

Why Entrepreneurs Should Never Meet VCs Unless They're Formally Pitching - asanwal
http://allensblog.typepad.com/allensblog/2011/07/meet-and-greet-not.html

======
rdl
This really doesn't fit with either my experience or with what numerous very
qualified (VC, big VC raise, startup accelerator, etc.) people have said.

There's the Mark Suster "lines, not dots"
([http://www.bothsidesofthetable.com/2010/11/15/invest-in-
line...](http://www.bothsidesofthetable.com/2010/11/15/invest-in-lines-not-
dots/)). Talk about what you're going to do, then do it, and when you meet up
later, you'll have a track record.

There's all the stuff you can learn from VCs (I've learned more from people at
Sequoia and Kleiner, among others, about my market, than from a lot of other
people) -- what trends they see, what the market looks like to them, etc. If
you pick a domain-expert VC (I've actually found a few partners in computer
security), you can get some distilled knowledge from a lot of customers.

In my experience, VCs are really clear about "let's chat", "meet for coffee",
etc. where a super formal pitch (deck, etc.) is inappropriate. Showing a demo,
having some talking points down, etc. is great, but you do NOT need to have a
polished presentation for this.

You don't want to start the "deal clock" by announcing that you're looking for
funding (basically, if you start looking for funding and don't raise any in a
month or two, you look stale...), but informal early stage chats don't do
this. It's great to be in a startup accelerator or have some other external
deadline where you can say "we're not raising money until after xxxx".

That said, maybe there is an alternate reality where this advice is beneficial
or accurate; I just don't think it's Silicon Valley in 2011.

------
adamt
My personal experience contradicts this - and as context to that statement
I've raised about 10 rounds from EU, US and Asian investors.

Some of his points (e.g. about not being shopworn) have some validity, but
that can be avoided/mitigated with the right positioning and the upsides
outweigh it.

My advice would be:

* Make it really clear you're not raising money yet. Don't pitch, don't take any slides/laptop, just have coffee with them. Talk about your business in a straight-forward/relaxed manner. This often bypasses the VC's pitch-defences (they've had 10 businesses already that week talk about how spectacular they are, and how they are world-leaders in a billion dollar market).

* Position it that at some point in the future once you've hit your next milestones. Define those milestones as things you feel extremely confident (and not just as an optimistic entrepreneur) that you will hit.

* At the end of the meeting, if you think you like them, ask them - 'so would you be interested in hearing from us when we're ready with our round?' as a soft conditional-close. VC's never like to say no (they just show interest, then stall), so they'll give you a yes as it costs them little. Also be prepared to ask their advice and for intros and use the fact VC's talk to your advantage. Ask them if this deal is in their space, and if not, are there any VC's they'd recommend you spoke to. Second only to making money VC's like to look smart and networked. So if you're credible, they can often introduce you to other VCs, or even useful industry contacts.

* When you are then ready to raise, you have a warm prospect you can call on, and you gain credibility by hitting the milestones you talked about. It should be easy to position the partner you first spoke to into an internal champion, by letting him position it as a company he'd been tracking for a while, and that they are one of the first people you'd pitched to as a result.

------
pjhyett
This is poor advice. We've met dozens of VC's since GitHub launched to 1) meet
interesting people 2) learn as much as possible 3) figure out who we like if
we ever decide to go that route. Folks like Satish Dharmaraj at Redpoint have
loads of information gleaned from successful ventures and I'd have a drink
with him any day.

------
tibbon
I disagree. I think of it as just networking. Very little of my VC interaction
has been in their offices, but more out at events, parties, and lunches. They
are just normal people, who often have a pretty good external perspective on
things.

And just because I'm meeting with them doesn't mean I'm talking about my idea.
Sometimes other companies and bouncing ideas around. Sometimes about
technology. Sometimes about where is best to drink.

------
qdot76367
tl;dr:

VCs are not normal humans. They exist solely on pitches, it is what gives them
life force.

If you see a VC who is talking to a person that is not pitching, run and tell
a grown up immediately.

------
pbreit
This is bad advice. There is typically little downside in meeting up with VCs
and plenty of upside.

------
inthewoods
So I've got an informal meeting with a VC this week - originally, the meeting
was setup to talk about positions within the startups he's funded. The meeting
took a while to happen because of various delays/vacations - and during that
time I've come up with an idea I'm executing on. But it isn't ready to show,
and, quite honestly, I'm not sure a VC would be interested in it, but they
might be.

Should I just talk about the positions, or bring up the idea? I'm concerned
I'll appear to be all over the place (does the guy want a job or to run his
own shop), when the reality is that the side project is an exploration at this
point.

