Are VCs Evaluating you or the Power Point?

- Soumitra Sharma, IDG Ventures India

The best startups will always get funded. Most often, they will have an enviable combination of multiple factors such as large and growing markets, excellent teams, innovative products or services, defensible competitive advantage, high exit potential etc. However, most venture-backed entrepreneurs would agree that during the fundraising process, they somehow managed to create a ‘vibe’ with the Investment team during numerous meetings and presentations. Something that really helped them sail through the investment process and in the midst of it all, create a bonding with these individuals, who would then go on to sit on their boards for multiple years and work closely with them in creating value. Moving to the other side of the table, as a VC, founding teams often leave us with this weird ‘positive’ feeling. You may call it spunk, or spark, or chemistry. But it just leaves you with this voice in your head that says “There’s something about this team that tells me it will make this happen”.

As an entrepreneur, it’s important to appreciate the fact that a critical component of any VC investment decision is the conclusions investors draw about the personalities and interpersonal skills of founders, based on their interactions. Whether it’s an innocuous email, a 15 min. b-plan update call or a full blown investment presentation, a VC is always judging entrepreneurs, and trying to observe even faint signals that might prove to be major red flags later on. A large part of value creation in early stage investing is dependent on personalities of both entrepreneurs and investors, how well they gel and whether they can spend thousands of man-hours together over a 5-10 year period, trying to grow the business.

Keeping this in mind, there are certain things entrepreneurs should be aware of while interacting with VCs. These are more applicable for in-person meetings and presentations, although the underlying ethos applies across the board. Let’s look at some of these points:

Listening is important – it’s important for entrepreneurs to demonstrate that they are good listeners. Whether you like it or not, investors will question you during board meetings, and give you feedback, suggestions and ideas. An integral part of active investing is to work with entrepreneurs vibrantly and add value to their thoughts and actions. A founder who doesn’t listen to a VC’s suggestions or feedback during fundraising discussions is unlikely to pay much heed to advice at later stages as well.

A great way to demonstrate listening skills is to let the VC complete the point without interrupting, ask intelligent questions on his arguments, and convey your own thought process on the issue while seeing some merit in the VC’s points as well. Engage the VC in an intelligent, candid and unbiased conversation about your business, and he will come out impressed.

Being defensive is a big blunder – you should expect that VCs will put you in a spot by asking you uncomfortable questions. It’s not that they don’t like your venture; else you would have been filtered out way earlier in the process. First, they are trying to poke holes in your business plan to see what all can go wrong and whether you are aware of these aspects. Second, they want to see how you react to these situations. Reacting defensively, rudely or with a smirk, suggests inflexibility and lack of open-mindedness. VCs realize that no one can be always right, and that the venture would be routinely faced with sudden changes in business dynamics. Ideally, investors would want to back an entrepreneur who can navigate this uncertainty, be open to accepting weaknesses, take feedback constructively and act on it.

When faced with difficult questions or apparent criticism during VC meetings, smart entrepreneurs counter it with cogent and fact-driven arguments, rather than emotional ones. They also candidly accept weaknesses and in several cases, ask for suggestions to overcome them. This approach tells a VC that in later years, the entrepreneur will be open to feedback and constructive criticism, and also act on it.

Treat your co-founder like a ‘co-founder’ – in most founding teams, one entrepreneur has a stronger personality than the other, and also ends up speaking the most in discussions. However, founders should keep in mind that their co-founder, irrespective of how much air-time he gets, should be treated with respect in the discussion. This implies not interrupting while he is making a point, asking him to step-in when a question in his area of competency comes up, not supplementing his points or arguments unnecessarily, and not making any condescending remarks about the business line he is handling.

VC discussions are a wrong platform for hogging airtime or limelight. A key part of the VC decision making process depends on team chemistry, whether the co-founders have mutual respect and whether they will stay together through thick and thin, all the while also playing their respective roles in the venture. Great b-plans will still not get funded if there are question marks on these aspects.

Watch your body language – it might be difficult to believe but VCs monitor the minutest body language details during presentations. These could include anger or weird changes in facial expression when faced with a tough question, being laid back in the chair (indicates lethargy), aggressive hand movements while putting forth an argument, zoning out in the middle of a discussion etc. All these are observed and decisive conclusions are likely to be drawn on their basis. Any off-putting body language maneuvers should therefore, be avoided. Be calm, composed, alert and professional while presenting. Even if you are feeling offended at a question, try and counter it with facts. If you are feeling sleepy, ask for a coffee. Passion should be demonstrated with words, ideas and vision, not with violent finger pointing or raising your voice.

Know your business – if you are the CEO, VCs expect you to know the gross margins. Turning to the third co-founder for the answer is not an option. If you are the CTO, they expect you to tackle questions on scalability of your technology architecture. Reverting with more details later is not an option. VCs expect you to be thorough with all numbers and charts in your business plan presentation. A blank expression will just not do. It’s a simple yet critical point – know your business!

To conclude, unlike growth stage investing, early stage VC is much more an art than it is a science. At a startup stage, products are new, business models are unproven and consumer preferences are unclear. At the end of it all, a VC bet is largely a team bet. It’s a bet on a bunch of people who, they believe, will deliver on all the wonderful yet risky things they are saying right now. Interpersonal signals and chemistry go a long way in cementing this belief, and also pave the way for a fruitful relationship between the founders and investors in coming years.

Disclaimer

The views and opinions expressed in this column are strictly personal, and not those of any organization/institution the author is or has been a part of, nor is made in any official capacity of such organization/institution, unless explicitly stated otherwise. None of the information, views and opinions in the column should be construed as business or legal advice.