Right pitching key to fund-raising

Fifteen years ago, I was a greenhorn in the VC industry, relatively speaking. In a meeting with a prospective entrepreneur, I was extolling the virtues of the fund for which I was then working. At the end of the meeting, the founder’s on your face kind of remark piqued me. He simply said, “Whatever you have said is fine. But frankly we find all VCs the same. Some of them wear black suits and some wear grey suits — that is the only difference.” The comment has been bothering me.

Shouldn’t there be differences among investors in the philosophy of investing? How can the entrepreneurs benefit from this insight? To understand more, we did a detailed survey of 45 investors. We believe, the results would help the entrepreneurs on how they should engage with investors when they begin talking to them.

Using broad brush strokes, we classified our respondents into three categories: angel investors, independent VCs, and institutional VCs. When the VC arm is a part of a larger entity (for example, ICICI Venture), we classified it as institutional VC, and independent VCs otherwise.

Converging on value First, we looked at valuation – a question that ranks utmost in the minds of entrepreneurs. While there is a general consensus that valuation is an alchemy that involves both subjectivity and objectivity, the components of the mix vary with the investor. A higher proportion of angel investors indicated that valuation is a subjective process, as compared to that of VCs. Among the VCs, a higher proportion of institutional investors indicated that valuation is a fairly objective process.

Thus, how you pitch depends on who you are talking to. If you are talking to an angel, wear the hat of a ‘poet’, but in the case of a VC, wear the hat of a ‘quant jock’. For, the nature of the pixels in the picture can be substantially different depending on which hat you wear and you would be better off wearing a hat that resonates with the investor.

Next, we obtained the priorities among investors for the different factors that influence valuation. All the three groups of investors have indicated that the biggest influencer of valuation is the founder and management team. Anchor your pitch on this factor irrespective of the investor group you are talking to. Similarly, all the three groups give the least priority to past financial performance. Investors are more interested in the picture you paint on the future, rather than the laurels of the past. Among other categories, priorities differ between investors. For example, institutional VCs accord a higher priority for returns as compared to that of angel investors; while angels give a higher priority for business model as compared to VCs. Tailoring the pitch with an intuitive understanding of the investor priorities can deliver better results.

Investment triple helix Third, we looked at the relative importance of valuation, deal structure, and return covenants to VC investors. Valuation of the deal comes first among the three, though the relative priorities differ. The relative importance given to valuation by angel investors is the lowest, whereas, in the case of return covenants, it has been the highest. There is very little to distinguish between investors in deal structuring. This indicates that entry valuation can be an important determinant of returns. While deal structure and return covenants can help contain losses, valuation probably determines the magnitude of upside gains from the investment.

“Spot the differences” between two similar pictures remains a favourite way to pass time while waiting or travelling. Correctly identifying all the differences leads to a sense of minor achievement.

Similarly, there are differences between investors, who at a distance look similar. Understanding these differences helps to pitch the talk accordingly. The right pitching is critical – whether it is in a sports field or in a music concert, and I would add to that list, fund raising by entrepreneurs as well.

The writer is Professor, Department of Management Studies, IIT Madras. Swati Panda, Assistant Professor, Institute of Management Technology, Hyderabad, co-authored the article.

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