About Pitching Your Startup and Negotiating Term Sheets[i],
Author: Brian Laung Aoaeh
A heavier than expected workload an a number of fronts has restrained my ability to keep up with the reading that I have to do in order to write a post based on The Startup Owner’s Manual. As a compromise I have decided to post about other equally pertinent topics till I can pick things up on that front.
But, don’t let me slow you down. With my exam in June looming and work coming fast and furious I cannot guarantee when I’ll be able to devote the time to revisiting the book before June. In the meantime, you can take an online class based on the book here: Udacity EP245 – The Lean Launchpad: How To Build A Startup With Steve Blank. I recommend Steve Blank’s class at Udacity over my inherently inadequate attempts to distill each chapter in a blog post.
This week though, I have decided to briefly tackle two topics that always catch my attention while I am going about my responsibilities at work.
The first? The startup pitch. Donna Abraham recently authored a post[ii] published by VentureBeat that touches on the some of the issues I usually find “interesting” about some startup pitches. Below I list three things that I think startup founders can do better when they are preparing to speak with potential investors as they try to raise financing.
- First, it is unacceptable for the audience not to be able to understand the startup’s “problem statement.” This is not the same thing as saying the audience should understand the startup’s technology. That is not what I am saying. In my personal experience an investor will follow up with a startup whose problem statement is easy to grasp and remember. That is true even if the pitch was too short for the investor to understand the nuances of the underlying technology. So practice, practice, practice and distill your problem statement till it absolutely describes what your startup is doing in terms that your prospective investor can understand and remember.
- Second, every one that might be pitching your startup formally or informally to potential investors needs to be able to talk about your technology. It is unacceptable for anyone pitching a “technology startup” to stumble on a question like “What makes your technology different?” or “So what’s your secret sauce?” or “Why wouldn’t everyone else in the world just copy this?” Again, practice, practice, and practice some more. Distill your answer down to the three traits about your technology that make your approach to solving the problem you are solving unique. I am partial to always having the CTO on hand to delve deep into technical questions. Either way, the CEO ought to know the basics otherwise someone else should have that job.
- Third, it is a fallacy that a prospective investor will agree with a statement like “We have no competition . . .” even if that is technically true. In most cases it is not. Often, an astute investor will interpret this to indicate extreme naiveté or evidence of a laissez-faire attitude towards competition, or worse. None of which helps the investor reach a conclusion that favors making an investment. Remember that investors invest in order to earn a return, not because they wish to provide capital to entrepreneurs that need financing. Competition is one of the factors that could wipeout the entirety of an investor’s investment in your startup. Don’t give the appearance of intellectual laziness by failing to develop a considered response to questions about competition.
There’s a link to Donna Abraham’s post at the end of this post.
The second? Startup term sheet negotiations. Bob Ackerman published a post[iii] at VentureBeat that you should read. Below I list two things that I believe you should consider in addition to the issues he raises in his post.
- First, just because one investor has proposed a term sheet does not mean your startup should stop speaking with other investors, nor should you stop seeking term sheets from other investors. That said, it is unethical to disclose specific terms proposed by one investor to another investor. You should protect the confidentiality of each term sheet. Your job is to secure financing for your startup. Depending on a positive outcome with one investor without chasing down every other potential opportunity out there does not make much sense to me. What if those negotiations fall apart? What if that investor suddenly has a change of heart? Your best bet is to keep in fund-raising mode until you have cash in your startup’s bank account.
- Second, don’t fall into the temptation of trying to maximize valuation right from the outset even before you have any justification for doing so. Even if you get way with that early on, the risk of a down round increases dramatically in that case. Also, subsequent investors will simply walk away if they feel the valuation is not justified by the results you have achieved between one financing and another.
You should feel proud if you are pitching to investors, or negotiating a term sheet. That is a sign that your hardwork up to this point has paid off. However, if you succeed at this stage, it’s the beginning of even more work. Enjoy the moment, and try not to make mistakes that can easily be avoided.
Let’s talk again in two weeks.
[i] Any mistakes in quoting from my sources are entirely mine.