As an entrepreneur, one of the most mystifying elements of seeking funding is pitching to venture capitalists. Entrepreneurs raising funds for the first time often find themselves courting the wrong investors or presenting themselves incorrectly because they’re not sure what venture capitalists or angel investors want.
That’s why entrepreneur Richard Harris, who has successfully raised VC funding, wants to demystify the fund raising process.
On March 29, Harris gave a talk at the Scarlet Startups Meetup on the Rutgers University campus entitled “The Secrets of Raising Venture Capital.” As the CEO and co-founder of New York based Intent Media, which helps large-scale commerce properties turn into search engines, he has plenty of experience seeking – and getting – venture capital funding. Earlier in his career, he worked at Boston Consulting Group and also was the SVP of Strategy and Distribution at Travelocity, helping it grow to over $2 billion in revenue during his tenure. Needless to say, he knows the game fairly well.
Harris started by giving a brief overview of the venture capital landscape, noting that it is comprised of mostly small firms with anywhere from 8-20 partners (usually middle-aged white men) managing anywhere between $100 million to $15 billion. They’re mostly concentrated in New York City, San Francisco or Boston.
He then dove right into how venture capitalists view an investment opportunity, specifically the allure of investing in entrepreneurs who have a great vision.
“The classic phrase is ‘Buy low, sell high,’” said Harris. “But the interesting thing about venture capitalists is they don’t really care that much about buying low. If you’re a big company, they care about selling high.”
For instance, a small investment in a large company simply isn’t worth the time and energy considering the small returns it will bring back. But a startup that has the potential to become a very large company will bring a much greater return.
“Finding the right company is super important for venture capitalists,” said Harris. “The negotiation is much less important than the vision of what the company can be.”
In order to reach that scale, Harris said, the founding entrepreneurs need great vision. More often than not, their investment portfolio comes down to this: around a third are absolute disasters and they lose the entire investment, a third return double or triple on the investment, and 2-5 percent are home runs – companies that explode in popularity, such as Uber or Airbnb. Investors who came upon those two startups early on could see that the founders had a great vision, and later earned a very high return on their investment.
He then detailed the three most important things that venture capitalists look for in a company.
The most important thing: people.
“When you pitch an idea, that idea will always change,” said Harris. “A good venture capitalist knows that the pitch he sees will one day not be the company he’s investing in. So you can’t invest in the idea, invest in the people that can best handle the transition.”
To that point, he says networking is absolutely crucial. With his second company, Harris had a firm invested in his group before they even had an idea.
“That’s a dream scenario,” he said.
The second most important thing is the idea; it has to be something palpable. Entrepreneurs need to find a problem or an inefficiency – something missing. If they can pinpoint a problem, articulate a solution and have a team behind it, that’s very compelling to a VC firm.
The third most important thing is something many young entrepreneurs don’t always have an exact definition of: scalability.
Harris defines it as “being able to create more and more outputs without increasing inputs at the same rate.” As a startup, if you need increasing amounts of input, that grows more and more risky for investors. Companies like Ebay and Uber, which don’t need to spend much output to hire a larger labor force, are a venture capitalist’s dream.
Harris then went onto describe the world of the venture capitalist, describing it as a ‘bubble’ and ‘echo chamber’ in which they reside. He alluded to a bar at the end of Sand Hill Road in Silicon Valley, where the entrepreneurs and investors meet and connect.
“All the venture capital firms know and compete with each other,” he said. “They all golf together, get drinks together…and they’re all colluding to figure out the hot deal or trend.”
So how can you break in? Networking, says Harris. Unfortunately, there’s no easy way to network besides being fearless and simply getting out there. The best advice he has is to be authentic and start early.
“If your business is about to run out of money and you start trying to raise money, they can smell that,” said Harris. “And as people smell that on you, it’s harder to build a network.”
On the other hand, good networking starts when you’re passionate about an idea and meet with other passionate people with no ulterior motive. Even if nothing immediately comes from that connection, they can always put you in touch with people further down the line.
Finally, Harris ended his talk with some practical pitching advice: documenting your idea no longer entails a complicated business plan. Instead, said Harris, follow the template from venture capital firm Sequoia and create a simple, 15-slide presentation that outlines your venture, the problem you are solving, and why it’s a compelling investment opportunity.
In the end, it’s about knowing your audience. Harris’ talk helped entrepreneurs in search of funding understand how to meet venture capitalists, size them up, and then how best to communicate with them — making sure they’re well-prepared when faced with that all-important opportunity of being able to pitch directly to one of them.