On the occasion of the 20th anniversary of his venture capital group, Pritzker Group Venture Capital, I had a lengthy fireside chat with JB Pritzker at 1871 (JB led the group that founded 1871 in 2012) which was held before an enthusiastic crowd of entrepreneurs, investors, and several hundred others interested in hearing the gospel straight from the horse’s mouth. When you’re JB and have more than 20 years’ venture experience and roughly 160 investments behind you, there’s a whole lot to say that’s well worth listening very carefully to. It was especially refreshing to be able to steer away from the standard clichés and get into some very practical tips and suggestions about what he and his team look for in considering a deal and how that differs from many other venture firms which are constrained by the requirements of their limited partnership agreements and other considerations like IRR (as opposed to ultimate return on capital) as well.
As many times as I have done sessions like this – being on one side or the other of the microphone – I find that there’s always something for each of us to learn and a few key take-aways which I believe are worth sharing with your own people and with the startup world in general. We discussed a wide range of topics (while trying to stay as far away from politics as possible); spoke specifically about some of his more recent deals as well as his firm’s particular investment criteria and objectives; and then took some questions from the audience. One of the things that was clear throughout the conversation was that the value for the audience in sit-downs like this is less about the novelty of the information we hear and more about the need to continually be reminded about the pretty basic basics of the business of raising money.
Among the very first things we covered was the necessity of “warm” introductions. Unsolicited business plans tossed over the transom are just as quickly tossed in the trash. I was reminded as we spoke of a great old piece of Chicago advice for patronage jobseekers which has been attributed to various politicians and goes: “We don't want nobody that nobody sent.” It’s the same story for your pitch and your proposal. If no one cares enough to vouch for you and your idea and make the right introductions, you’ll never get to first base. And these aren’t courtesy intros from the guy next door or someone’s brother’s brother – they’re from highly-regarded business professionals whose time is precious and whose advice and opinions are always being sought. It’s a small club and getting in the door is the first step to getting anything done.
Next on the short list was the need to temper your confidence with a little humility and a fair amount of listening. This, of course, is a life skill – not just a fundraising tool. (See http://www.inc.com/howard-tullman/leaders-learn-best-by-listening.html .) JB said that no one knows the answers to every question and, even if you think you do, there’s more to the investor courting process than simply demonstrating that you are right all the time. Investors want to be wanted, needed, and heard (as we all do) and they want to feel that their input, guidance and assistance will be invited, appreciated, and even listened to from time to time. They’re looking for a long-term partner, not a game show contestant, or the best college debater. Building a big business is a long, painful process and, while speed and skill are important, so are collaboration and team-building and building that team is as important with your investors and in the board room as it is with your partners and employees.
Without any question, the largest single cause for startup failures (more than 40% of the cases) is no market need. JB noted that it’s absolutely critical that your pitch: (a) identifies a deep, existing and acknowledged pain point; (b) demonstrates that the “sufferers” are willing to pay serious money to have the pain addressed and remedied; and (c) shows that you have a viable and deliverable solution to the problem. No one wants to pay anyone to develop the cure for no known disease or try to fund and launch a solution in search of a problem. And while you’re at it, you need to show that there’s a lot of these folks and that the market (and reasonable add-ons and extensions to it) is big enough to support the expected growth of your business and, more importantly, to include a couple of bigger players as well as potential buyers for the business. SMS Assist (the newest Chicago unicorn) was cited as an example of a business that started out serving 3 basic service and maintenance needs of retailers (floor care, lawn maintenance, and snow removal) which – even at scale - wouldn’t have amounted to a very large and interesting opportunity until you added in the revenues associated with the 45 other kinds of needs and requirements these customers also had which SMS could grow to address.
Almost 25% of startups fail because they don’t assemble the right team and – in our technology-drenched world today – JB noted that it is crucial that your E suite (engineering, design and programming talent) be at least as robust and strong as your C suite is. VCs bet on the jockey, not the horse, but increasingly they’re betting on the whole team and not just the boy or girl wonder. Things today are so complex that it’s rarely if ever a one-person show and – as often as not – the real meat of the new business is not the smiles and the sizzle and the showmanship of the CEO; it’s the steak and the substance of the people in the pit making the programs sing that makes the difference in the long run. As I like to say, you can’t win a race with your mouth. Nothing speaks louder than code. JB said that his ultimate decision to make a commitment to and an investment in Signal (Number 1 fastest-growing company on Crain’s Chicago Business 2016 Fast 50) was largely based on his confidence in the experience, talent and prior successes of the CTO they had recruited to the founding team. It’s almost always a good bet to go with the people who’ve been there before and are looking to do it again rather than the folks who say they can get you there.
Finally, right behind market fit and team problems in terms of fatal failings for a startup, comes the substantial risks associated with strong competition (either existing or emerging) which drives about 20% of the new companies out of business. JB noted that competition is a complicated conversation to have with any entrepreneur. On the one hand, it’s obvious that your new business is always going to be replacing or enhancing or improving upon something that is going on now because nothing exists in a vacuum. And, in addition, if no one else in the world was doing something similar or interested in what you were hoping to do, you might have to ask yourself why. And finally, those potential competitors (large and small) may also turn out to be very helpful in determining and demonstrating the size of the opportunities and the markets you’re looking at taking on. In fact, they may also be potential channel partners, strategic investors and, ultimately, acquirers as well. The point is that they can’t be ignored and your pitch and your plans have to have plenty of provisions for how you expect to deal with them. And, by the way, it’s perfectly OK to argue – as the guys from Netflix often say – that you’re not trying to do things differently, you’re just going to do them well.
The final thought that JB left us with was pretty simple. He said that it was critical to know what you don’t know and – having acknowledged and accepted that – to get busy every day figuring out how to fill those gaps. (See http://www.inc.com/howard-tullman/common-communication-mistake-destroying-productivity-success.html .)