Feb 1, 2023
How do Startup Founders Raise Venture Capital? w/ Chris Smurthwaite of VC Insider
- BRT S04 EP05 (167) 1-29-2023
What We Learned This Week
- EX VC or ‘Recovering’ VC who now works with Startup Founders to help them raise $ money & build their business.
- Startup Founders need to research VCs to understand what type of fund they have, do some research on the fund, industry & and who they work with
- What VCs do not appreciate - How to Contact a VC, do not spam, make the email personalized, this is a commitment, build a relationship
- Startup Founders need to learn how to Tell Their Story, then work on the Pitch Deck with Problem / Solution Model
- What is the Exit Strategy? Exit by Acquisition, or by IPO (go public)
Guest: Chris Smurthwaite of VC Insider
https://www.linkedin.com/in/csmurthwaite/
Chris Smurthwaite is an ex-venture capitalist.
He consults with & advises Startups on navigating the complex world of Venture Capital. He spent the last decade in corporate strategy, business development and growth operations on both the investor and innovator sides of the table.
At age 30, was hired to run a corporate venture capital fund for a $1.4 billion company.
Among other accomplishments, the fund made:
- A Seed level investment in a health tech company in 2018 which sold for $425M in 2021
- An early stage investment in a company that was acquired for $106M — 7x valuation gain over initial investment.
Since 2013, I have:
- Advised ambitious Founders whose companies are valued from $500K to $250M
- Established multi-million dollar business development partnerships with emerging companies
- Made early stage, on-and-off balance sheet investments
Notes:
Seg 1
Chris is an ex VC (Venture Capital Investor) or reformed VC who now works with startup founders to help them raise money and build their business. Chris is a recovering VC that ran a corporate fund in Phoenix Arizona a few years back. They invested in start ups. Chris says that the startup side is more fun.
Startups know about VC or venture capital but typically not the specific VC fund.
There are all different VC fund types, as in the industry they work in, their area of expertise or size of startup they work with. Different industries could be tech, or health, or finance. Some startups are trying to add a tech dimension to a health field for example.
There are different stage types and funding rounds. Funding rounds could be pre-seed, then seed, then round A, round B, etc. Stage types are what level of advancement the startup is at.
Startup could be pre-revenue, it’s a smaller company with no profits yet just developing a product. VC funding in this type of company would be writing a small check. Then there are companies with a finished or proven product but not much sales yet, they are early stage. This company would get a bigger check.
Many startups will fail, 90% as what is discussed in the industry, is very common. How startup defines failure and how VC defines failure are very different. Startup could define failure as - we built a nice little profitable business but it did not get to scale. Another way of founder might define failure as they build a small business but the business collapse because they could not get VC money. Success for a founder is really building any type of business.
VC defines failure as they were not able to exit through acquisition or an IPO.
Market match or product market fit is crucial when building a startup. The model or product must be proven, must be adaptable, and something customers would pay for this particular solution. VC always wants a big market, with lots of users for the opportunity of a big success.
An angel investor has a smaller investor who would write smaller checks to typically preseed start ups. Do you want to do research and know what your market is, create a sample market and see what the market wants. Not ready aim fire, but, aim ready fire. Ask the market sample if you build product X, would that solve problem Y for you?
Seg 2
How to contact a VC, and what VCs don’t like. VCs don’t like being spammed, instead they want the email to be personalized. VC appreciate when founders take time to get to know them and what products they fund.
They appreciate a founder who takes time to research and show the commitment to find the right VC. It is really unacceptable if a founder does no research on the VC fund they’re contacting. This takes 10 minutes, to look at a website and LinkedIn and do some minor research.
VCs are going to invest a lot of money in a founder so it’s all about building a relationship and the commitment of the founder. Simple structure for an email could be, I saw you invested in company X, we are similar, can we chat?
Path 1 - short email to a VC with 3 to 4 paragraphs that are simply 1 to 2 sentences each. Also give a website link to the start up, and attach a short summary slide deck, that is 8 to 10 slides.
Think of the process like you’re creating a more detailed résumé to try to land a job. The goal of the email is just to get the interview for the job. Respect the VC you are contacting and understand what they want. Then the VC can decide if it’s a good fit and should proceed.
Path 2 - if the VC decides it’s not a good fit but likes the presentation then they could refer the idea or start up to a venture capital firm that might be a better fit. How do you educate the VC is important for a founder.
Seg 3
If startups need help creating a pitch deck for a venture capital, there are many examples online of how to do it, and samples from famous pitch decks like Airbnb. Standard pitch deck is the problem and solution model.
