Recent profile pic for noted investor Dave McClure.

[Editor's note: Startup Jedi is a new column by GeekWire chairman, investor and serial entrepreneur Jonathan Sposato. Future columns will be made available exclusively to GeekWire members in a special members-only area of the site. You can become a GeekWire member by registering here].

I hear a lot of startup pitches.

I can tell you how many startups are currently pursuing the tablet presentation space, or online content filtering for kids, or iPhone apps that identify parking spaces near the hippest bars. The pitches are usually quite good, because they all have heart and the entrepreneur is, by definition, super committed.

On the rare occasion when the pitches are bad, it’s usually because of one of the following things:

  • A lack of situational awareness that the segment is already super crowded.
  • The entrepreneur is not a clear communicator, or under par in his or her ability to sell, and unfortunately someone hasn’t pointed this out yet.
  • Something truly outlying like the entrepreneur is a wing nut, smells bad, feels entitled, or was rude — all barriers to transferring confidence to a potential investor. In other words, the entrepreneur is uninvestable as a person.

But most of the time, I like listening to the new ideas.  The exchanges are always productive two-way dialogues, where I end up learning just as much from the entrepreneur. Frankly, I use these meetings as a way to gauge the marketplace. Are entrepreneurs noodling on health care ideas, like they were a couple of years ago? Or are marijuana vending machines the new hotness?

The clumping of ideas is always interesting.

Jonathan Sposato

These meetings also hold up a sort of distorted mirror back to me. They reflect what the community perceives as my value-add. Am I the guy with the UX expertise? Or the one who knows how to exit to big companies? Or the expert on lean bootstrapping without a formal series A?

In each of these meetings, there’s an underlying message about what they are seeking from me, in addition to funding. 

So, as an angel, what makes me ultimately invest?

Zillow co-founder Rich Barton often talks about how he knows a good investment “when he sees it.” With the good ones, there’s something that causes him to sit up and lean forward. I agree. When you hear a lot of pitches, your ‘blink’ gets pretty good in sensing when the right ingredients are present.

But what are these ingredients exactly? For me, there are three key phrases that, if present, make me perk up:

1) “I have several reasons why we will crush this.”

Put another way, does the entrepreneur speak ‘grandiosely’ about the opportunity. I like entrepreneurs who speak provocatively and ambitiously about their concept. My favorite English professor used to say: “If you can’t articulate your thought in words, then perhaps the thought doesn’t really exist.” And the concept goes beyond that:  “If you can’t state your vision ambitiously, then perhaps your idea isn’t so interesting.”

So instead of saying, “This is a photo sharing service,” say this instead: “We’re creating ‘phototainment’ —  a whole new way of communicating between families using photos.” This story in the New York Times suggests that there’s a very thin line that separates the personality of a promising entrepreneur from a person whom psychiatrists might say needs some therapy. So, go ahead. Make me wonder about you a bit. Speak grandiosely about why you will crush it.

2) “Here’s a list of other people smarter than you, who are also investing.” 

You want to know a secret? Investors enjoy their interactions with other investors. It’s that simple. When they see that several other established investors are betting on your company, it not only lends some additional validation for the concept, but they see an opportunity to sit across the table from others whom they respect.

3) “Here’s exactly how I plan on using your money.”  

Investors need to have some idea of your story for growth, with money as the language of that story. Look, I don’t need to see an actual P&L (although if I do see one, I’d actually be impressed). But it’s incredibly heartening if  you have thought carefully about how you would deploy the investment dollars.

Think of it this way: That guy you are trying to get money from probably got to where he is because he’s at least decent at budgeting, allocating his investment dollars in balanced ways, and trading off return-on-investment percentages across different asset classes. You can earn a great deal of confidence if you simply expose your thoughts for future growth, in terms of dollars.

Bottomline: The truth is, there’s probably many more factors than these three that cause seasoned investors to throw money at you. There are intangibles like the entrepreneur’s reputation, track record, and persuasiveness. Maybe your kids happen to go to the same school and you just hit it off. I can keep going here.

But to those of you who are seriously committed to consistently winning investors’ confidence, remember to keep these three notions top of mind.

Please tell me: How you’re going to crush it, who else agrees with you besides me, and how you’re going to spend my money.

Startup Jedi is a new column by GeekWire Chairman Jonathan Sposato. A Microsoft veteran, he served as CEO of Picnik and Phatbits, both of which were acquired by Google. Future installments of this column will be made available to GeekWire Members in a special members-only area of the site. You can register to become a GeekWire member here

Comments

  • guest

    That image is not appropriate. When I hear people swear as much as Dave, I have a lower opinion of them and don’t see them as successful. I didn’t read your posting, not worth my time. But I did leave a comment because of your poor taste in an image.

    • victor

      Actually, a lot of successful people are dicks, and swearing like a sailor comes with the territory. It is because they don’t have the patience to wax poetic. Bill Gates is famous for his foul mouth, and just about every other tech CEO is that way. So yeah, looking for people who dare to cuss in “polite”company will help you find people who knows what they want in life.

