Few people know what venture capitalists are really thinking during pitch sessions, but these 6 tactics help get start-ups to billion-dollar status.
Venture capitalist Emily Melton still remembers the day Jacob Sattelmair, founder of Wellframe, showed up with his pitch to persuade her firm, Draper Fisher Jurvetson, to invest in his start-up.
"He looked like he had been in a bar fight," Melton said. "His eye had been sealed shut."
"Don't worry. It's not contagious," Sattelmair told her when he saw her expression, explaining that he had an eye infection.
Melton had already met with Sattlemair and introduced him to a couple of partners at the Silicon Valley firm, known for backing start-ups such as Skype, Twitter and Tesla. Now it was time for Sattelmair to pitch the entire partnership in a meeting that would make or break his deal. He went on to deliver a killer pitch for his tech platform, which helps health organizations manage their at-risk population.
"He had passion and vision," Melton said. "He could hold the room-with just one eye."
After that meeting in July 2014, Draper Fisher Jurvetson went on to lead an $8.5 million funding round in Wellframe in September.
Venture capitalists often hear hundreds of pitches a year. But only a small number of entrepreneurs like Sattlemair win funding from them. The 4,354 VC deals that took place nationwide in 2014 may seem like a large number, but not compared to the millions of small businesses that exist in the U.S. And even as the number of U.S. cities where $100-million-plus deals are taking place has increased, nearly half of the 2014 deals took place in hot spots such as San Francisco (876), San Jose (417), Boston (371) and New York City (395), according to the MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association (NVCA).
So what separates entrepreneurs who succeed from those whose pitches fizzle? Few people are privy to what venture capitalists are really thinking during closed-door pitching sessions to find the next billion-dollar deal. "It's such a secretive thing," said Lakshmi Balachandra, an assistant professor at Babson College and former venture capitalist who has conducted research on pitching.
That said, some entrepreneurs are figuring it out. Here are six tips on how to join the elite club of those who win funding.
Generally speaking, Balachandra's research shows that successful pitches must address the two M's-the market and the management-to succeed. Smart pitches, she said, answer questions like: What does a market look like? What position do you have in the market? What is the competition? As for the second M, great pitches make it immediately clear what investors should find interesting about the management team.
But there's more to the complex alchemy of pitching. The best pitchmen-and women-also tend to be a bit clairvoyant in reading the minds of VCs. "The investor has this running internal dialogue," said Michael Greeley, general partner at Norwalk, Connecticut-based Foundation Medical Partners, who has also served on the board of the NVCA. "How am I going to make money? How will this have an impact or social benefit? How will I not be embarrassed? Great presenters are answering these questions in the conversation," he explained.
To ace a pitch, by all accounts, it is essential to build trust with investors right out of the starting gate. "It's really important to establish that intimacy quickly," Greeley said. "The listener makes the decision in the first five to 10 minutes. It's usually around how compelling the individual is."
Balachandra has found that mentioning a shared alma mater or networking group often works well. Some entrepreneurs customize their pitches in clever ways.
Venture capitalist Dave McLurg, a partner and board member at Lucro, a global business advisory firm based in Scottsdale, Arizona, still hasn't forgotten a pitch he received in 1996 by Tax Strategy Software, a firm involved in tax prep. In his slide deck, the founder had obtained a picture of McLurg and his family. It appeared on the left side of one slide. On the right side was the image of a building.
"So, Dave, what I do is quite simple," the founder explained. "I'm sure you would agree you're going to die. What we do is ensure your money goes to the left as opposed to the right. The right is the IRS."
McLurg made a deal. "I remember that example as being key," he said. The start-up was later acquired by a bigger firm.
Raising capital is serious business, but Balachandra's research found that successful fundraisers often show their sense of humor in their presentations and often smile or laugh. Eric Trappen, a private investor in Phoenix, was surprised when the creator of a sophisticated data-security system showed up at his office wearing cookie-monster slippers last year.
"He was extremely eccentric, which was counterintuitive to the sophistication of the system he developed," said Trappen. "There was an interesting dichotomy going back and forth." Trappen was intrigued-and decided to invest.
If you really want to get funded, ditch the boring slide deck and come up with a quick demo that entertains your audience. Greeley still remembers the pitch he heard about 12 years ago from Robert Langer, a "rock star" scientist and entrepreneur at Massachusetts Institute of Technology. Langer was pitching MicroCHIPS, which had developed a technology to deliver pharmaceutical via microchips implanted in the body. As part of his presentation, Langer brought one of the chips to show investors.
"It was so futuristic-but he could hand it to me," recalled Greeley, who was affiliated with Flybridge Capital Partners, based in Boston and New York, at the time. "You could envision putting one of these in your body and changing the trajectory of our health care. He told the story in such a captivating way, I felt like I was sitting around the campfire."
Flybridge decided to invest in the start-up, which is now called Microchips Biotech and has received funding from the Bill & Melinda Gates Foundation.
At FeedMusic, a young San Francisco start-up McLurg advises, he was wowed, in part, by an unusual organizational chart that founder Mitch Ahlenius included in his presentation. Its cell-like design depicts the company-which helps artists and others make money from digital content they create-as a sort of live organism. "Even something as boring as an org chart, he did in a visual way," McLurg said.
Investors cut entrepreneurs some slack for getting nervous when pitching but find it hard to get past someone who seems frenetic, Balachandra found. Investors say they also start to worry when someone seems extraordinarily nervous or incapable of deviating from a script.
"One CEO came in and read from a script, which was horrifying-terribly embarrassing," said Greeley. "Another guy came in last week. I said, `Tell me about your CFO.' He couldn't remember the guy's last name."
In another pitch that Greeley found painful to witness, an entrepreneur began perspiring so profusely it was dripping onto the table. "One of my partners couldn't get comfortable with the fact he was sweating onto the table, so we didn't invest," Greeley said. But in an ironic twist, the entrepreneur went on to build a billion-dollar company.
Greeley advises entrepreneurs who get stage fright to arrange an initial breakfast meeting with one or two partners before presenting to the whole team. "Do things that create a connection with individuals who will be in the room, so when you come in and do a group presentation, you'll already know them," he said.
Phil Myers, managing director of Phoenix, Arizona-based Performance Edge Partners, advises entrepreneurs to avoid the "bozo no-nos" so they don't lose their audience instantly. Among the worst, he said, are "describing themselves as the next Google and talking about how there is this big market out there and if they just get X percentage of it, we'll be rich."
Avoid any hint that you have delusions of grandeur, Myers advised. If you truly want to make a deal, tell a colorful story about how you identified an untapped need in the marketplace-ideally because you are intimately familiar with it through experience in the industry-and show exactly how you'll address it. "People who are trying to solve a problem are just different," he said. "Every piece of their energy is devoted to 'How do I do this better?'"
-By Elaine Pofeldt, special to CNBC.com