Chris thinks of a pitch stack in different terms. The pitch deck is nothing more than some thing to pique the interest for a VC to get the meeting. A visual and descriptive medium to put your best foot forward.
It has never been easier to find funding and start a start up. Chris recommends that you tell your story first and ‘why you’. This is what should be as part of the pitch deck or pre-pitch deck. Why you know your market and then the problem / solution model.
Past companies built on sand like FTX or Theranos eventually got exposed. They told a fascinating story initially but the execution was garbage. How founders tell their story, what’s their best story? The founder story or company journey with customer testimonials added in.
Think with storybrand technique, using the heroes journey of storytelling. Position the customer as the hero, brands that empower customers. This stokes emotion in the VCs. This is what Nike and Apple built billion $ dollar brands on.
Building a StoryBrand, book by Donald Miller
Storybrand discusses that familiar story of the ‘Hero’s Journey, and how a business can intertwine this into their marketing material, including the website. You identify with your customers thru their problems – even using common archetype symbols like a villain, guide and an internal feeling to overcome. Customers can relate to the story, and connect with your business as someone who can help them.
The Book in One Sentence
- Building a StoryBrand is about making your customer the hero of a story.
The Seven Big Ideas
- The customer is the hero, not your brand.
- Companies tend to sell solutions to external problems, but customers buy solutions to internal problems.
- Customers aren’t looking for another hero; they’re looking for a guide.
- Customers trust a guide who has a plan.
- Customers do not take action unless they are challenged to take action.
- Every human being is trying to avoid a tragic ending.
- Never assume people understand how your brand can change their lives. Tell them.
More on Storybrand technique - Full Show: HERE
Chris helps the founder to find the best story, and create the process showing the journey for the customer using the product. What was that ‘aha’ moment on how the founder discovered this idea. Does the founder even have a good story?
The motivation of the founder gets improved with a good story. Is the product a moon shot, that’s going to jump curves and create a new technology? What’s the startup expertise and their viewpoint to the world.
Seg 4
What is an exit strategy? This is when they start up is either acquired by another company, so exit through acquisition. Another exit is an IPO, where the company goes public.
Day one priority for VCA is to determine an exit strategy, but does not want the founder to be obsessed with it. Initially when VC gets together with the founder this is spring training, not the World Series.
Talk about the beginning of the process.
What are the gaps in the industry, what are the problems not being served, and how can the start ups product take care of this. Space you play in and where you attack are very important in developing a product.
An example was the dollar shave club used great marketing and a good price to show that people wanted shaving supplies through home delivery with a subscription. After that you need to speed to replicate as fast as you can.
The old Gretzky hockey quote, skate to where the park is going to be. Skate two good ideas and opportunities. What is the niche and blue ocean for this product to be able to swim in. We don’t want lots of competition.
VCs constantly do research on industries and subsections of industries to find potential blue ocean opportunities. They will even create financial models and market models, to do advance due diligence for opportunities. Then you try and find start ups who are working within these niches.
VC is after you have a process and competency so they can raise money for their fund with LPs or limited partners.
New industry is being looked at by venture capital and start ups or things like a pharmacy, health online, with companies like pill pack. Need to look and see how many players in the market already how many start ups are working on this problem? Start ups need a compelling case to get venture capital funding. Lots of companies and start ups are working in telehealth, but that does not mean there are not still good ideas out there.
Seg 5 - O/T
When you’re building a good product and unique technology, acquisition is always a potential exit even if you don’t have the sales. There’s an opportunity for bigger tech companies who could use the technology you are building and add it to products they already have.
For example Microsoft is making a multi billion dollar investment in open AI and Chat GPT as this could potentially increase their search engine Bing. Microsoft purchased LinkedIn in 2014 to get into the social media space, with an established product. They paid $ billions for it.
What kind of customer data does your start up capture? Data and information on customers is extremely important. Startup founders not powered by tech like health or financial services tend to overlook data management. They may not capture the customer data versus product use. Or they may not realize what type of data they even have.
Partnerships and revenue share are a part of modern tech. Companies like Airbnb and Uber or so valuable because they know so much about their customers.
What is the long-term vision of the start up? What products and customers can work together. VCs do not really know what works and what does not. So they have to fund multiple start ups and look for one of them to be a home run. Famous book Zero to One by Peter Thiel talks about how difficult it is to find these great companies.
Tech Topic: https://brt-show.libsyn.com/category/Tech
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