My Top Tips from Roy Bahat from Bloomberg Beta
Last week I posted the This Week in Startups episode of Roy Bahat doing an in-depth Q&A. I hope you all were able to glean some really good insights from Roy on your own, but as promised, here are my biggest takeaways from the episode. As a reminder. these are based on Roy’s experiences and whether these tips are right or wrong, it is up to you on how you use the information.
The first impression: In most cases, the fight is won or lost in the first moment of connection. The things that are crucial to this are who introduced you, the reason to be excited about what you do. That's usually it, if you don’t win them here, it's going to be tough. They are basically seeing the name of the person who is telling them about you and the subject line, and these are things that you actually have a lot of control over. For instance, doing reference checks can easily net you info on who knows this fund and who they respect. As for the reason why, you have about half a sentence to explain to convey to them, why your company is going to be one of the most extraordinary. The reason why needs to be in your pitch deck or your email or in the subject line, front and center. Good reasons for why you will be the most extraordinary are fact-driven statements that usually started with words like “first”, “best”, and “only”.
The post-sell to all of this is to add a brief reason for “why this VC/investor”
The VC system (minute 3:19): The employees in the firm advance based on if their coworkers and upper management like them, not on how good their investments are. This provides some crazy misalignment. Hopefully, this will help with not taking “No’s” personally.
Roy’s Mental Model of the system (minute 7:27): “VC receives a pitch. They ask has this person ever made money for me before? If yes then I will for sure fund the person (0.1% of founders). Then they ask, has this person ever made money for somebody that I know before? (1% of founders). Did someone whose judgment I deeply trust in what will make me money tell me about this company?
Personality: Trust and personality like in a job or relationship are factors in the decision process. They may not be the initial reason why, but getting an investor is “like getting married to someone, with no divorce option.”
VC Math (minute 40:11): If a VC is going to make money, they need to make a return in order to make a carry. So in order to do this, typically a VC is looking for investments that can return the total of the entire fund plus some, with some evaluating based on if a single investment can return the entire fund. In order to do this, VC’s ask, how much of this company do I need to own in order to get the return I want, and they think what are my constraints. The constraints being money and time. From the constraints, you start seeing how many slots do they have in the fund. Time is a bit difficult to get the slots for, but money can help you find out a lot about what the VC is looking for. For instance, they are usually going to invest about the same amount of money into each company as a percentage of the total fund, so you can now understand why their check sizes are what they are, and start understanding the evaluations and equity ownership that they come up with. To summarize, fund strategy is a function of fund size, and valuation is a function of fund strategy and “you”.
Example: If you are a company that a bigger investment fund wants to invest in, you will generally be able to earn a higher price.
Planning through derisking (minute 45:09): The thought process should not be, did you go from 1x to 10x, but what risk did you eliminate?
Pitch decks (minute 45:38): “I am unaware of cases where anybody is persuaded by a [pitch] deck... A more accurate model is that a person has whatever pre-existing belief they have, and either you satisfy those pre-existing beliefs or you are done.”
Raising Money (minute 47:17): As a founder looking for money, your job is not to convince somebody to invest in you, it is more similar to an enterprise salesperson. Your job is to disqualify leads as fast as possible and focus on the leads or investors that are worth your time.
To gauge interest, as Roy learned from Peter Pham, the speed of response is your key indicator. A day is really good, one to two days is a maybe, and any longer shows no interest.
Seed stage question (minute 54:00): Is your product at risk for getting stuck and becoming too niche, or is there some general multiple that is used to gauge an exit potential.
Thinks that 3-5 year financial projects are worthless. Fiction is fiction. Though understanding what are your unit economic assumptions, and how you plan to make and spend money in the short term, are important.
Vision (hour 1:10:42): It is good for you, but it never is the decider.
Hope this tare down and summary helps with the digestion of that Q&A session, if you want to discuss further or have other questions, feel free to send me a message!
“I am unaware of cases where anybody is persuaded by a [pitch] deck” - Roy Bahat
Sources: https://www.youtube.com/watch?v=VfaUG6OPLk0
