October 18, 2022
Failing to understand how timelines can change or lacking authenticity can be costly, members of Protocol's Braintrust say.
Good afternoon! In today's edition, we asked a group of VCs to tell us about the mistakes they often see when founders pitch them during downturns. Questions or comments? Send us a note at firstname.lastname@example.org
Partner at Menlo Ventures
The biggest mistake founders can make is underestimating how a downturn impacts investor psychology. The previous fundraising tactics, approaches, time–even diligence required –will be different, so being well prepared for this is the best way to overcome that potential mistake.
Rounds moved quickly over the past few years; FOMO was the prevailing investor mentality. Now many investors will shift to the combination of prioritizing investing in their top thesis area and an entrepreneur they've gotten to know well. Six to 12 months before fundraising, entrepreneurs should spend more building relationships and explaining the arc and key milestones for the business. They should get a sense of the potential investor's help with quality advice, customer and candidate intros, etc. Both parties will benefit, and the time committed will ensure you are each at the top of each other's lists. Finally, and importantly: When you do go raise, make sure you've hit those milestones. A complete data room can save both parties a lot of time (depending on the stage). One key failure mode in this environment is to rush the process or create artificial pressure. If a VC is interested and prioritizing you, they will ask for more information, do the work, and know that if they intend to win with conviction, they have to work quickly. It's ok to be honest about where someone is in the process relative to others so you can try to move parties at the same pace, but artificial pressure is likely to backfire.
Most FOMO is gone. Caveat: if you are a top 1% company, you can raise the same way that has been occurring the last few years, but it's difficult to say who is a top 1% company, and frankly, that process is probably not best for you or your new investor anyway.
Founder and general partner at Moxxie Ventures
The most critical mistake we see is not anticipating how long things can take during a downturn. Whether it's fundraising or managing a sales pipeline, it's critical that founders move quickly yet thoughtfully when market conditions change. The days of quick funding rounds with minimal diligence are over (which is a good thing) and the founders with high burn, long and murky sales cycles, and short runways will face trouble. Speed is a critical advantage, and the founders who can quickly build great products and partnerships will persevere in the long run.
Co-founder and managing director at Forgepoint Capital
A critical mistake many entrepreneurs make during a downturn is getting so distracted by reacting to market conditions that they lose focus on what matters most to customers. It’s natural to immediately want to reduce activities and revisit your cost structure, but you cannot lose sight of what customers need and how to serve those needs as they weather the downturn as well. In fact, moments like this are opportunities to get closer to your customers and help them at a deeper level, which can surface powerful new insights to inform your product and delivery model. You may also be able to refine your ideal customer profile and your go-to-market strategy — working smarter, not just cost-cutting for the sake of reducing expenses.
Partner at Ridge Ventures
Lack of authenticity. Founders often make the mistake of pretending everything is going well and that they’re raising “just in case.” They have to remember that it takes time to build and grow a company and with that comes unforeseen hurdles. In a downturn, founders should be clear about what lessons they’ve learned and what decisions they’ve made, and be forthright about stating why they still believe they are building a company of great value. In being authentic, don’t be afraid to lead with your weaknesses. Of all the skills founders should develop, particularly amid a challenging market, self-awareness gets overlooked. Having an excellent product might not matter if that product is too early or too late, but transparency is a valuable trait irrespective of market conditions.
Aside from the usual investment criteria (product-market fit, competition, traction, etc.), I value team and leadership just as much. Working alongside incredible people is important, especially in the early days as companies navigate product maps, customer acquisition, pricing, and other challenges. A transparent founder who shares their shortcomings during the pitching process — and how they’ve bounced back — demonstrates the authenticity, grit, and leadership you want to see in a long-term partner and (crosses fingers) the leader of a billion-dollar company with hundreds or thousands of employees under their wing.
Managing director, venture investing at Citi Ventures
See who's who in the Protocol Braintrust and browse every previous edition by category here (Updated Oct. 18, 2022).
One thing founders often overlook when pitching in a downturn is the importance of demonstrating the expertise, stability, and ongoing growth of their team. Given the competitive talent landscape, founders need to make it clear to potential investors that they are bringing in the right talent and that their team is energized, reliable, and committed to the long-term success of the company — not just to what they stand to gain from it.
No business can achieve long-term growth without a smoothly functioning team, even if it has a great product or service. Founders can build a more stable company by surrounding themselves with people who are passionate about the business, recognizing team members’ efforts, and creating a positive company culture by leading with both compassion and strength. This will help them ensure that their employees have what they need to continue executing on their game plan and position their company as a safe bet for potential investors amid challenging economic conditions.
Kevin McAllister ( @k__mcallister) is a Research Editor at Protocol, leading the development of Braintrust. Prior to joining the team, he was a rankings data reporter at The Wall Street Journal, where he oversaw structured data projects for the Journal's strategy team.
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