VC Jujitsu

By now most people know that the term Jujitsu describes a form of self-defense that uses the power of the attacker’s own weight and strength against them.  When you are the little guy this is not a bad strategy.  In a pitch meeting, the entrepreneur is definitely the little guy.  So here’s a little VC Jujitsu to keep in your back pocket for the next time you are in combat.

First, you need to know what is coming.  You can hardly expect not to get your beak a little bent while you guard, turn, parry, dodge, spin and thrust if you enter into a contest not knowing what to expect.  So let’s think it through.  A VC will likely reject funding your startup for the following reasons:

  1. We don’t see this enterprise as a a good fit with our strengths as a firm.
  2. We as a firm don’t have experience or knowledge in the space you are in.
  3. I don’t have the bandwidth that you as an entrepreneur deserve.
  4. We see this being competitive to one of our portfolio companies.
  5. We have concerns that there are not strong competitive barriers to prevent others from doing what you are doing.
  6. We don’t have more room in the current fund to invest.
  7. We don’t think it is a big enough market.
  8. We would like to see more customer traction before we feel comfortable moving forward.
  9. This investment is a little too early for us. We are more likely to get involved in the next round.

There are a number of good ways to mitigate these types of objections well in advance of ever meeting face-to-face with an investor.

Not a good fit with our strengths. This is usually a reference to investment stage.  A VC website will tell you what they like to invest in.  If not just look at the portfolio companies.  If you are searching for seed stage or early stage funding, don’t go into a firm that likes to write bigger, lower risk checks in later stage deals.  If the VC likes to straddle the line on stage ask in the introductory email what their capacity is to do deals of your startups stage.  If the VC ignores the question that’s a bad sign.

No sector Expertise.  Hopefully you have read enough of these blog posts to know that you should be choosing your VCs carefully.  That means knowing in advance what type of VC they are, what stage they like to invest in, what sectors they are strong in, who the best partner is to speak with, etc.  Hopefully you are not starting from scratch, but if you are, go to your nearest business library. Ask the reference librarian for a volume that lists all the different venture firms and provides contextual information about them.  I think that it is even online and search results can be sorted and downloaded. 1) don’t target firms that aren’t strong in your sector and 2) if a VC that you have targeted tells you this startup is not a good fit at least be prepared with a reason why you it is. If you still get the run around, get out of that place as the VC is not investing and just stringing you along for information.

Bandwidth. A VC has a changing responsibilities along the investment lifecycle.  Sometimes it is prospecting for new investments.  Sometimes its nurturing portfolio companies to success.  Sometimes its harvesting and exiting.  When a VC says that they are bandwidth constrained, either they already have enough portfolio companies or they are in a different stage of investment for a given fund.  The solution, find out how many boards or portfolio companies the person you are meeting with has.  If it’s much greater than 5 or 6, the partner doesn’t have the time you deserve anyway. Check on their LinkedIN or bio page.

Portfolio related competition. Duh? If you walk into a meeting not knowing if you are providing competitive G2 to a VC because of a similar portfolio company, shame on you and shame on that VC for taking the meeting and not telling you. On the other hand if you see a company that could be competitive, do your homework on why you are not. Ultimately that is up to the VC and or the portfolio company.

No barriers to entry. The VC might be right. It’s you job to convince them why there is or why that doesn’t matter.  Be prepared.

No room in the current fund.  Ask in the introductory email.  Make sure that not only is there room for the initial investment, but there is money being reserved for follow on investment. Nothing worse than getting stuck without support or worse yet the appearance that you are damaged goods because your initial investor will not commit to a follow on investment.

Market not big enough. Again the VC might be right.  However there may also be a disagreement about how big the market is or how big the market needs to be to justify an investment. Please check out my TAM, SAM, SOM post. Also make sure the market is $500 million or more.  Also figure out from portfolio companies what size market the VC likes to invest in.  Finally, think big and disruptive so there is no doubt.

Customer traction.  If you are looking for a Series A, you should be able to show customer interest and perhaps some paying customers.  A big name customer or OEM is worth a bunch of little, no name customers.  Customer access by the VC and customer feedback in the form of case studies are valid data points.  It is on the entrepreneur to know what the rule of thumb requirements are for a certain stage investment.  In addition, ask the VC early.  Six months before raising money start a dialog with VCs and ask what will you need to show to get an investment.  Save the correspondence and be prepared to show that you have met those requirements.

Too early.  Once again it is on the entrepreneur to know the stage the VC they are meeting with likes to invest in.  Make sure you can point to examples of other investments the company has made in your stage.  Or have an ass-kickingly good reason why they should go out of their comfort zone to invest in you.  Maybe it their area of expertise.  Maybe it’s a personal relationship. But it better be good or time is being wasted.

Moral of the story: Information is power.  Power is strong Jujitsu.  Be armed with information!