Quick PaaP Test: Someone walks up to you at a party and wants you to join their teleportation company.  Do you care if the market for teleportation is big?

Well, what you care about is not whether the market is big or small, but whether or not you can make a lot of money in it.  And that depends.

Some big markets are already done; the players are set, the money is flowing, there’s no room for newcomers to make a difference or make a score.

Think soft drinks today.  A huge market, but no big transformations.  It’s trench warfare: a few points of share for Pepsi, a few points for Coke.

You would want a market where a new change was happening, an old order was about to blown away, and there was a real chance for newcomers to grab a lot of new business.

So, #1 characteristic of a market: is a lot of money likely to change hands soon?

I call this a “big wind”.  Is a big wind blowing in this market?

#2 question: how much of that big wind can the teleportation company get?

Savants call this the “addressable market”, and it’s not a simple question to answer.

To answer it right, you have to have a model of how money is going to be taken away from the incumbents, how the customers are going to shift over, what will be the reasons that will pry the first, second, and third waves of customers away from the old solution.  And you need to quantify those waves.

#2 characteristic of a market: a bottom-up analysis of addressable opportunity.

Sadly, most market sizing work in presentations is the opposite of this:

You see what’s wrong here?  The usual pitch contains easy answers to non-problems; investors want hard answers to real problems that the business might face.

Please Stop Complaining About How Busy You Are – Meredith Fineman – Harvard Business Review

Great observations, but doesn’t go to the heart of the matter: people protest how busy they are so that they won’t seem idle.

It’s like the women in “Schindler’s List” who prick themselves and put blood on their cheeks and lips so they will appear robust and won’t be “selected”.

The “uber-busy” are afraid they’ll be flagged as members of what Marx called “the reserve army of the unemployed” which seem increasingly a feature of our times.

Instead of a“framing slide” as the way to begin a pitch, most entrepreneurs are coached to start a pitch with a long section – the longer the better – on the “market need” for which their product or service is a solution.

It’s not uncommon for a pitch deck of forty slides to have 15 or 20 on this topic, covering these kinds of issues:

• The absolute misery of people who suffer from the problem
• The vast numbers of people affected
• The profound inadequacy of existing “solutions” to the problem
• The size of the affected market.

Nothing wrong with this kind of discussion in and of itself, but the first words on the first pitch are probably not the place to do so at length.

Why?

Because pitchees will rapidly sort into three groups:

1. Those who understand the market-need argument and agree that the market is a big one
2. Those who understand the market-need argument and think it’s not a big one
3. Those who don’t know where they stand but are willing to stipulate that the market need is big in order to see what you have to say about: who your team is, what your solution is, and how much it’s going to cost them (in other words, the stuff that should go on the framing slide).

Emphasis here is on “rapidly”.  I would guess I go into one of these three buckets midway through the first slide on the market need.

If my experience is typical – and the investors I’ve spoken to seem to agree that it is – then the Solution Pitching approach to Market Need to have one slide on market need, not twenty.

What might be on this slide?

• The problem: “people spend collective years driving cars to work.”
• Some argument about size: “Commuters spend $40B per year on autos, public transit, air travel, and rail.”
• Some argument about market adoption: “Commuters have not adopted teleportation in the past because 10% of the transmitted people were not successfully re-constituted on the receiving end.”

So, enough detail so that your audience knows what problem you’re proposing to solve, why it’s a big potentially lucrative market, and why the market will be ready for your solution.

The rest of the “market needs” slides can go into the back of deck as an appendix in case more detailed questions come up.  There will certainly be more discussion about the market, and I will say more about it in a subsequent post.

I recommend beginning a presentation with a single slide with the following information:

• What your business is, elevator pitch: “We build faster-than-light teleportation systems”
• How far along you are: “We are building the first prototype for the scalable system”
• Who you (and your team, if any) are, by function:  “We built the first teleport prototype at NASA”
• What you’re asking for: “We’re raising $200M to finish the scalable prototype”

Maybe there’s other bullets that go on this slide, but these seem like the essential ones.

Why?  Put yourself in your audience’s shoes: they don’t know who you are or why you’re there.  They need a framework to put the rest of your presentation into perspective.  Who What and Why supplies this framework (basically the same advice given to news story writers; get it into the first paragraph).

I can’t tell you how unusual it is for a presentation to have such a slide.  Of all the deals I’ve seen at Valhalla, I think maybe 5 or 6 had something like this.  The presenters who had framing slides tended to be return entrepreneurs (although it was by no means the case that every returning entrepreneur used them).

How do most presentations begin?  A slide with our name, the name of the company, and a relatively non-specific tag line.

So in this case it would be:

• Valhalla Partners
• Regent Teleportation
• “Journeys Simplified”

This does nothing to help frame the presentation.  I get it that you’re talking to me, but it’s actually not really news.  If your name has to do with what you do, that’s a bit helpful, but not as helpful as saying what you do (and in today’s world, most startups have names that tell you very little about what they do; to be fair, most investor groups don’t have such names either).  And the tag line may be useful in some context, but is not helpful here.

Or the first slide will have a handsome graphic and plunge right into the market problem.

