For entrepreneurs seeking venture capital, the pitch is everything.
Most investments in a start-up company, from the smallest “seed” financing that may be based on little more than an idea for a start-up, to a $50 million round for a profitable company preparing to go public, is preceded by an entrepreneur standing in a room explaining why venture capitalists should part with their money.
We asked Brian Jacobs, general partner with Emergence Capital Partners, a San Mateo, Calif.-based technology investor that is investing out of a $200 million fund raised in 2007, to take us behind the scenes of a typical company pitch and explain what goes through the mind of an investor as he’s watching and listening.
The slides below are a selection from an actual presentation made by Emergence Capital portfolio company InsideView Inc., a San Francisco-based company selling software that helps salespeople find new clients, improve existing relationships and close deals. The information is customized for each user and is provided through a Web-crawling search engine that finds and filters potentially important sales leads and information from in new social media sites and other emerging data sources. The presentation was shown to new investors, but eventually the company chose to accept the insiders’ investment proposal which resulted in an $11.5 million insider Series B financing in April from Emergence Capital, Rembrandt Venture Partners and Greenhouse Capital Partners. The company has now raised more than $25 million.
We interviewed Jacobs while looking at the slide presentation, which was similar to the one he saw that first spurred his firm to invest in the company. He took us into the mindset of a VC as he decides whether to, as Jacobs says, “give away millions to people we’ve just met.”
Slide #1: “Productivity Challenge: Information Overload”
Jacobs says: As I’m listening and watching to this, I have no idea what the company does yet, but they are describing a problem that makes sense. It used to be really hard for businesses to gather company and executive information – the only way to get it efficiently was to subscribe to traditional editorial databases, the so-called legacy data providers. Now, every day there are new sources of information becoming available and the problem is no longer how to get it but that there’s way too much of it. It’s now more about relevance and not just access.
At this point in the presentation, I’m attracted to the fact that this company is using a business-to-business model - it’s selling to small and medium-size businesses (SMB) and other companies, not individual consumers. That is where some of the best opportunities are, and I have a greater comfort that this company will get paid for its services.
Slide #2: “Productivity Solution: SalesView”
Jacobs says: Now I’m seeing that this is an automated technology that helps to solve the problem with software to identify the relevant information from all these new data sources that have sprung up, specifically information relevant to a salesperson. The software crawls the Web intelligently. If the customer is selling office furniture, the software will find companies that are opening or about to open new locations. If they are selling technology to enable mergers and acquisitions, the software will find companies that are buying other companies. All this happens through alerts that go to the salesperson and can integrate into other customer-relationship management software. I am starting realize they can uncover sales insights by pulling together relevant information in the same way that Bloomberg enables trading insights by aggregating relevant financial information.I can also now see that this company integrates data into CRM software from Salesforce.com, Oracle, Microsoft and NetSuite. Since Emergence Capital Partners was an investor in Salesforce, a lightbulb goes off in my head. We want to talk to our relationships at Salesforce and find out what they think about this company. We’re in the business of giving away millions of dollars to people we’ve just met. We really need to know everything we can about them.
Slide #3: “Smart Agents”
Jacobs says: Now we get to a screen shot of the actual product, which is essentially a compilation of all the information relevant to the salesperson that has been excavated from the Web that day. My first thought is that it doesn’t look like a very slick product. There’s a lot of text and it’s not very visual. I’m beginning to think, do people actually like this product? I’m reserving judgment though, because some products are cool-looking and no one uses it. If salespeople like this product, that’s all that matters.
Slide #4: “Customer Growth”
Jacob says: Now I have my answer: A lot of people like this product. I love this slide. It’s very visual and shows progressively that more and more businesses are using it. I’m thinking that these guys have accomplished something here. It’s not just a theory. In the list of customers, I’m also seeing names of companies we’ve invested in. So we’re going to talk to all of them and ask them what they think of the product. At about this point, I’m asking myself a question that we ask each other all the time. The question is: Am I feeling greedy? In other words, is there something about this company that is provoking a visceral positive reaction within me about how successful this investment can be for us? If you’re not feeling that at all – if that temperature hasn’t risen enough - then I may not have the passion to convince my partners or to work with this company for the next five years.
Slide #5: “Progress Since Most Recent Financing”
Jacob says: This slide is simple and effective. The message of growth is reinforcing my growing feeling that this company is doing something right. At this point we assume all the data is accurate, but of course we will check it all out when we do our due diligence. I am also interested in the reference to free seats and paid seats. That tells me they have a free product and a paid product – what we call the “freemium” model (free and premium) - so I’m starting to understand how they are gaining users and how they are getting paid. I’m starting to understand their business model and their cost-efficient sales strategy.
Slide #6: “MRR-Cash Burn From Operations”
Jacobs says: This slide, which looks at monthly recurring revenue and cash burn shows me things are really moving in the right direction – they are not spending more money as they grow.At this point we might start thinking about valuation. A little posturing might occur in the first couple of meetings. Neither the potential investor nor the entrepreneur really wants to say upfront how much they think the company is worth, which will determine how big a stake we would get with our investment. Our ownership percentage determines how big our return is if the company goes public or is acquired. We want to know if they are talking to other investors and how much interest they already have, which helps us determine how much negotiating leverage we have.
If a company’s first presentation gets me wanting to invest, I have them come back and meet with my partners. Credibility and trust among partners is absolutely critical. I have to explain what I like about this company and convince my partners that this could be the next Google. But they are trying to convince me that they’ve found the next Facebook.
COMMENTARY: My favorite comment is in slide #4 where Jacobs makes reference to "feeling greedy". I remember one noted VC saying, "If I don't smell an IPO at the end of the line, I am not intereste." Whee, tough people.
My other favorite comment is in slide #6 where Jacob says "they are not spending more money as they grow." I wonder if he understands the concept of an increasing returns business. That's usually what you encounter in the software business. Margins increase even more with volume because the fixed costs of developing that software have been fully absorbed. Cloud-based SaaS businesses offer even more: access 24/7 365 days, eliminates software administration and maintenance, and investment in software. This is what is driving cloud-based computing, and VC's are eating it all up.
In conclusion, my favorite anecdote: "VC's want to see $100,000 in the cash register before they make an investment, then they worry if the money is counterfeit." No disrespect intended, but since Jacobs brought up the issue of greed, enough said.
Courtesy of an article dated August 23, 2010 appearing in The Wall Street Journal's Venture Capital Dispatch
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