibility. So here are some ideas of what to tell VCs when you’re missing the data they want to see:
- Don’t Bullshit: Good investors usually succeed because they’re able to read people well. Also, since they’ve seen so many pitches, they have lots of data to call you on your bluff. For example, let’s say you’ve got a SMB SaaS business. I might ask, what does your customer acquisition costs look like compared to [Market Leader]. You probably know your acquisition costs to date but if you don’t know the competitor’s #s, don’t try to stammer out some random guess. What’s a reasonable response? Engage me and drive towards getting the data. “You know, I’ve heard a few different numbers but have had a really hard time confirming. What have you heard or can you suggest any people who might be able to check the deck we’ve collected?”
- “I’ll Get Back to You”: If you haven’t run the test, don’t have the data handy or need to crunch the logs in order to tease out a piece of information, that’s totally cool. Obviously if it’s a primary KPI I’d love for it to be top of mind, but if it’s not, don’t waste 10 minutes looking through your inbox for the email with the stat or open the command line to check when the cron job is running next. Just tell me you’ll get back to me and then do so in a timely manner with some context.
- Educate Me: There are certainly many things you know about your business that I don’t. If I’m asking for a piece of information which isn’t very central to the way you think about your company or I could be asking a better question, I’d love to learn why. Excellent chance to help me get inside of your mind.
- Lay Out The Framework: At a high level you can probably reduce your business to a formula. If I’m asking about X, just show me where X fits into your overall formula and we can go from there. For example, there was a recent pitch where, during a very successful alpha, 100% of customer acquisition came from word of mouth marketing. The company’s cost of customer acquisition was currently zero! That’s awesome but when I asked about these costs as they scaled their business, the founders insisted their product was so good that this cost would remain at zero because that’s what the data has shown them so far. I disagreed. Now I could be wrong – and if I was, likely passed on an amazing opportunity – but what I would have loved to hear: “The industry average is $X per customer, so we’re obviously way below that. We think that at scale we’ll be able to maintain an advantage so our model has us at 1/2 $X over the next two years but we ran a sensitivity analysis and even if we end up spending $X as well, our margins are still competitive and we can still hit our 2014 milestones with a few months of runway left before raising the A round.”
Investors, entrepreneurs – does this ring true for you?