      • guest

        Fortunately, as an entrepreneur, you can shop around for a VC that fits your style. If you’re hard up, you just suck it up and go with whoever gives the money.

        There are many (Seattle) VCs I’d really prefer not to do business with, unless they are either my only choice or can give me a clear advantage.

      • victorsfriend

        So, to be successful, you need to be a dick. Bravo…

    • http://www.facebook.com/people/Jonathan-Sposato/786250122 Jonathan Sposato

      appreciate the comment. the point of the cereal box image was to draw attention to the fact that different angels/VC’s all have widely divergent styles of how they handle pitches. dave mcclure happens to be super smart but also one of the more controversial ones due precisely to his ‘hold nothing back’ style. thus i thought it would be interesting to use the image as a means to underscore the difficulties/friction/heartaches that most entrepreneurs face in raising money. now, those who know me will laugh here that me trying to swear is a little like the fonz trying to say he’s sorry (i’m ssssss……ah forget it.)

  • henry albrecht

    I respectfully disagree with ‘guest’. This is a fantastic summary — and the first “crush this” comment is a great way to screen for optimism, resilience, ambition, drive, and the willingness to lay it all on the line. Nicely summarized and well-written. By the way, a lot of awesome companies hear ‘no’ from all the “cool, big name investors” — but end up attracting business people who respect frugality and fly under the radar with their quiet $10MM.

  • Bob Crimmins

    Good stuff, Jonathan. Clearly, number 1 and number 3 are completely within the control of the entrepreneur and anyone who reads your words here and doesn’t heed them in subsequent pitches is… well shame on them. But number 2 is a bit of a circularity, i.e., “to get an investor, first go out and get an investor who is smarter.” Not trying to nitpick, but number 2 is actually the hardest to come by… and by a long way. I think it’s also the most impactful on most investors. I’ve seen investors make an investment decision within two minutes of hearing about the company, from a third party, once they heard that another investor that they respect was “in” the deal. This can be totally rational behavior. But, by definition, this is not a possibility when trying to get the first investor. What’s your favorite advice for overcoming the 1st-investor hurdle? Certainly, being good at number 1 and number 3 will be important but since number 2 stands alone as the most impactful factor (if that’s true) then the opening gambit is a different beast than the middle game… which I take your comments to be characterizing — after all, number 2 is an impossibility until at least one… and probably even two or three investors are already in (unless your first investor is… well… someone like Jonathan Sposato. :-)

    • http://www.facebook.com/people/Jonathan-Sposato/786250122 Jonathan Sposato

      great question bob! you’ve pointed out the one part of this post (the circularity aspect that comes from investors investing in what other investors invest in..) that i wish i had spent more time on. but i can expound on it some here. its really a similar dynamic as in M&A when you try to put yourself in an auction scenario. as you know several of the ceo’s from your recent techstars mentoring experiences do this very well. they start by having near simultaneous conversations with multiple investors (cast a super wide net). as positive feedback invariably surfaces from one or several investors, you quickly socialize this feedback laterally across the others… thereby you begin to soft circle commitments from the top 10% of most motivated/positive set. more commonly this happens in real estate a lot when selling agents ‘whisper’ communicate to a buyer’s agent that there’s very positive feedback from some potential buyers (or that an offer may be imminent). its usually at that time that several offers occur at once. in raising capital you obviously don’t want to overstate a potential investor’s interest to another investor, but sometimes it can be enough to know that the entrepreneur has met with several other brand names already, and that they in turn are recommending others to look at the deal, even in lieu of an explicit commitment. i’ve seen this ‘circling in’ of likeminded investors work in favor of several companies in recent years.

      • http://twitter.com/bcrimmins Bob Crimmins

        Thanks, Jonathan. That really resonates. In my experience, it’s hard to overstate the wideness of the net required to successfully close funding. I’ve certainly underestimated that wideness on more than one occasion.

  • Ryan Dancey

    What values you do accept for the concept of “crush”?

    We have a very high chance of making this work?

    We have a very high chance of being first to market with this concept?

    We have a very high chance to redefine customer expectations in this space?

    Or are you looking for “we will achieve a billion dollar valuation in less than 3 years”?

    • http://www.facebook.com/people/Jonathan-Sposato/786250122 Jonathan Sposato

      good q’s ryan! again i wish i had gone a little further in talking about this one in the initial post. great feedback the short answer is ‘yes’ i do in fact presuppose that behind the provocative statement(s) is a viable, sustainable, value rich concept that people will want. once that’s present, then investors want to look for differentiators. so yes to all of the above questions you smartly raised.

      i think the key point of the #1 is that you have a highly interesting way of talking about the concept that will persist past the fund raising phase, and clearly differentiate you in the following important 3 scenarios moving forward;
      a) you can speak to your end users in a way that is better/more interesting/more emotionally than your competition.
      b) you can be more interesting and more quotable with press. your company will be remembered and you quoted more often if you clearly have a new take/perspective on your category
      c) you are trying to recruit the best people to work for you. A players love the ‘esprit de corps’ that comes with being on a team with a great and interesting mission. i think of steve jobs’ famous quote when trying to recruit john sculley; “do you want to sell sugared water your whole life? or do you want to change the world?”

