In uncertain times, investors become even more risk averse. For startups, persuasive pitches are all the more important. This is what to pay attention to.
At the start of the summer, Mistral AI was an unknown startup consisting of three French founders. Then it shot to fame by pulling off the heftiest seed funding deal ever cut in Europe. Was it hype? Not judging by the backers. Investors included renowned venture capitalists and angel investors such as Google's former CEO, Eric Schmidt. This consortium put in USD 105 million of funding to power the startup on its way to creating a rival product to OpenAI's ChatGPT.
This story tells us a few things about the tech and investment landscape in the second half of 2023:
In straitened times, potential investors become more risk averse. There is more focus on business fundamentals, and a greater inquiry into the personal fidelity of startup founders vying for capital. There is less money sloshing around the tech ecosystem because those holding the purse strings are forced to be more discerning. This means founders must learn to be more convincing when pitching. In a downturn, persuasion matters more.
What then is the anatomy of successful pitching to potential investors? In most cases it boils down to the possession of two components:
Roei Samuel is an angel investor and founder of Connectd, a platform that links entrepreneurs and investors. When starting his first company - RealSport, which he sold in 2019 - raising funds was a struggle. After all, he was still at university. Connectd exists to help good ideas flourish, even when founders don't have a pre-existing network of moneyed family friends or colleagues. Samuel reckons that the perfect pitch consists of art and science in the right proportions.
"The art is the suitability, passion and drive. This tells the investor off the bat that these are the people to solve this particular problem. It's also about inspiring others. Any founder who struggles to inspire an investor won't win customers or lure the best talent," he says. "Science is about showing that your return profiles will work, and demonstrating your potential."
As investors scrutinise founders with more effort, founders would do well to exercise the same discipline. Kerry Baldwin is co-founder of IQ Capital, an investment firm. She oversees funds there that range from seed (which is anything below GBP 5 million), to GBP 30 million, specialising in deep tech. In the last twenty-five years, Baldwin has met thousands of founders on the make. What's the most important thing to include in a pitch? For Baldwin, it's for an entrepreneur to communicate their reason for being in the room with her.
"Pitches work when a founder arrives to a meeting with a clear idea of what they want," she says. "They must be able to describe the outcomes they can deliver with a specific sum. So, "our ideal is GBP 6 million, but with GBP 4 million we could take the company to this point". We also want to know why they need IQ Capital. Beyond securing funding, we want to know what it is about our knowledge and network that appeals to them."
Another crucial component is one that even experienced entrepreneurs get wrong from time-to-time. That is, a developed understanding of how pitches at various company stages should differ. For instance, Baldwin observes, a seed pitch should be all about vision, and painting a unique view of how a problem might be fixed. At series A, a pitch must show how the business might conquer other sectors or markets, and create repeatable revenue. And at series B, there are trickier enquiries still: how are global trends shifting to create challenges or opportunities? And, is the founder still the right person to lead the company?
"It's surprising how often founders at series A or even B come in and try to sell vision as though they were still at seed," says Baldwin. "At series A or after pitches must be practical. We've gone beyond proof of concept. We're trying to get to repeatable revenue and move into different sectors, geographies. And this needs to be reflected in the pitch deck."
Academics have proposed that there is a link between investing and poker. Both require a skillset that comprises of strategy, anticipation and an acute reading of the person sitting on the other side of the table. Mo El Husseiny is founder and managing partner of Ventura Capital, an investment company that focuses on pre-IPO technology startups. While the process of evaluating the merits of a company is deeply empirical, El Husseiny also impresses the importance of the human factor in his work.
"During a pitch, you watch people and try to unpick what is important to them," he says. "You discern what drives them, and what they value. You get an impression of where your principles and priorities might align or diverge. Investing can mean spending a significant part of your life with this team, backing them and supporting their business development. You must keep sharp on the human aspect."
What's the worst thing a founder can do in a pitch? For El Husseiny, the cardinal sin is concealment. "When someone is evasive on a direct question, it leads me to think ahead. Working with someone becomes impossible when you need to decrypt the truth from fragments," he says. "This kind of thing instinctively kills deals for us. We pride ourselves in being able to walk away from a process at any stage in it. Losing a sunk cost is better than sticking around to find out what surprises might lay in store."
In the coming years, we will discover whether the group of investors who put such a sum into Mistral AI were savvy or foolhardy. While that company and its all-star founding cast promises to corner a highly lucrative corner of a fast-growing category in tech, other startups must refine the art and science of persuasion. While the market will eventually enter a new phase, where capital is again more free flowing, the best investors are likely to remember the lessons associated with this straightened period. Founders will do well to take note.