Pitching Your Startup? Here Are 5 Red Flags VCs Look Out For
When your business’ future rides on a single pitch, that pitch needs to be nothing short of perfect.
And whether it be an excessive use of buzzwords, or the way you and your co-founder converse, one minor misstep can mean waving goodbye to funding.
Chibo Tang, a partner at investment firm Gobi Partners, talks to Gen.T about the most common mistakes founders make in their pitches—mistakes that have significantly cost them—and how you can avoid them.
Tang has been in VC for over a decade. As the head of the Hong Kong Gobi Partners office, he's led investments in companies including Airwallex, Welab, Aqumon and Sandbox VR. He also manages the Alibaba Hong Kong Entrepreneurs Fund, a nonprofit that provides funding, mentorship and training for young entrepreneurs. In 2019, he was recognised as a Global Top 25 Rising Star by the Global Corporate Venturing and Innovation Forum and was the Hong Kong Venture Capitalist of the Year in 2017.
Here are the five warning signs Tang says he's on the lookout for in any pitch.
Risky Founder Dynamics
When he’s listening to a pitch, Tang says the first thing he looks for is founder dynamics. “How did they meet each other? How long have they been working together? Do they cut each other off when the other is speaking? Essentially, what is their dynamic?”
“A good, strong founder team should be one that is well oiled. They should jive very well with each other, with not much conflict. Everyone should be clear and working towards one goal,” he says.
Founders who are related are a red flag for Tang. “It’s not a dealbreaker, but it would definitely add more pressure to the strength of the actual business and cause us to do more due diligence and give more attention to the actual management of the company and the division of labour.”
“I think out of all the investments that we’ve made, I don’t think there’s been one successful related founder team,” he says. “The difficulty is that even if the founders are jiving well in the immediate term, that doesn’t mean to say that 2-3 rounds later, when the company is much larger, that they will still jive well. The company is in a different place and they need different skill sets. If the CEO said, ‘Look I’m sorry but we need to bring in a real professional CFO from the outside,’ how would that go?”
“It’s not a straight up deal killer, but it’s definitely something we keep in mind.”
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Some founders tell me, ‘We’re going to make this super app and we’re going to solve everything that’s wrong with the world.’ And I’d say okay, well there’s the door
An Overly Long History
“We’ve had companies come in and the founders have been working on it since 2002. To some investors that might be a sign of strength, but for institutional VCs like us, if this is a company that you’ve been working on for 10-15 years and you still haven’t gotten to a real inflection point or to a point of real growth and scale, then there’s something wrong here.”
“It’s not an automatic dealbreaker, but the founder should have a very good story to back up why the company’s development has taken so long,” Tang says. “At the end of the day, it could still be a sign that the founder has trouble pivoting, or that they have trouble grasping the larger opportunity in the market that they operate in.”
Tang says that the long company history could point to the founder not having a strong enough drive or hunger to grow the business into a larger success. “We often find that these founder personalities are a little bit less assertive and less aggressive, and that’s a risk for us as well. Because when we invest in companies, we hope for them to scale quickly, and only if that happens can we exit the investment at an attractive valuation in a reasonable amount of time.”
If a founder is happy growing organically or growing at a slow rate, Tang says that’s not the type of founder they’d want to work with. “That’s not to say that the business they are in is bad, or that they’re bad entrepreneurs, it’s just that they’re not suited to a venture capital investment.”
Biting Off More Than You Can Chew
Tang isn’t a fan of founders reeling off all the buzzwords they know in an attempt to impress him with their industry knowledge. “Often a lot of founders will be really excited about what’s going on in the tech space and they’ll say there’s so much they can do, and there’s so much opportunity in this market,” he says. “Some founders tell me, ‘We’re going to make this super app and we’re going to solve everything that’s wrong with the world.’ And I’d say okay, well there’s the door.”
“If they’re at an early stage, how many of these things can they realistically do? And with a team of their size, how many of these fields could they realistically be experts in? It also doesn’t say a lot about how they think strategically or how they envision the company’s priorities to be as it grows. So that is really a big red flag there.”
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I think out of all the investments that we’ve made, I don’t think there’s been one successful related founder team
— Chibo Tang
“Forecasting out four to five years—that means nothing to me,” Tang says. “We’ve been in the startup investment space long enough to know that even a forecast that’s two years out is most likely only going to be 20-30 percent accurate. There’s going to be a huge amount of uncertainty as to how the company grows and what happens in the market. So any forecast that’s out past three years is pretty much irrelevant. And entrepreneurs should know that.”
Founders have pitched to Tang telling him that they’ll be profitable in seven years and giving him an expected revenue in year eight, to which Tang says, “Well that just tells me that you’re not a well-seasoned entrepreneur or that the people you’ve been talking to aren’t the same type of investors that we are.”
“I’d prefer entrepreneurs come in with a very detailed six to 12 month roadmap, a plan of action, key metrics that they will be achieving in this time period with this amount of money and the use of proceeds, and be very concrete about near-term goals and what will be their immediate next milestone. And once you achieve that milestone, what will that allow you to do next?”
“It’s good to have long-term vision,” Tang adds. “But there’s not a lot of detail that you can provide there, and we don’t expect that. I want to hear more details about how you expect to get there.”
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Tang is adamant that founders shouldn’t be actively trying to line up a buyer for their company to demonstrate that it’s a very ‘low-risk investment’. He explains that some entrepreneurs come in with pitches that show that they have lined up “so-and-so corporate or so-and-so financial investor to buy them in two years”.
“That’s not what I want to hear. If I am investing in the company, it’s because I believe in the future of this market and I believe that you’re a capable manager and CEO to make this into a great business—stand-alone. If an acquisition or an IPO ultimately happens, that’s as a result of the strong business performance that you’ve been able to achieve and that will all come naturally.”
As institutional investors, Tang says he looks out for whether the company is feasibly able to IPO or to become acquired so that he can get a financial exit, “but that shouldn’t be what the entrepreneur is thinking about or helping us to think about. The entrepreneur’s sole focus should be on making his venture as big as it possibly can be.”
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