Tech Start-up Insights
What makes a technology start-up fundable? What do VCs look for?
It is not good enough to have a great pitch deck or a really good product. You have to stand out from the rest of the crowd. How do you stand out? You have to clearly state what it is that you are doing. It is amazing to us how few entrepreneurs are actually good at this. Give investors some evidence that someone other than you believes in this value proposition that you are asserting. Ideally, you already have some customers or some evidence from third parties that gives investors confidence that what you are saying is true. So, be clear, be compelling, and be credible in order to stand out.
How can founders find the right investor for their company? What is the secret to getting the attention of a VC?
Then, figure out a credible way to connect with them. The most credible way to connect is to get an enthusiastic recommendation from someone they already know and trust. This is one of the brilliant features of LinkedIn – showing relevant connections. If you cannot do that, then get an enthusiastic recommendation from someone who is generally credible, such as a known entrepreneur, executive, or professor. Do not, however, pay someone who says they will connect you. That’s a double negative. You show that you cannot do it yourself, and now you have even less money.
What should start-ups think about before contacting a VC?
I had an epiphany when I crossed over from being an entrepreneur to being a venture capital investor.
When I was an entrepreneur, I thought venture capitalists were these brilliant analytical brains, with a filter and an algorithm in their heads that enabled them to intake all the stuff that entrepreneurs spew, sort out the relevant data, and calculate an internal rate of return.
I had an epiphany when I crossed over from being an entrepreneur to being a venture capital investor....
The secret, I learned, is that investors only invest in companies that they fall in love with. So, before you contact a VC, you have to figure out what you have that will make a VC fall in love. Seriously! It is not good enough to explain that you have a useful product and there is a big market. You have to get us to Wow!
How can a pre-revenue tech start-up determine its valuation?
What are some of the common mistakes that founders make?
Lack of operational discipline. If you are going to scale your company, you have to learn to put in place the systems and processes that are necessary to scale it. What I recommend is that from Day One you measure your key performance indicators (KPIs) and that you manage your company in a disciplined way by putting together a dashboard of your KPIs across all of the aspects of your business and measuring your progress in each area on a regular basis.
Lack of financial discipline. You, as an entrepreneur, should know your economics, that is the numbers that are critical to your success. Who is your target market? What is your revenue projection? How much capital are you going to require? These numbers should be at the tip of your tongue. Do not abdicate your financial understanding to an accountant or a spreadsheet.
Among bad hiring practices are:
- Hiring your buddies
- Hiring based on Resumes because they do not reflect the skills, the character, and the willingness to work hard
- Hiring based on Skills only you may be missing other characteristics that may not make the person a good fit for your company
- Hiring on Desperation because bringing someone who is not a good fit may do some damage to the company
- Hiring “followers”, in other words, people who are just going to do what you are going to tell them to do. You want to hire people who have the ability to take a leadership role and can be responsible and accountable for delivering and solving problems in their domain. You want to be able to delegate and rely on your people to execute.
Cultivate diverse thinking in your hiring. You want skills, you want experience, but you also want people that have the right attitude and the willingness to take a leadership role, push back when it is appropriate, and drive their particular area to success.
Assuming you can replicate initial sales at scale. Almost every entrepreneur gets this wrong. They get some initial traction, which seemed easy enough, and then they extrapolate and assume that they can replicate initial sales at scale. As a result, they underestimate how much time and money it will take to scale the company and achieve profitability. When investors see the company consistently missing revenue projections, they lose faith in the company, and the company can no longer raise money.
You are Chief Evangelist for the Start-up World Cup. What are your thoughts about start-ups in USA vs. Europe? Is Europe catching up with Silicon Valley?
The difference between Europe and the US is not so much the strength of technology and the capacity for innovation as it is the breadth and depth of the angel investor community, the corporate investor community, and the venture capital community, as well as the pool of experienced entrepreneurial talent and the ease of doing business.
If you could turn back time, what would you do differently?
The standard answer most investors would give to this question has to do with what we call our “anti-portfolio.” Every investor has a list of companies they could have invested in that they did not invest in – that is the anti-portfolio. Of course, if we could turn back time, we would invest in those companies, and not invest in the companies we did invest in that did not work out. I have tried to learn from all these mistakes (as well as my successes), but I stirred up some controversy when I told a reporter that my decision to not invest in Tesla very early on was actually not a mistake. At the time, it was an insane investment thesis – putting early-stage venture capital into launching a new car company using a new technology – and for many years after, it looked like I was right. Tesla almost died more than once in the years after I passed on investing. But after many years of struggle, Elon Musk pulled it off. So, I learned my lesson, and I have made up for it, somewhat, by investing in SpaceX.
What type of companies and funding stage does Pegasus invest in, and what is the Venture Capital-as-a-Service (VCaaS) model that Pegasus offers?
Our model is very different than the standard Silicon Valley venture capital model. Instead of one big fund, we manage over 30 separate funds, each with a specific investment mandate. Most of our funds have a single corporate limited partner with the primary objective of making strategic investments, but several of our funds have financial return as the primary objective. In almost every case, however, we have the ability to bring the networks and resources of our corporate partners to the table when investing in a start-up company. This makes Pegasus extremely attractive to most start-ups and gives us a degree of access and clout that very few venture capital firms have.
For our corporate partners, we provide a high-power turbocharger for their corporate innovation efforts. Most corporations now understand that innovation cannot be limited to internal R&D. Successful innovation requires that corporations tap the entrepreneurial innovation ecosystem. But few companies know how to find the right start-ups to work with, and even fewer companies know how to work with start-ups. We provide that bridge, to help corporations find valuable emerging technology companies and to help corporations and start-ups collaborate to the benefit of both. We call this model Venture Capital as a Service.
To be clear, it is a service to both corporations and to the start-ups we invest in. By bringing the experience, the networks, the application opportunities, and the distribution capabilities of our global corporate partners to the table when we invest in a start-up, we can help our portfolio companies accelerate their development and growth. And because we are experienced entrepreneurs and venture capital investors ourselves, we can help both the start-ups and our corporate partners structure successful collaborations and avoid the mistakes that plague many attempts at start-up/corporate relationships.