My current plan is to NOT discuss the idea as I don't have a prototype working
yet (probably 1-2 months), but then contact him again later when I've got
something to show.

Thoughts?

------
pge
I'll add one point from my perspective as a partner at a venture capital firm.
The viewpoint that is expressed in the post - that a meeting with someone that
I'm not going to fund is considered a waste of my time - is incorrect. Do not
forget that the provision of capital is a competitive business (I think
entrepreneurs sometimes give up some leverage by forgetting that). We (VCs)
are always eager to meet the best companies and have a chance to build a
relationship with them. Good entrepreneurs tend to know other good
entrepreneurs. Spending an hour bouncing around ideas on a venture with a
talented entreprenuer is both fun and good marketing.

------
iamelgringo
Disagree:

I've found a number of VC's to be quite helpful and informative. Not only
that, but their contact lists are usually really, really impressive. And, a
lot of times, VC's are able to point you to interesting people that might be
able to help.

It also depends on the VC. Some of them only want to talk to you if you to
hear you pitch. Others rather prefer to get acquainted and talk and get to
know you over months before they invest. If you hit that kind of VC with a
pitch, then you'll be asked to follow up in a few months.

------
papa_bear
This is only a somewhat relevant question, but for those that have experience,
are meetings with angel investors more or less casual than VC meetings? Or
does it vary too much from person to person to make a distinction?

~~~
joshfraser
Pitches are usually more casual with angels, but other interactions could go
either way depending on the person.

------
NY_Entrepreneur
Part I

So, we have Allen Morgan's post with a link to some conflicting advice from
Mark Suster. There is also the recent

    
    
         http://www.avc.com/a_vc/2011/07/continuous-financing.html
    

with conflicts with Allen Morgan's advice.

There can be another reason to contact VCs before looking for a check: When an
entrepreneur accepts a check from a venture partner, commonly the partner will
be a Member of the Board of Directors of the entrepreneur's company where the
entrepreneur is the CEO. There the Member can give advice the CEO essentially
has to take seriously, approve/veto some actions by the CEO, and fire the CEO.
The Member has a 'fiduciary responsibility' to their limited partners and,
thus, is not totally devoted to 'supporting' the CEO.

So, the Board has a lot of power over the CEO, and the CEO is very much
'working for' the Board.

So, about a venture partner, the CEO would like to know, "Do I want this
person with a lot of power over me and my project? Do I want to work for this
person? Can this person play a constructive role in challenging work on the
'bridge' of my ship crossing rough seas?".

Here, for entrepreneurs seeking success, is an inescapable, fundamental point:
The successes the venture partners must strive for are, in our economy,
necessarily rare. That is, only a tiny fraction of people in the population
can be worth a lot of money, say, $1 billion.

Okay, such success is rare. Then, necessarily, other than luck, it is
necessarily also rare that people can clearly see a path to such success.
Darned rare.

Let's take an old example, the Wright brothers on their way to the first
sustained, controlled, powered flight.

So, do the usual: Before the attempt, look at history and estimate the chances
of success. Okay, so far, everyone had failed. Indeed, well funded and well
respected Langley had recently fallen into the Potomac River trying.

Now, does this mean that the Wright brothers were fools for trying? The answer
is, it depends on what additional information the Wright brothers had! It
turns out, they had a lot of additional information:

First, the brothers knew that crucial points were lift of their wings, drag of
their wings, thrust of their engine and propellers to overcome the drag of
their wings, and good control on all three axes, roll, pitch, and yaw.
Moreover, they were about the only people in the world with such knowledge!

Second, for lift and drag of their wings, they were not guessing. Instead,
they had invented, built, and made good use of the world's first, good
aerodynamic wind tunnel with a delicate 'balance' for measuring the small
forces. Nice work. They didn't really understand Reynolds number (important
for scaling to larger sizes) but otherwise did good work. Net, they had good,
first-cut data on the lift and drag of their wings. Similarly for their
propellers. Then they knew how much power their engine should have. They
basically knew, just from their bicycle shop in Dayton, that they had enough
lift, power, and thrust.

Third, they had worked out means for the needed three axis control.

With that additional information, their chances were quite good. They were
right and for the right reasons and knew it quite well just there in the back
of their bicycle shop.

Did they make money? Apparently: After their first flying successes, they were
able to sell versions of their airplane for big bucks. They remained important
in aviation at least through Curtis-Wright in WWII.

Okay, suppose the Wright brothers had had investors who were Members of their
Board of Directors. Suppose the investors knew nothing about the wind tunnel,
lift and drag calculations, power calculations, and three axis control. Such a
Member might have read about Langley falling into the Potomac and used their
'fiduciary responsibility' to insist that the Wright brothers immediately
stop, quit, cease, and desist and sell off all their supplies of wood for
kindling.

Why? Again, it's fundamental: Only a tiny fraction of the population can see
success clearly. That is, only a tiny fraction of the population, or
investors, could have seen the difference between the Wright brothers and
Langley.

That fundamental point remains: Only a tiny fraction of venture partners can
look at a project just in development, say, like the Wright brothers still in
the back of their bicycle shop, and evaluate the work at all accurately. Far
too easily the venture partners will hear some bad news, say, about Langley,
and tell the CEO to sell off the business for pennies on the dollar or to shut
down the business and return the remaining cash. Why? Because the venture
partners don't understand the work, from their limited knowledge can see only
disaster, and need to exercise their fiduciary responsibility. Again, the
ability to understand a big success early on is necessarily very rare; only a
tiny fraction of venture partners will be able to, say, follow the Wright
brothers into the back of their bicycle shop, look at the wind tunnel and the
calculations, and understand what they are seeing.

So, what the venture partners really want to do is to wait until the Wright
brothers have been successful at Kitty Hawk and made headlines in the
newspapers. Of course then the brothers could glue together a second copy of
their plane and sell it for enough to have cash enough to glue together
several more and, for a while, execute 'organic' exponential growth, which is
likely just what they did do.

So, between the entrepreneur, who does see the future clearly, as the Wright
brothers did just from the back of their bicycle shop, and a venture partner
and candidate Board Member, there can be a lot of 'tension': Early on, the
venture partner will likely not understand the project well even if such
understanding is readily available. Then on the Board, such a Member is
dangerous, a loose cannon on the deck or bridge of the ship, someone, out of
ignorance, about to jump into the lifeboats and leave the ship to sink, all
for no good reason. Later on, once the project clearly works well, has paying
customers lining up, etc., the entrepreneurs might not need the cash and,
still, won't want someone really dangerously ignorant on their Board.

So, an entrepreneur, if they do want and need to take an equity check, needs
to evaluate venture partners realizing that necessarily only a tiny fraction
will be able to see the future with any accuracy.

Sure, this consideration holds for only a tiny fraction of entrepreneurs:
Again, necessarily, only a tiny fraction of entrepreneurs will be like the
Wright brothers and able to see the future clearly just from their development
work. Mostly entrepreneurs will be like Langley, eager for a check so that
they can dry off, fish their equipment out of the river, rebuild their plane,
make some guesses about changes, and try again. Keep guessing, Langley: "Maybe
glue some feathers on the wings? Where's your wind tunnel? You don't have one?
Well, then, next try, wear a life preserver or, better yet, have an assistant
be the pilot. Still better, f'get about building a plane, get a camera, be a
newsie, go to Dayton, and follow around behind the Wright brothers.".

So, what in current information technology entrepreneurship central to Hacker
News is at all analogous to what the Wright brothers did with their wind
tunnel, lift, drag, and power calculations, and three axis control designs?

Sure: A traditional way to be successful in business is to pick a 'big'
problem that so far is poorly solved and where a good solution will be
valuable. Then invent some new, powerful, valuable technology for some 'secret
sauce' difficult to duplicate or equal that will give a much better solution
to the problem, one good enough for major business success, and with a Buffett
"moat", that is, a technological barrier to entry. Right: This 'secret sauce'
would not be just routine C/C++, Java, Python, Visual Basic .NET, C#, etc.
software. And, right, again, such 'secret sauce' is necessarily rare.

