Ways to charm a venture capitalist


Investing In Ideas

Investing In Ideas

In the early stages of a venture, the founders’ most valuable commodity is not money but information. Many fail not because their idea is a dud but because they do not leverage their precious information resources effectively, such as details about the way they are going to provide the solution to a market opportunity.

This is the theory proposed by Hamid Bouchikhi, professor of management and entrepreneurship at Essec Business School in France.

Financial leverage is at the heart of business, Professor Bouchikhi notes. It gives company owners access to extra funds by allowing them to take on more debt while retaining their equity stake. Why then, he wonders, do not more entrepreneurs take the same approach with their market insights?

“To succeed as an entrepreneur, not only do you need savoir-faire. You need what we call faire-savoir: the ability to share the right information, at the right time, with the right people.”

Unfortunately, this ability to utilise the available information to commercial advantage is not a skill many entrepreneurs possess, says Prof Bouchikhi.

He gives the example of a team of young graduate founders who pitched their start-up idea to Essec’s investment fund a few years ago. The concept, an online platform for consumers to manage their various savings in a single place, was an idea many VC funds were backing at the time, so the board had no trouble understanding the potential market.

However, the team spent all their time in front of the panel explaining the concept when they should have been addressing the panel’s main concern, which was why such a young group with so little work experience should succeed in what was a highly competitive market.

“If they had anticipated this correctly, they would have come with a story that explained how they intended to manage it,” Prof Bouchikhi notes. As it was, they didn’t, so they did not get the money they wanted.

“Even those who have good communication skills can sometimes neglect background information and risk undermining their credibility,” Prof Bouchikhi adds. “Informational leverage is in some ways similar to financial leverage. In other words, when entrepreneurs know how to use informational leverage, they can impact investors’ belief in the profitability of idea, even when they have little evidence to prove it.”

According to a chart created by Prof Bouchikini, deciding what information to share and by when is key to this strategy, as over time the value of the information will decrease, as doubts about the founders’ ability to deliver rises.

The trick is to find people who you can pitch your ideas to and who can help you sift out the unnecessary points from those your audience will want to know. If you are trying to sell to new customers, for instance, Prof Bouchikhi recommends talking to existing customers about what they feel are important FAQs.

“I have seen some smart guys who are seeking equity investment deliberately contact two or three funds which are not necessarily in their target group,” says Prof Bouchikini. “They do dry runs of their pitch to get a sense of what these people see as important.”

“This will give them the chance to fine-tune their argument, identify informational gaps, and address key partners with the highest impact information about their venture.”

Entrepreneurs should also be aware that some information can limit their independence vis-à-vis their investors or other partners and should not be shared unless absolutely necessary.

Prof Bouchikhi gives the example of a business that is on the verge of receiving a large order. While some investors might be willing to back it under fair terms without having this information, it would be wrong for the entrepreneur to share the news right away.

“By keeping the information to himself, he maintains credibility, just in case the order doesn’t end up going through,” Professor Bouchikhi notes.

“If the order is signed, this will be a positive surprise for investors and justify their belief in the entrepreneur’s project, after the fact.”

Copyright The Financial Times Limited 2015

(c) 2015 The Financial Times Ltd. All rights reserved. Please do not cut and paste FT articles and redistribute by email or post to the web.

Leave a Comment