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Faced with information overload, we have no alternative but pattern recognition. -Marshall McLuhan (Photo credit: Wikipedia)
VC's use "pattern recognition" to assess the viability of deals. Pattern recognition is a method of seeing
commonalities between a current , novel concept and previous ideas. And while it is a great tool commonly used by Venture Capitalists, the pattern recognition tool is mostly ignored by entrepreneurs. Which is a shame, because every investor pitch would benefit from substantive comparisons to previous successes and differentiation from previous failures.
I use the adjective "substantive" precisely here. For an entrepreneur to say we are a cross between "Facebook and Twitter" is not substantive.
Substantive comparisons need to be as precise as possible to be worthwhile.
To say, "We anticipate a go-to-market approach quite comparable to Companies X and Y, both of which relied on $5 per lead CPA and conversion rates of 3% to generate first year revenues in excess of $2M" is very substantive. And it is convincing. Substantive comparisons can leverage almost every aspect of an investment pitch.
Picture the proverbial hockey stick revenue slide. One line going out and up, dramatically so, in year 2, 3 or 4. We see a lot of these, at least in investor pitches -- we see a lot of these -- and the entrepreneur that can make it seem highly likely is quite rare. Rarer still is the one that can actually do it. Now picture adding two or three companies historical data, who have grown comparably to the hockey stick slide, and make an argument that your company can do the same. Because, for example, your value proposition is similar or the target audience is the same. Or, specifically, talk about the distribution partners or other critical events in the company's history that led to this hyper growth and what the comparable event will be for the company you're pitching. Do the legwork, people who do their homework tend to succeed. This isn't news.
Simply, turn the power of pattern recognition in your favor by consistently finding factual examples to support your probability of success.
Most of what you need to do this is online. The rest is generally available from current or former employees of the companies that will serve as your com-parables. No, you generally don't want or need secret information. But, even to say something like in a pitch meeting like, " I consider three successful Companies, X, Y, and Z, to be the most comparable. And I've talked to marketing and sales folks from each about the key things that drove their phenomenal growth. It boils down to the following four things that we need to do......".
Holy cow, talking about having me at hello.
Specifically, here are four areas that one can benefit from pattern recognition in an investor pitch.
1. Value Proposition
Finding successful companies with analogous value propositions is compelling and enlightening for anyone considering investment. It validates both the potential market and the likelihood that the market will respond to your offering. You can have the greatest solution to a large, existing problem but people have to want it. The old adage from biotech is that is not just how many people have a condition, it is how many people will seek treatment for the condition. If people want the solution, how will you clearly communicate your product's ability to meet that desire/need. The success of previous value propositions within your target market is just a plain, old good thing to know....
Can what you're selling be profitably sold? You would be surprised how often potential new deals fail to make this argument convincingly. It isn't just about price, though price is a factor. It is about the combination of marketing, sales and price yielding a profitable company. One cannot succeed selling $25k Saas subscriptions with $150k salespeople, the numbers won't facilitate or support a growing company. You can model it any way you want but no one has done it. Here again, showing the pattern by offering an example proves the point. Bringing just a "made up spreadsheet" that you authored doesn't make the point.
Does this team know the processes and approaches critical to success in this company? This is probably the area where most companies do link back to the previous experience of management as a basis for success in the new venture. But precision is frequently lacking in these descriptions, be precise -- "Jack's experience at Acme -- where they used the same telesales model we're intended to use -- is going to be instrumental". Tell with depth and clarity what people learned from the personal/professional experience and company observations related to the company at hand.
Do you know the critical metrics for the business you're pitching? Customer acquisition costs, lifetime value, profitability, churn, etc. are all fundamental to success. Don't make them up, don't estimate them. Research them and find suitable examples. Present those examples in your pitch. Perhaps, even present some you regard as not good examples for comparison and describe why they are not good examples.
A demonstration of real command of expected key metrics and solid examples of those metrics in practice will go a long way to building belief in a model.
Clearly, there are many, many more areas in any pitch that would benefit from pattern recognition. It is my suspicion that there is a material amount of this information at the fingertips of any CEO building an investment pitch. My point would be bring this information forward as it builds credibility while it steers an audience to a point of view.
The business development function is uniquely critical and powerful in a small company. Business development folks, unlike sales people, should pursue deals that are trans-formative for the company on an individual basis. Sales, on the hand, pursues deals that are collectively trans-formative - positively if there are a lot of sales and negatively if there are not a lot of sales.
Finding great business development talent is tough and most small companies have to grown their business development talent from former sales people. That transition from sales to business development isn't natural as some of the rules are different.
Since I have advised on a few these transitions, here are my 6 Deals to Avoid.
1. Stay away from deals with other small companies
Small companies can't help other small companies. There is no large sales force, brand name, marketing resources or development talent that can be leveraged by one company in the favor of the other. If your business development doesn't involve sales, it better involve actions (by people).
2. Avoid "You go first partnerships"
Steer clear of deals that involve co-marketing to each others' prospects where the request is for you to deliver your list to them first or ones that request the two companies to take a set of actions but all of yours are upfront.
There is no value in doing press releases where two companies express undying love for one another. If you aren't taking specific steps, you're wasting time.
4. Beware the Bureaucrats
Some companies are simply too bureaucratic to be of much help. If they can't out of their own way internally, they are unlikely to be of much positive effect as your partner. Don't do deals with companies that can't move the ball forward. If they don't have a string of successful deals with smaller companies, you're unlikely to be the first.
5. Understand the heritage
Larger companies with reputations for borrowing/stealing "ideas" or engaging in litigation have earned these reputations. Be respectful of these reputations, there is no amount of legal agreement wrangling that will protect you. Don't do deals with companies expect them to behave differently than their history. Don't do deals with companies that have been accused of purloining ideas on more than a couple of times.
6. Don't do deals with people you don't trust
If you don't trust them, you are probably right not to trust them. And like the heritage point, there is no amount of legal word smithing that will keep someone from screwing you if that is their intent. Trust is a basic, instinctual thing. Rely on your implicit abilities of who to trust. Don't do deals with people you can't trust, you can do plenty of deals with people you don't really like as liking and trusting are different. You can grow to like people you don't initially like as you get to know them. In fact, it is quite commonplace. Growing to trust someone over time that you don't originally trust is rarer. That's because it is harder to trust than like the people you meet in business.