~~~
NY_Entrepreneur
Part II

So, what fraction of venture partners could look at such 'secret sauce' and
evaluate it, say, like looking at and evaluating the wind tunnel of the Wright
brothers?

I can absolutely, positively assure you that the answer is, "may I have the
envelope, please?", in all the US, countable on two, maybe one, hand.

About the best an entrepreneur can hope for is (1) they (the entreprenrur)
have some solid technical qualifications (technical accomplishments,
professional titles, educational degrees, publications), (2) they have some
solid business qualifications (successful start-up, development, and
management experience), (3) they have work about ready to hit the headlines,
that is, are packed and on the way to Kitty Hawk and, then, some venture
partner sees (1)-(3) and 'believes' and seems to be willing to continue to
'believe' even when, say, there is a crack in the engine block and a two month
delay.

So, how the heck is an entrepreneur going to find such a 'believer'? NOT
easily!

Finding such a venture partner is one reason for contacting them early on! Or,
for the Wright brothers, once they made headlines at Kitty Hawk, likely many
investors came forward. But would the brothers have wanted such people on
their Board? Heck no! Why: Because that first successful plane at Kitty Hawk
was only the first of years of widely active R&D in aviation and where, at any
moment, an ignorant investor could get nervous, exercise their fiduciary
responsibility, head for a lifeboat, and leave the ship to sink.

