VCs and Angel Panelists Offer Advice at May VANJ Pitch Olympics

The panelists at the May 20, 2013, Venture Association of New Jersey (VANJ) Elevator Pitch Olympics provided hints and encouragement to startup entrepreneurs trying to fund their companies.

The panel was moderated by Ted Rosen, New York chair of the metropolitan securities practice at Fox Rothschild, who advised the entrepreneurs to hone their pitches and practice them over and over until investors can understand who they are, what their business is and what they are trying to accomplish.

In response to Rosen’s questions, the panel — made up of angels, VCs and even one crowdfunding portal developer — offered sage advice to the attendees.

On the panel were Ted Hayes of Golden Seeds (New York); Larry Bettino, general partner, StarVest Partners (New York); Gil Beyda, founder and managing partner, Genacast Ventures (New York and Philadelphia); David Drahms, principal, Osage Partners (Bala Cynwyd, Pa., and Branchburg, N.J.), Ryan Feit, CEO and cofounder, SeedInvest (New York); J. Skyler Fernandes of Centripetal Capital Partners (Stamford, Conn.); andCristian Ossa, angel investor, Delaware Crossing Investor Group.

Some of the panelists’ wisdom is summarized below.

From the general introduction:

• Keep in mind that investors are looking for great deals in which to invest. They seek opportunities to put their money to work for them. They don’t want any money left in their funds at the end of the year.

In response to a question about valuations:

• Angels and VCs invest in companies that fall within a narrow valuation range. For example, Genacast Ventures looks at firms with valuations between $1 million and $5 million. If you value yourself out of that range, they won’t look at you.

• Don’t put your eggs in only one basket and count on just one VC or angel. It’s important to get a competitive process going. If you have two or three term sheets, your valuation is negotiable. If you have just one term sheet, the valuation is going to be whatever that term sheet says.

• Typically the simplest way to determine a valuation is to take the amount of money you are raising and multiply it by four.

• VCs and angels who invest in so-called greenfield opportunities — new markets with no existing players to look to for guidance in valuing a company — sometimes use a checklist and back into the valuation because there are no comps to guide them. Entrepreneurs can influence the valuation within a certain range by highlighting, for example, their team’s depth of experience, or pilot customers willing to talk about the product, what they like about it and how much they’d be willing to pay for it.

In response to a question about preparation:

• Entrepreneurs tend to prepare poorly. They need to do enough research to build a list of funds to go after. They should then spend time determining how they are connected to the people in those funds. LinkedIn is incredibly valuable for this. Determine whether you have a second-degree connection to someone and if so, ask to be introduced.

• Investors look for recommendations from people they trust. Often it’s the angel investor with skin in the game who brings a company to the attention of the VC who provides follow-on financing. Sometimes it’s other portfolio company CEOs. Other times it’s a trusted adviser like an accountant or a lawyer. “We will listen more to people we know and respect than [to] someone trying to sell us something,” said one of the panelists.

Regarding a question about the presentation and the deck:

• Some of the best companies have had some of the worst decks. It’s more important that the investor be able to articulate the investment and answer investor questions well. The VC or angel wants to understand the financial model and the key drivers for the business on both the cost and the revenue side.

Replying to a question about projections:

• Hockey stick charts don’t impress  investors.

• It’s more important to sit down with entrepreneurs and figure out how the founders came up with the numbers they are showing. VCs and angels try to understand the thinking behind the numbers. “What’s the spreadsheet behind the spreadsheet behind the spreadsheet?” asked Ossa.

• Though anyone can come up with financial projections, fifth- or sixth-year projections are hard to make. Therefore, noted one panelist, “you are basically doing a sanity check. Is that person presenting a sane picture or not? Can they have a market penetration of one or two percent … or are they trying to get 50 percent of the market, and are [they] a little crazy?”

[This is the second story on the May 20 VANJ event. The first was published here.]