Raising venture capital: Selling technical ideas to nontechnical investors

Image courtesy of Big Hero 6.

In the first post of this series, we talked about your pre-fundraising checklist. Today, we dive into the actual fundraising process and what you need to understand to sell yourself and your startup effectively — with an emphasis on sell, since that’s what this process is. VCs have to believe in you and your vision.

The problem for hardware startups, though, is that people don’t usually buy things that they don’t understand, and deep technology is, well, deeply technical, which makes the process much harder. Most hardware and deep tech funds aren’t composed of technical people. You can see the paradox. A lot of “deep technology” that gets funded isn’t actually that deep. A lot of AI companies that get funded are just using a series of if/then statements. In the VC world, it’s easy to say no, but it’s hard to say yes. If a VC doesn’t understand what you’re building, they usually won’t go through the effort to figure it out, and it’s just an instant no. Let’s talk about how you can fix that. 

Dumb it down

This might feel like beating a dead horse, but VCs want to feel like the smartest person in the room. Or at least, feel smart. You need to dumb your pitch down. Not dumbed down in an “explain it to a 5-year-old” way, but create parallels to similar products. Simplify complex ideas. Use good graphical aids. 

Where I see a lot of founders get lost is when they have a deep technical understanding of a space, maybe they got their PhD in the technology they’re building. This becomes a “flux capacitor”; oftentimes in movies, you see screenwriters make up terms that mean nothing but sound impressive. You don’t want your startup to come off in a way that feels nebulous and untouchable. Instead, take a page out of the Big Hero 6 notebook, where there are microbots, levitated wheels, and concentrated lasers — more accessible items to any audience because they know the simpler technology they come from.

A last important note here: There are edge cases and a few (and it’s only a few) highly technical VCs. I wouldn’t consider myself in that block, but I’ve been around the block a few times and still code actively. Some people do have advanced technical degrees. Do your homework, assess during the first few minutes of your call, and add additional technical details as necessary. The worst thing that can happen is you explaining basic terms to somebody who is intimately familiar with your space and technology. 

Scale it up

VCs invest in businesses that create outsized returns. But what does that actually mean? The rule of venture is that every investment has to “return the fund,” so if it’s a $20MM fund writing a $1MM check, they need to make a 20X on that investment. You need to show you can back into that. Sound easy? Maybe not quite as much as you think.

Oftentimes when structuring their pitches, I’ve seen founders conveniently forget about dilution. When you raise a new fundraising round, existing investors essentially have their ownership percentages decrease. Realistically, from seed to series A, this can be as much as a 70–80% haircut on the original ownership percentage.

So, if that same $20MM fund holds 10% after the seed round (assuming they don’t take pro rata), they could only own 3% by the time of exit. Meaning that the original 20X actually ends up looking like a 60–70X. Not impossible to hit, but if the VC invested at a $15MM post-money valuation, that means you’re exiting for at least a billion, otherwise you’re a bust. This is where hardware businesses struggle because it takes a lot of money to build a factory or to push out a fleet of robots. This means you have to do one of two things: Exit bigger or exit without taking in more capital. The former is far easier to sell in a pitch.

Where this lands you: As a founder, your job is to showcase the vision, not necessarily the reality. It’s a prisoner’s dilemma of sorts. You’re competing against businesses that will sell ideas that may never materialize. Or who either by negligence or maleficence misrepresent capital it will take to get to market. VCs can’t tell the difference.

So, what do you do? You either play the game or you get played. You need to think about your other markets. You need to think about your IPO and post-IPO life. And you have to know a feasible — not likely, but feasible — pathway to get there. Remember, not every business is a venture-backable business. If you’re reading this article and thinking you don’t know how to show yourself as a $1B+ company, it might sound harsh, but maybe you should seek another funding vehicle. 

Do it confidently

Once you’ve nailed the pitch, you need to practice. The other common fallacy I see from technical founders, especially at hardware startups, is that they let their science background dictate their pitch style. This isn’t a conference presentation, and you’re not Oppenheimer — you’re Jordan Belfort selling blue chip stocks to nonaccredited investors.

Image courtesy of Sean McPheat.

One important part of the confident pitch is speaking the same language that VCs speak. There’s a lexicon of VC terms and it’s important for you to know all their abbreviations, the cadence of a call, etc. VCs will judge you on your ability to make small talk for the first five minutes of a pitch, your ability to connect with them, and your ability to sell them on the vision. The reason for this is that if you ever need to raise more capital, you’re going to have to sell another investor, and similarly, you have to sell your team on your vision too.

Confidence can’t be overstated. Realistically, the fastest way to close your financing round is fear of missing out (FOMO). The more aloof you are, the more confident you are that you’ll close this round with or without the VC you’re on the call with, the more FOMO you’ll create. It’s that simple.

Image courtesy of The Hollywood Reporter.

Deck design and construction

We’re going to sidebar here for a second to talk about the pitch deck. This is how you should get introductory meetings and scale conversations. Unless asked, you should strictly never go through a pitch deck on a fundraising call. There are very few services that I feel are worth every penny you pay for them. Good design is one of them. You can find good, cheap designers, but you should look for them, build a relationship, and find someone you trust to work with.

In terms of deck content:

• Don’t overload any slide. Most VCs will spend 5 minutes on your deck before the call if you’re lucky. It’s harsh, but it’s reality. The easier you make the deck to digest quickly, the better your chances are of raising funds.
• Create vague excitement without offering too much. You don’t want to give away everything. VCs like to think they’re smart. Lead them to the questions you want to answer.
• Make your deck under 20 slides. You can always have a full version or an appendix you send later.
• Never have someone sign an NDA. If someone can copy your product from your pitch, you don’t have a real product to begin with.
  

Narrative is everything

From when you start fundraising to as soon as you’re EBITDA (earnings before interest, taxes, depreciation, and amortization) positive or even have a line of sight to that, your entire fundraising ability is strictly driven on narrative. That could be as many as four or five rounds of financing and hundreds of millions of dollars driven on narrative alone. When VCs make assessments of companies, they do the first iteration based on judging the CEO alone. The CEO’s ability to fundraise, hire, or in general terms, inspire others, is what dictates fundraising success. Double down on the narrative, refine it, and keep fundraising constantly.

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