So, an entrepreneur doesn't want 'dumb money' that could too easily destroy
the company for no good reason. 'Smart money' that could walk to the back of
the bicycle shop and understand the wind tunnel and the calculations would be
good. Lacking that, 'patient' money is necessary. Indeed, if the Board Member
just writes a check and otherwise ignores the company, then that might work.

Net, it is likely much better if the entrepreneur just f'gets about venture
investors and, like, say, just a Main Street pizza shop, opens, gets
profitable quickly, grows 'organically', and has nothing to do with equity
investors. The difference between such a pizza shop entrepreneur and an
information technology entrepreneur is not so much what to do early on but
just the much greater potential of information technology.

How much greater? Suppose the Web site is just from a living room with 15 Mbps
upload bandwidth to the Internet. Suppose one Web page can be sent for about
20 KB or 200 Kb. Suppose the 15 Mbps is half full, 24 x 7 for 75 Web pages a
second being sent. Suppose each Web page has 3 ads. Suppose the ad targeting
is good enough for $1 of revenue for each 1000 ads displayed. Then get

1 * 3 * 75 * 3600 * 24 * 30 / 1000 = 583,200

dollars a month in revenue. At's a lot's of carryout pizza!

So, that's

75 * 3600 * 24 * 30 = 194,400,000

Web pages a month served. So, how to get that many people so interested? Sure:
Did I mention "pick a 'big' problem that so far is poorly solved and where a
good solution will be valuable"?

So, just why don't we see more examples? Well, there are each year maybe a
million information technology entrepreneurs with routine work and otherwise
mostly just luck on their side and only a tiny number of entrepreneurs like
the Wright brothers. Then among the winners, tend to see more from routine
work with good luck than from careful R&D and planning!

Is there a role for "careful R&D and planning"? Sure! F'get about information
technology venture capital; for pushing to a great future, it's a nearly
brain-dead, junk effort, real kindergarten stuff! Instead, the all-time,
dream-team, unchallenged, world-class, astoundingly high batting average
backer of the future of information technology, indeed, the main creator of
Silicon Valley is, "May I have the envelope, please?", thankfully for US
national security, the US DoD. E.g., near 1942, a letter, a few calculations,
a few measurements, and a few scientific papers got the US to invest about $3
billion scarce 1942 dollars in the Manhattan Project. So, the $3 billion was
invested just from some simple evidence, mostly just on paper. In comparison,
information technology venture capital would have said, "You build one and
test it and, then, we will consider funding half the aviation gasoline for the
Enola Gay.".

ROI? Sure, the $3 billion was an average of $3000 per casualty for the
estimated 1 million US military casualties for an invasion of the home islands
of Japan. Great ROI and bargain.

Of course there are many more examples -- stealth, GPS, Sosus, phased array
radar, phased array passive sonar, the SR-71, and much more. Important? At the
start of Gulf War I, Saddam had the world's third or fourth largest military.
The US blew his military off the desert with more casualties from recreation
such as playing softball than from Saddam's military.

So, what about the information technology venture partners, why don't they do
similar work? First, the venture partners, e.g., history majors and lawyers,
nearly never have the qualifications to be a DoD problem sponsor. Second, the
limited partners who actually have the money and evaluate the venture partners
have even less good qualifications. Bluntly, shockingly, so far US information
technology venture capital is insisting on just ignoring 'technology'. So,
they entertain themselves with total nonsense about their special 'insight',
'deep domain knowledge' (a bigger laugh than anything from Jay Leno),
'judgment', etc. Basically all but a small number of US information technology
venture partners are totally unqualified in 'technology'.

But why should the venture partners and their limited partners change? Because
on average they are losing money! As from Mark Suster, over the past 10 years
or so, about 2/3rds of the venture partners have lost their jobs from not
being able to raise another fund from having negative returns. Basically they
are failures. The rest? Some of them have been lucky.

Real understanding as for US DoD problem sponsors? We're counting on two,
maybe, one hand. The rest are drinking witch's brew and taking shots in the
dark.

So, why contact venture partners early on? An entrepreneur with good work such
as the Wright brothers will think, "If they can't understand what's in the
back of our bicycle shop now, then we don't want them on our Board later for
the rest of the progress in aviation as we do much such R&D work in the
future.".

A venture partner will likely say, "Let me see your demo at Kitty Hawk and
your confirmed orders for planes, and then we'll consider an investment.". The
Wright brothers might have said, "We'll show you the back of our bicycle shop,
with an NDA, and ask you for an explanation of what you saw, and if you give
good answers then maybe we will consider you for a seat on our Board. Since an
ignorant person on our Board could kill our company, we don't want any such
person, even with a checkbook.".

