How to pitch to VCs: 5 questions a tech startup must answer
Like many software developers, I’ve had more than one occasion when I tried to launch my own tech startup. I liked the idea of the independence and freedom of self-determination that my own company provides. Yet, for all my desire and many tries, I just couldn’t make it past the first VC pitch.
Here’s why: I didn’t have a good elevator pitch.
For a venture capitalist, time is money, and when you make a pitch you don’t get a lot of it; 15 minutes is the max.
Fortunately, at the time, I had the ear of an experienced corporate businessman for counsel. I shared my frustration and rejection, and he in turn taught me a lesson that has lasted me a lifetime. When raising capital from a VC, in your first pitch you must answer these five questions clearly, compellingly and in as little time as possible:
- What’s the product or service?
- Who’s the customer?
- What’s the benefit?
- What’s the price?
- What’s the competition?
What’s the product or service?
It’s actually quite a challenge to clearly define the product or service your business plans to offer. Many software developers turned aspiring entrepreneurs feel the allure of affecting the big picture, and this can lead a tech startup to cast too wide a net in its product or service.
In the quest to be a disruptor a startup might try to be everything to everybody, which is rarely a good business plan let alone a credible product or service. As a result, the product or service is vaguely defined.
A detailed and focused intention about your product or service will make it easier to attract investors and customers. Amazon didn’t start out wanting to dominate the retail business; its original intention was to sell books online, and the other stuff followed. (For a start-up, selling books online is a lot easier than dominating the retail sector of American commerce.)
In short, when you describe your product or service, ensure that the VC on the other end of the pitch understands the viability of your product or service quickly, clearly and convincingly.
Who’s the customer?
Most products and services are not for everybody. VCs already know this. What they really want to know is that you have a clear idea of who or what your customer is.
They’ll ask questions such as: What does the customer do? Is it a business or an individual? What is the customer’s purchasing power? Is the customer base big enough to support your enterprise for years or decades? How will you approach the customer? What motivates the customer to buy?
These are all important questions, but they essentially boil down to a single critical one: do you truly know the customer for your product or service and what makes that customer tick?
What’s the benefit?
Besides convincing the VC, you must also clearly articulate your product of service’s benefits to the customer.
Sometimes a customer may not realize they want your product and thus can’t understand any benefit at hand. Few people in the 1970s foresaw many benefits and consumer desire for a computer for personal use, However, that is more of an exception that proves the rule. Most customers know what they want (or believe they need) and can identify a product or service’s benefit. Many people understood the benefit of a small, inexpensive, fuel-efficient automobile, hence the rise of Toyota. The benefit of a Corolla was apparent.
Your product or service should provide a real, apparent benefit, and you must be able to describe that benefit clearly and compellingly.
What’s the price?
Price counts, and so does setting a price according to the value of the product.
At some point, a customer will pay for the product or service you sell, including any “free” tier. Eventually, some money will change hands. You’ll need to set a price that the customer can afford and with which your startup can make a profit.
You can have the greatest product or service in the world, but if your customer can’t afford it or the competition undercuts your price while not compromising quality or availability, your business might not be as viable as you think it is.
What’s the competition?
Almost every business has competition. Extremely few have the vision and resources to create a market from scratch with no competitors. Even Facebook, the poster child for all that a tech startup aspires to be, had competition when it started out — remember MySpace and Friendster?
Competition is good, especially for startups. You don’t have to create a market; it’s already there. Your challenge is to compete effectively for that existing customer base and broaden your market appeal.
Putting it all together
It’s hard to create a successful tech startup. Sadly, most fail. VCs know that.
They also understand that successful startups can provide a significant return on investment. This is why VCs are motivated to take pitches and invest money, should the startup be viable.
Convincing them of that viability is the critical factor. Seize the moment and confidently present your case, address those five questions about your startup and take a big first step toward a successful launch.