This is among the top 3 most

Ken Ken — Wed, 19 Mar 2008 14:59:27 -0700

This is among the top 3 most common attributes I see in rookie-- and even experienced-- entrepreneurs who pitch.

It's clear why it happens: the entrep is always deeply impassioned in the subject matter of their baby and it's therefore all-too-easy to run away w/ verbosity on the subject.

The winning entrep learns to control this feeling, separate out the emotion while not losing the passion, and strategically separate themselves from how deeply-involved they are to make a pitch that even a caveman-- err, layman-- can understand.

-Ken
P.S.: The Standard is back! Woohoo!

Keep it simple, because VCs are stupid

Steve Brotman — Tue, 18 Mar 2008 08:58:03 -0700

One of the toughest experiences for a venture capitalist is watching an entrepreneur present a potentially great idea -- only to see the entrepreneur blow it by making the pitch far more complicated than necessary. It's like hearing fingernails on a chalkboard. It's that bad, and here's why:

First of all, complicated pitches make the potential investor feel stupid.

Entrepreneurs sometimes err on the side of complexity. There are a million ways to be complex. Some entrepreneurs insist on showing you a detailed demonstration of the product. Others will launch into arcane science or algorithms that only an MIT doctoral candidate could understand. There is a subtle psychology here that could be plumbed, but showing someone you are smarter by confusion isn't a productive strategy. Fact is, most investors will likely avoid investing in something they don't clearly understand. VCs have bosses, their partners and investors in their fund, and if VCs can't explain these businesses to them, they are going to look silly and get fired -- even though the investments may work out in the long term.

But here's something else to consider: VC investors are actually stupid.

OK, what I really mean is that a VC will *never* be as smart about an entrepreneur's specific business as the entrepreneur is. While the investor might have read the entrepreneur's materials and looked at the company website, they can never truly understand the opportunity as well as the entrepreneur does. Investors need a very simple picture drawn for them. It's easy for an entrepreneur to get nervous, over-prepare, and perhaps put an investor on a high pedestal, particularly those investors who have experienced earlier investment successes. However, the best pitches are simple, direct and to the point, and have a very sharp logic to them.

Allow me to illustrate with an example from our fund's portfolio. Medidata is a company you probably have never heard about. But when I met the founders, Tarek Sherif, Glen de Vries and Edward Ikeguchi in 2002, they succinctly described Medidata's main value proposition: The Medidata service shortens the pharmaceutical drug discovery process by a year. For pharmaceutical companies, every day saved is worth between $1 million and $8 million dollars in revenues. 10,000 clinical trials are done every year, and less than 3% of trials use this special process. Medidata charges a few hundred thousand dollars per year for the service per trial. The opportunity seemed clear: Medidata had a huge potential market, and the product and service were primed to generate a ton of value for Medidata's end customers, the pharmaceutical and biotech companies.

Did I want to know how the service worked? Sure I did. I wanted to know right away how they do it, how many competitors they have, discuss the barriers to entry, see a demo, talk to customers, etc. They didn't talk-- at first--about EDC protocols, how many patents they had, or FDA approvals. They didn't delve into how they segment the market with fancy marketing position charts, or meticulously go through their product page by page.

But they "had me at Hello" because they discussed right up front their value proposition in simple, direct terms I could understand. It may seem counterintuitive, but if you are an entrepreneur pitching a VC, the more the target understands, the smarter he or she thinks the entrepreneur is. It's true about good writing, and same is true for investment pitches.

Later, when the hook is deeply set, that's when to pull out the charts and bring out the complicated concepts. But for the first 20 minutes of a presentation, the entrepreneur's goal should be to quickly explain the value proposition, the problem their company solves, the addressable market opportunity size, and how the product or service is better, be it cheaper, faster or higher quality. Simply put, nothing excites an investor like understanding the amount of value released and the value that can be captured by the company.

Nevertheless, it's amazing to me how often entrepreneurs leave out these basic elements.

When talking with an investor, an entrepreneur needs to explain fairly quickly and directly, how and why he or she is going to mint a ton of money. While an investor does care about changing the world, the entrepreneur's pitch still needs to connect the dots and explain why and how this venture will make money. There, I said it: Moe-ney, Moe-ney, Moe-ney, Moe-ney! Moe-ney!

Of course, there are exceptions. Some VCs may indeed prefer a more complicated story and might actually be OK with a lack of clarity in explanations about the business model, or the market opportunity or the value proposition.

Now, let's say it's your startup, and a VC funds you and your complicated story. The investors were smart, and did their homework, and figured out what you were trying to say.

Getting the money from them was actually the easy part. Now, you have to go sell customers a complicated story. You have to recruit managers with a complicated story. You have to convince alliance partners to partner with you with a complicated story. Or, God forbid, you have to raise another round of capital with a complex story.

Then -- if you get that far -- you want to sell your company. You are going to try to go public with a complex story? Convince a huge corporation, a management team of up to a dozen people, a board of maybe another dozen people with diverse backgrounds, to buy a complex story? That's going to be a tough sell. The bottom line is that complexity is a kind of tax on entrepreneurial effort, making it far harder for early-stage companies to do just about anything.

And that's probably the most important reason to keep your "investor" pitch simple. Keeping it simple is the hallmark of entrepreneurial success.

Related news, commentary, and predictions:

Prediction: Google acquires Plaxo
Prediction: The USF VC Confidence Index will rise to 3.70 or greater in Q1 2008
Mark Cannice: The impact of Bear Stearns' collapse on entrepreneurs
Matt Marshall: Even as Bebo big sale happens, lofty valuations will elude other start-ups
News: Dow Jones: Web 2.0 investments peaking?
Mark Henricks: Reality check: Are business plans necessary?
Peter Rip: Death Valley: When Ventures Fail

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This is among the top 3 most

Keep it simple, because VCs are stupid