When serial entrepreneur and partner at Pegasus Tech Ventures Bill Reichert came to Luxembourg for the regional final of the 2023 Startup World Cup, he lifted the lid on three secrets to how VCs operate. Here, Silicon shares the full list of 10.
- VCs don’t invest with their brains, they invest with their hearts.
When Reichert started out in Silicon Valley, it was widely believed that the secret to a good pitch was a data-packed pitch deck, with plenty of charts and graphs about market size, competitive advantages, and eye-popping financial projections. When he studied other VCs he realised that the difference between an interested VC and an uninterested one was linked to a “wow” factor, “some trigger that made their heart beat faster.” VCs do not invest with their brains but with their hearts. “It isn’t about team, it isn’t about technology, it isn’t about market. It’s about having a compelling value proposition,” says Reichert.
- VCs are not impressed by your vision and passion. They are impressed by your ability to execute and sell.
Founders need to prove their ability to execute and sell. He says: “There are plenty of ambitious, visionary entrepreneurs out there, but there are surprisingly few who love to be out there with customers, who really understand how to sell, and who know how to drive a team that executes well.”
- Despite the common wisdom that you should under-promise and over-deliver, you have to over-promise and over-deliver.
Reichert says that the reality is that every entrepreneur over-promises, even when they think they are being “conservative.” “You won’t get any credit for under-promising. More important, VCs want to see that you can over-deliver – you get brand name beta customers, you get top-tier talent on your team, you make every seed dollar go ten times farther than other entrepreneurs. The most credible entrepreneurs are those who make big promises and actually deliver on them.”
- Entrepreneurs should not focus on market size. They should focus on market opportunity.
VCs are looking for markets that startups can penetrate quickly, grow fast, and achieve scale. Reichert says that almost every entrepreneur gets the “Market” slide wrong, focusing on a big TAM (Total Available Market) and CAGR (Compound Annual Growth Rate). But market size is almost always irrelevant. He says: “Startups never fail because the market is too small. They fail because they can’t get customers. You need to show that you know exactly who your customers are and that you can get them at an impressive speed and cost.”
- VCs don’t want entrepreneurs who are smart. They want entrepreneurs who are savvy.
People who are “smart” are the ones who got straight As in school, got 100% on the tests, and got into the best universities. As a result, they think they have to have the right answer to every question that comes up. That’s a dangerous attitude, says Reichert. “People who are savvy figured out a clever hack to get a good education, but know they don’t always have the right answer. The reality of startup life is that you can’t always know the right answer. Savvy entrepreneurs don’t pretend to have the right answers, but they figure out a way to get good answers fast and cheap.”
- VCs don’t invest in entrepreneurs who are nice. They invest in entrepreneurs who are urgent and persistent.
Too many entrepreneurs defer to VCs during the fundraising process, fearing that they will somehow offend investors by pestering them too much. Reichert says that entrepreneurs should not waste their time chasing VCs who show no interest in their startup, but once an investor shows interest, entrepreneurs need to take control of the process and drive the process as much as they can. He says: “Fundraising is a version of sales, and VCs assess your fundraising skills as a proxy for your sales skills.”
- High-performing teams don’t always execute in harmony. High-performing teams are fuelled by “constructive conflict.”
Entrepreneurs are frequently surprised and disappointed by the amount of conflict inside their startups. They assume that the bold vision and spirit of their startup will align everyone into harmonious execution. But unless everyone you recruit thinks exactly like you, there are going to be differences of opinion. And that’s a good thing. You don’t want to suppress different ideas. You want the richness of different perspectives on your team. The key is to elicit these different perspectives and develop a culture and process of “disagree, then commit.” People can suggest alternatives, but once the team makes a decision, everyone needs to work together to get to success.
- Customers don’t buy products, they buy benefits.
Too many entrepreneurs fall in love with their product idea. They spend most of their time trying to perfect their product. Reichert says: “They believe that all the competitive products are crap. They are convinced they fit into the category, ‘If you build a better mousetrap. the world will beat a path to your door’. But VCs don’t fund cool products. They fund startups that deliver unique and compelling value to customers. You need to show that your startup culture is not product-centric, but customer-centric, focused on delivering obvious benefits to your target customers.”
- VCs don’t understand your pitch.
Entrepreneurs overestimate the domain expertise of investors, and they overestimate the clarity of their pitches. Reichert says: “VCs don’t want to appear stupid, and so while you are talking about your synthetic oligosaccharides or your perovskite materials or your Diffie-Hellman algorithm, they might be smiling politely and pretending to understand.”
The answer isn’t about dumbing down but rather making sure what you are saying is clear to the person you are talking with. Reichert concludes: “Don’t make VCs work to understand what you are pitching.”
- VCs don’t invest in your Why, they invest in your Wow!
It has become popular to talk about the power of Why as a driving force behind entrepreneurial success. Reichert says that while the concept has a place in building your company culture when you want to convince VCs to invest in your company, you’re Wow! is much more important than your Why. He says: “Your Wow! is the amazing thing you can do that makes the hearts of VCs beat faster. (See secret #1.) It’s your ability to deliver 10x what the nearest alternative can deliver. The key to getting to Wow! is to be clear (secret #9), be compelling (secret #8), and be credible (secret #3).”
Bill has co-authored a book that addresses many of these points in more detail. Read about “Getting to Wow! Silicon Valley Pitch Secrets for Entrepreneurs” here.