Gil DibnerEurekamp, February 2008

Communicating Innovation:How to pitch to a VC

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topics

● Communicating innovation● VC basics● The VC pitch: a user’s guide

- What VCs are looking for- Presentation structure

- A few helpful tips

● Q&A

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communicating innovation is hard

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pitching to a VC is especially hard

● 1 in 100

● Fear of rejection

● Communicating a new idea

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VCs are inherently skeptical (it’s our job!)

● Lots of investments● Lots of failures● Looking for big successes – but very few materialize

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VCs are investing someone else’s money

● They need ammunition● You need to give it to them● Love is (usually) not enough

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why the VC model is so hard

● A $200M fund● Target: $600M (3x the amount invested)● 20 investments at $10M each● Assume 10 investments will fail● So 10 investments need to generate $600M● An average of $60M per investment● But VCs only own about 20% at exit● Requires an average company valuation of $300M

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so what are the VCs looking for?

● Team● Large market opportunity● Technology● Strong competitive position● Execution ability● Potential to be a public company● Deal terms that make sense

Amazingly, this is a great structure for a

presentation!

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but first…

● Prepare a short, clear elevator pitch that you believe in

● Put it on your first slide

● Three steps:- Tell them what you are going to tell them

- Tell them- Tell them what you told them

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team

● Can this team take the company to the next level?● Does the company have the ability to attract great people?● Does the company know what capabilities it’s missing?

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large market opportunity

●What pain does the company solve?● How do we know the pain is real?●Who is going to pay for this and how much? (ROI)● How big is this opportunity?

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avoid “Chinese marketing”

● There are 1,321,851,888 people in China● If I can sell a balloon dog at $1 to just 0.5% of them…●…I will have revenues of $6.7 million dollars in year one!

● Focus on specific attainable market segments where you offer high value

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pick up the phone!

● The more market validation, the better● Many people like talking to start-ups● Leverage your network (linkedin,

facebook, eurekamp, etc.)● Don’t be too secretive● The VC is going to check the market

anyway, so you might as well get started

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technology

● “Technology” doesn’t necessarily mean algorithms and chips – it can be user experience or a way of doing business

● It’s not about patents

● It’s about:- Uniqueness

- Barriers to entry- Tangible technology assets

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the “complexity” chart

● Allows a technology discussion to take place● Demonstrates you have thought about the technology● Allows you to show:

- What you have built and what you plan to build- Where you are unique

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strong competitive position

● If you have “no competitors” you are in a bad market- (or you don’t know your market well enough)

●Why do you have a good chance being a winner in the race?

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helpful competition slides

●Comparison tables help illustrate key differences

●2x2 matrices are especially clear

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execution ability

●What is the plan? Is it reasonable?● Do you know what to do after you get the money?● Are you raising the right amount of money?

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financial modeling:what’s wrong with this picture?

Year 1 Year 2 Year 3 Year 4 Year 5Revenue 0 300 4,000 20,000 80,000COGs 0 200 1,000 3,000 10,000Gross Profit 0 100 3,000 17,000 70,000Gross margin 33% 75% 85% 88%

R&D 600 1,200 1,500 1,500 1,500Sales and marketing 100 1,000 2,000 3,000 4,000General and administrative 200 500 1,000 1,300 1,500

Total expenses 900 2,700 4,500 5,800 7,000

Net Income -900 -2,600 -1,500 11,200 63,000

Cash position -900 -3,500 -5,000 6,200 69,200

-10,0000

10,000

20,00030,00040,000

50,00060,000

70,00080,00090,000

Year 1 Year 2 Year 3 Year 4 Year 5

Revenue

Total expenses

Net Income

Cash position

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communicating milestones:perhaps the most important slide

M1 M2 M3 M4

Month 3 9 15 24

Cash required $300K $900K $2.2M $3.5M

Headcount 4 8 11 15

Milestone Technology proofof concept.Image identificationwithin 5000 samplesize with 5% error

Complete R&D plan

Market validation

Image identificationwithin 20000 samplesize with 2% error

1 design partner

Working FPGAprototype

Open US office

3 design partners

BetaTape-out

1 design win

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potential to be a public company

● Can this be a stand-alone company?- Is this a “feature” or a company?

●What are the growth opportunities?● Are there any similar stories?

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deal terms that make sense

● this is a long-term partnership● alignment of interests● VCs have limited flexibility because of the VC model● “Valuation” is really just a function of

- How much money the start-up really needs- How many investors are sitting around the table- VC expectations of between 15% and 30% depending on the stage

- Competition on the deal

● Almost all VC terms are standard

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tips for your meetings with VCs

● Decide on your goals for the meeting- Introduction / testing the waters

- Brain storming- Financing

● Be yourself and be comfortable with your story

● Expect tough questions (its part of the process)

● Be clear about what you know and what you don’t know

● Listen to what the VC is asking

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this is a two-way street:you are choosing a partner

● Do your homework on the VC

● Does the VC understand your business and your market?

● Do you have chemistry with the VC?

● Can the VC bring you value beyond just financing?

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dealing with “no”

● Unfortunately, hearing “no” is often part of the process

● Genesis has said “no” to several companies that are now in our portfolio!

● Do your best to get solid feedback

● If you are consistently getting “no’s” try to understand why

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momentum

● One of the secrets to generating VC interest is momentum

● False momentum vs. real momentum- FALSE: “You better move quickly because I am talking to 3 other

VCs…”

- REAL: “Just wanted to update you that I have added Yoav as VP R&D and spoken with two more potential customers in New York…”

● Momentum can come in many ways:- Users, technology, team, customers, market validation

● It creates the feeling (and the reality) that this is going to happen and the VC better get on board

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final words

●We know this isn’t easy

●We are here to help, brainstorm, advise, consult

● Don’t take “no” for an answer