      • Ryan Dancey

        @facebook-786250122:disqus thanks for responding!

        The reason behind my question is that I have seen (and created) a lot of business ideas over the years that had a high likelihood of success, first mover advantages, and ideas that would be transformative, but that could not rationally justify a billion dollar terminal valuation. It would be more likely in a “best case scenario” that these ideas would generate somewhere between a $25 million and $100 million terminal valuation.

        These kinds of businesses might require between $1 million and $5 million in capital to reach their potential. At that price there are a lot of potential buyers for these businesses, as well as the potential for the company to throw off cash that could be returned to investors even in the absence of M&A.

        It seems to me that the appetite for that kind of deal is very limited (one might say “nonexistent”), but that the appetite for the exact same business, if the entrepreneur were to multiply the estimated terminal valuation by 10x, would have people racing to invest in it. That remains true even though the number of potential acquirers drops to a handful, and the business probably has to operate at a loss with negative cashflow to attempt to hit the scale needed to justify that lofty valuation.

        In other words, if the person making the pitch was willing to lie, then the people making the investments were willing to believe. That seems dysfunctional to me.

        From the perspective of the investor, what is your mentality here? We all know that the billion-dollar exit is a very rare outcome. Do the long odds just not matter?

        • http://www.facebook.com/people/Jonathan-Sposato/786250122 Jonathan Sposato

          thx for the followup ryan! actually it sounds like you’re my type of entrepreneur. i like the long odds myself. i like businesses that throw off a lot of free cash (or pay out consistent dividends) to owners over the long haul. also for reasons more idiosyncratic to the dynamics of M&A, i don’t think selling to a big company is always the right answer (the subject of a future post to be sure).

          so to clarify, i am not saying entrepreneurs should only speak in stratospheric (and most likely highly unrealistic) terms wrt company’s future valuation (the ‘how much’). its more about how the product itself is transformative, and talking about its ability to change lives in a differentiating way (the ‘how’). so my advice was really not about valuation, but product value and differentiation.

          lastly, i say more power to you ryan in your generation of businesses that are highly efficient at achieving $50M to $100M terminal valuation on a $1M to $5M raise! i think consistently getting base hits over and over again beats chasing the elusive homerun.

          • Gail D.

            I have had the good fortune of working with Ryan over the years. And he is the real deal. Good exchange regarding the reality that a 5x return on a $25M business is better than a 0 return on a $100M promise.

      • http://twitter.com/fijiaaron Aaron Evans

        Aren’t most startups these days (especially “social”) the digital equivalent of sugared water?

        • dude

          “social” reminds me so much of the dotcom days. But I don’t think it is sugar water, I think it is the POT smoking laws we have in Seattle now… Woo Hoo!

  • surprised

    Very surprised to read that GeekWire is putting up a pay wall – and a pricy one at $249 per year.

    Can you share (in an article) your reasons for going the pay route? Are you going to reserve more content for paying customers only? How does the math work?

    • johnhcook

      Thanks for the comment. It’s not a paywall in the traditional sense, but a perk of becoming a member of GeekWire, which comes along with other benefits (including access to all 9 events that we are hosting in 2013, messages on the home page, etc).

      More details on our membership here: http://www.geekwire.com/memberships/

      We do plan to continue to experiment with the membership area, and we will likely post occasional content, special offers, giveaways, etc. in the members-only area. We also may test the idea of posting a column there first, and then releasing a week later on GeekWire.

      It’s an experiment. We are trying things out.

      But rest assured, the vast majority of our content, I’d say, 99.999 percent will remain open and free for our devoted readers. Thanks for the feedback, and hope you’ll consider a membership and continue to readi all of the fantastic stories in the pages of GeekWire.

    • dude

      Pay the money and support GeekWire. Good for the tech community.

  • Jasmine Gu

    Very helpful summary. Looking forward to more posts in Startup Jedi. The good discussions in comments may be worth another post.

    In addition to your answers to Ryan’s 1st question about “crush”, do you also look for proof of concept, ie traction, clients, revenue etc? At the early stage, if a startup needs to choose one to focus on, traction or revenue, do you have any suggestions? I often hear entrepreneurs ask this question about traction vs revenue.

    • http://www.facebook.com/people/Jonathan-Sposato/786250122 Jonathan Sposato

      hey jasmine : ) at the early stage i think the important pieces to demonstrate in descending order of importance would be;
      1) product goodness: proof of concept – shows you can build what you say you’re going to build. shows you can execute
      2) traffic. but absolute numbers are not important, its positive growth rate you want to show.
      3) partnerships. debatable whether this is #3 or #2, but its probably in the top 3. a company like everymove did a great job of lining up major partnerships with brand names which really helped secure their angel round.
      4) revenue. i would say you don’t need this at early stage at all so this one is last.

  • disgraceful

    The image on this article is a disgrace.

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