By popular demand (okay, two people asked me to do it), here are the top ten ways to attract the interest of venture capitalists. There's no guarantee that if you do these ten things that you'll raise millions of dollars, but this wishlist will get you in the game.
Before you even start addressing the hard stuff, never ask a venture capitalist to sign a non-disclosure agreement (NDA). They never do. This is because at any given moment, they are looking at three or four similar deals. They're not about to create legal issues because they sign a NDA and then fund another, similar company--thereby making the paranoid entrepreneur believe the venture capitalist stole his idea. If you even ask them to sign one, you might as well tattoo “I'm clueless!” on your forehead.
- Build a real business. This seems like a “duhism,” but few entrepreneurs do it. Most entrepreneurs focus on quick flips to an IPO or acquisition. Don't get me wrong: venture capitalists aren't necessarily good guys who want to make meaning and change the world. It's just that we've noticed that entrepreneurs who make meaning and change the world usually also make money. Nothing is more seductive to venture capitalists than a company that they can easily imagine having a big impact on the world.
- Get an intro. Venture capitalists are lazy people. We don't want to be DeBeers: sifting through two tons of dirt to find a few diamonds. We want things handed to us on a silver platter like when someone we know, and maybe even trust, tells us about a good deal. The best intros come from corporate finance attorneys, college professors, and the CEOs of companies in our portfolio. Intros from these parties will usually result in at least a meeting. (Incidentally, this is a good reason why even though Uncle Joe the divorce attorney could probably do your early legal work, you don't want him to: he can't make any introductions compared to the lowliest lawyer at Heller, Ehrman.)
- Obey the 10/20/30 rule. To repeat myself, your PowerPoint presentation should have approximately ten slides; you should be able to give this presentation in twenty minutes; and the smallest font should be thirty points. And yes, this means you--the guy with the revolutionary, patent-pending, curve-jumping, open-source, Google-adwords-optimized way to sell dogfood online.
- Show traction. The easiest way to “prove” that you have a real business is to see that you're already generating revenue. It's one thing to believe your bull-shitake PowerPoint presentation; it's another to see cash flowing into your company. You show traction, and most venture capitalists will be willing to suspend disbelief. Fundamentally, you're asking venture capitalists to take a leap of faith with you--we'd rather jump off a diving board than the Golden Gate Bridge. If you can't show traction, then at least line up customer references who will really say, “If they build this, we'll buy it.”
- Clean up your act. Going back to my theory that venture capitalists are lazy, you need to present a clean deal to venture capitalists. “Clean” means that there isn't a lawsuit by your former employer contesting the ownership of the intellectual property of your company; nor have you sold common stock to your friends and relatives; nor given stock to vendors in lieu of fees; nor have a disgruntled founder who owns 25% of the company but doesn't do anything but sit around and complain. The more crap that a venture capitalist has to clean up, the less likely he'll be interested in your deal.
- Disclose everything. If you have crap that you simply cannot clean up, then disclose it right away--not necessarily in the first meeting, but soon thereafter. When it's making an investment decision or, later, serving on your board of directors, the worst thing you can do to a venture capitalist is surprise her with bad news.
- Acknowledge, or create, an enemy. Woe to you that claims you have no competition. It means you're clueless or pursuing a market that doesn't exist. Venture capitalists like to see some competition--it means that there's some validation that a market exists. Then, it's your problem to explain why you have an unfair advantage. If you truly have no competition (and I doubt it), then just say that Microsoft or Google might go after you because these companies do want it all.
- Tell new lies. Please refer to my list of the top ten lies of entrepreneurs. Every time you tell one of these lies, you decrease the likelihood of funding by 25%. Do the math: you tell four lies, and you won't get funded. I'd like to add an eleventh lie that someone brought to my attention: “This is the last round of funding we'll need.” That's a joke and a lie.
- Don't fall for old trick questions. Venture capitalists will try two trick questions on you in order to assess your degree of cluelessness. (1) Do you see yourself as the long-term CEO of this company? (2) What is the liquidity path for your company?“ The right answer for the first one is, ”My goal is to build a great company. If it means that I need to step aside, I will gladly do so when the time is right.“ The right answer for the second one is, ”Frankly, I haven't given a lot of thought to liquidity. My team and I are heads down and focusing on finishing the product. If we build a great company, I'm confident liquidity of some form will occur.“
- Under promise and over deliver. In everything that you say, ensure that your results exceed expectations. Deliver a prototype earlier. Deliver your list of references earlier. Sign up your first customers earlier. Close a partnership deal earlier. Launch earlier. The only thing you shouldn't do earlier is run out of money.
Written at: Back seat of a car going to San Francisco.