13 Not-So-Obvious Ways To Improve Your Investor Conversations
Updated after our most recent round of 2021 interviews at Sputnik ATX
Over the last three years at Sputnik ATX venture-accelerator, I’ve noticed that there are certain not-so-obvious ways in which founders are tested by investors.
Sometimes it’s clear to the founders that they’re going up in flames. Other times founders walk out of the investor interview without a clue they’ve made a convincing argument that nobody should invest.
The vast majority of founders who make it to the interview phase are smart and capable people with great ideas. Usually everybody has a pitch deck that, at a minimum, covers the basics. But whether by sheer luck or intense preparation, only a handful of teams pass the tests, argue their case for investment successfully and ultimately are chosen to join the portfolio.
The thing is, the founders who don’t make it don’t know what they don’t know. And especially when it comes to first time founders, I don’t blame them.
After a several years of hearing founders pitch, I’ve come up with a list of 13 not-so-obvious ways founders can improve their investor conversations based on what we look for at Sputnik (in short, unicorn vision, high consumer surplus, low jerk factor). Here they are:
1. Show Up (In Person)
Part of our evaluation process is getting to know a founder’s level of grit, leadership skills, operational skills, jerk factor, and more. It’s very difficult for us to gage these factors over Zoom, and you’d be surprised how many teams only send one co-founder to represent after we’ve asked for all to show up, or announce last minute that they’ll be dialing in instead. To us, all major contributing founders should show up in person. It’s a sign of commitment.
(This one’s slightly different in COVID times, but if you can arrange for a safely distanced and masked outdoor meeting, that is probably best. And if you’re sick yet alert, please, dial in!)
2. Know Your Decision Maker
Who do you think is the person deciding whether to buy your product? How do you know, and what are their incentives to buy? You should be able to answer these questions.
Suppose you’re selling a B2B SaaS product for law firms that saves them time. You assume the decision-maker is the Managing Partner, because they’re the boss. But during your interview, the VC challenges that assumption — lawyers bill by the minute, and after all, the person who’s really saving time is the intern who is actually performing the function that you’re making more efficient. Maybe your customer is in-house, corporate counsel instead.
Now we’re talking about an entirely different customer with different incentives. This realization isn’t a bad thing, but if it’s ironed out before the interview you’ll be able to really show the investor that you know your customer.
3. Speak to The Right Audience
The way you describe the problem you’re solving might differ based on your audience. Persuading a lead to buy is different from persuading a VC to invest. Making a lead into a customer might require appealing to the person’s aspirational identity. Convincing somebody to invest requires explaining the actual problem you’re solving and how it appeals to the customer.
Check out Michael Seibel’s video on Pitching Investors vs Pitching Customers here.
4. Embrace the 80% Solution
Talking about your plan to perfect your product before releasing it to customers isn’t necessarily impressive to us. Instead, understanding that starting up is like building a plane while flying it is key. Your product should be functional, maybe 80% there, but don’t wait to start getting it into customers’ hands and collecting feedback. As Sputnik ATX Partner, Joe Merrill says, “perfection is the enemy of execution.” Otherwise, you run the risk of building something nobody wants.
5. Understand The Math of Your Value
Consumer surplus is the difference between what someone is willing to pay and what they actually pay for your product. On the surface, it’s a simple equation. But arriving at an answer for your business requires a thorough understanding of the market, competition and the problem you’re solving.
One time, a company told me they were making a dating app and charging users $20 for it. There was nothing significant setting the app apart from current leaders like Bumble and Hinge, which are free to users (without the boosts). This is a drastic example of a founder not understanding the customer and the market, and therefore the value she was creating for users.
Going into your pitch, you should have your consumer surplus figured out and be able to walk the investor through how you arrived at that number.
Of course, there is some guesswork in figuring out your value to the customer, but you should try to back it up with data as much as possible.
If your answer is in the billions, it’s in our sweet-spot. If not, one of the expressions in the equation could be holding you back from unicorn status, and therefore some venture capital funding.
6. Show You Listen to Customers — The Smart Way
If you have your MVP and some initial customers, you should be gathering feedback. Be able to describe how customers have responded to your product and how you’re tweaking the product accordingly (without making it fat). Bonus points for doing your research using The Mom Test method.
7. Be Responsive to Feedback
Investors want to know that their advice won’t fall on deaf ears. If the investor gives you a suggestion, don’t blow it off, and additionally don’t do everything they say for the sake of being agreeable.
Investors know that the startup world is full of advice and opinions from outsiders, including themselves. They want to see that you can show consideration and a willingness to listen, but not become distracted in your mission by following every piece of advice out there.
If you don’t agree with the suggestion, explain why. From the investor’s perspective, part of the value they provide is coaching, so if you think their ideas are stupid, why should they try to help?
8. Be Aware of Market Trends
Be aware of trends and fads related to your sector and think about how your startup works with or against them. If it works with a trend, is it sustainable or is it just a fad that will soon fall out of popularity? If it works against a trend, why does it make sense in the first place?
Here’s an example: Say your product is a sugary mixer for cocktails. During your pitch, the VC does a quick Google for “trends in added sugar” and points out this article about how consumers are adding less sugar, particularly in beverages. It helps your argument if you have a prepared rebuttal with sources to back it up. You might point out that your mixer is all natural (no artificial ingredients), which is actually trending; additionally, you could say that your mixer is a good alternative for the consumer who wants less sugar, because you can control the amount of sugar that goes into the beverage. No promises that you’ll win the argument, but planning responses to these kinds of questions is a good start.
9. Know Your Blind Spots
Are you thoughtful enough about the competition or are you just “awesome”? You should be able to describe your strengths and weaknesses, as well as those of your competitors, and have an action plan for how you’ll beat them. But be concise when you do this — don’t let your competitor take up too much of your interview time. Overall you want to see, and help your investor see, more opportunities than obstacles.
Similarly, you should learn from the guinea pigs in your space. A common question we like to ask is, “Who are the winners and losers in your space, and what have you learned from them?” Be able to point to success and failure stories of other people who have tried to do what you’re doing (if any), and why you think they succeeded or failed.
10. Dream Big
A common exercise we like to do in the interview is to tell the founder, “In three years, where do you see your company? 10 years?” Unsatisfactory answers include those that are completely unrealistic and also those that are too small.
If your answer is something along the lines of, “We hope to grow steadily and be a $50 Million business someday,” some VC’s will be thinking, “they want to build family business.”
Family businesses are fantastic for the founders, but they don’t always grow big enough to make sense for VC investment. At Sputnik, we want to see a bold vision (unicorn status) and be able to visualize the milestones you’ll need to hit along the way to get there.
Before scheduling a meeting with the investor, you should have an idea of what they’re looking for when it comes to industry, market size, consumer surplus, exit valuation, etc. It’s a better use of your time and theirs if you know upfront so you can either decide it’s not a good fit or adjust your business plan accordingly.
11. Outsource With Caution
Most of the time, it’s a good idea to have your tech team in house, not outsourced. If your team is outsourced, it will raise a flag for us and we’ll ask you about it. Outsourced tech teams tend to be mercenaries, not missionaries, and they can cost you a lot of money that could otherwise go toward growing your business.
12. Show that You’re Scrappy
Using your time wisely is important, but if you think you’re too good to do the dirty work, you’re not a right fit for us.
Be careful about the soundbites that come of your mouth — for example if you run a coffee stand but as the CEO you think you’re too cool to help take orders on a busy day, and your excuse is, “I’m not a coffee guy” … noted.
13. Know Your Sources
If you’re making an argument about market size, you should be able to back it up with reputable data. Oftentimes, investors Google and fact-check while you present your pitch deck — if something doesn’t add up, we point it out. So, it’s a good idea to have solid facts from reputable sources in the first place, and know what pops up with a simple Google search so you can defend your position if there’s a discrepancy.
The following organizations and databases can help:
https://www.austinasianchamber.org/business-tools
https://guides.lib.utexas.edu/market/MRDatabases
https://library.austintexas.libguides.com/marketing/marketresearch
Some of the tests above were deal breakers in and of themselves. Others only raised concern when compounded by others.
I can’t promise these are the same tests that other investors use, but I hope it helps you better understand the perspective of the VC, and score that next round of funding!
Author: Amanda Eakin, Associate at Sputnik ATX Venture Accelerator.
Edited by: Ingrid Garcia and Emily Jones.
Sputnik ATX is an Austin, TX based investor and accelerator that funds early stage maker-founders who solve real problems. Learn more at www.SputnikATX.com.