In this case, the first slide would show commuters waiting for a crowded subway train, and say

• 100 billion commutes take longer than they should

You get the idea.

I think a framing slide stands out (since there are so few of them) and shows respect for your audience (since you show that you understand what they’re thinking at the beginning of the pitch).

What’s not to like?

Of all investors, you would think VCs and angels would be people in whom, temperamentally or by design, Greed would massively overwhelm Fear.

It seems things are not that simple.

It’s not that Greed is so much stronger in us that it overwhelms our Fear.  It just happens that we have a particular bag of tricks for quieting our Fear.  To wit:

1. Control (or the illusion of control).  By having the power to overrule the founder and/or exec team of a startup, we believe we are hedging the risks of investing in them.  That, of course, presupposes that our ideas of what to do with the company are better for the company than his or hers (or at least that our ideas are better for our interests than his or hers).
2. Dribs and Drabs.  By doling out our capital in smaller tranches or rounds, we believe we are hedging the risks by tying infusions of capital to company accomplishments (aka milestones).
3. Due Diligence.  By studying the risks in detail before each investment, we believe we are hedging risk by understanding it.  Trading in “unknown unknowns” for “known unknowns”, in the words of that sometime investor Don Rumsfeld.

This may make more sense for investors – whether angels or VCs – who have some operating experience in the businesses and marketplaces they invest in.  Unfortunately, this is seldom so, and even if so, is seldom helpful.

Why?

Even if I made my bundle in enterprise software, the enterprise software of today doesn’t have that much to do with the enterprise software of yesteryear.  Things like SaaS, open source, BYOD, and “the SolarWinds sales model” have completely changed the playing field.  Oh, there are some verities, like “Buy Low, Sell High” or “Keep It Simple Stupid”, but any clown who’s read the digest of a couple of business books knows those things.

And even when an investor knows something about the area he/she invests in, it’s not clear how helpful their advice is.  Why?  Because people are seldom capable of accounting for their own success.  Ask a billionaire how he got there, and he will say, “never drink coffee” or “never make more than 2 decisions in an hour.”  Either these are pablum verities a la “operating experience” above, or they are quirky beliefs that probably don’t have much correlation with the success of the business.

So get an opinionated investor with a lot of pablum ideas with control of your company and you have a recipe, not for hedging risk, but for constantly diverting the company from its focus with boneheaded “try this” nostrums.

We VCs and angels get this, and so we are not less Fearful about our investments.  We may be even more so.

Again, I feel a bit odd even going into this material, but perhaps it’ll just be repetition for some while being news for others…

The Investor (let us give him or her a capital “I” for a generic proper name) oscillates between Fear and Greed:

• Fear that they will lose their money on your project.  Suspicion is the BFF of Fear.
• Greed that they will miss out on opportunity to make a killing.  Manic Haste is the BFF of Greed.

And it doesn’t take much to flip an Investor from one to the other (there is no middle ground).  In fact one and the same statement in a presentation can do it:

“Google has shown that the user base for online documents is huge”

Investor: OMG, what if you could make $2.50 for each Google Docs user [Greed], but OMG why couldn’t Google just take over this market [Fear]?

You can’t win with a bipolar audience like this; the best you can do is inflame their imagination.

It’s safe to say that the Investor will be in a state of Fear going into the presentation unless you’re a returning demi-god entrepreneur or their best buddy has just invested in you (if their best buddy is merely recommending you, that excites Suspicious Fear: “if it’s so good, why didn’t X invest in it?”).

It would seem that Job 1 is to flip the Investor into Greed, but this would be a big mistake because any attempt to do so will simply excite more Suspicious Fear (“why is she telling me all this pie-in-the-sky stuff; what gotcha am I missing”).

No, Job 1 is to return the Investor to the neutral state (which, paradoxically, will probably tip them over into Greed in any case).

The presenter does this by carefully framing the opportunity so that the Investor can hold it all in mind at once:

“I’m Entrepreneur Jones.  I’m asking for $2 million to prototype a teleportation service that will inaugurate in the U.S. in four years.  I’m partnering with two rocket scientists from Berkeley Teleportation Labs, the team that teleported a couple of hamsters to Titan last year.”

Why does this work?  Because the facts soothe Investor’s fears.  If Investor doesn’t know who Presenter is or how much money Presenter wants or how good the team is, or (briefly!!) what problem they are aiming to solve, Investor’s imagination can run rampant.  In a state of Suspicious Fearfulness, this means a spate of Fears going in.  A bad way to start.

The facts at least inhibit the Fear rush, and may even tip the Investor over into Greed.

Hammacher Schlemer, catalog seller of gadgets and gizmos, claims to be the “oldest continuously published catalog in the United States”.

But if you look at the catalog, none of the items in the catalog is billed as the “oldest” or the “first.”  Reason?  That’s not a valid competitive differentiation.

If you tell me your company was the first to make widgets, you get points for innovation, perhaps.  If you tell me you are the oldest widget maker, I guess you get points for doing something right, although sheer longevity is not an indication of that necessarily (think of the Postal Service).

Every item in the H-S catalog is either the best or the only in its category.

And that does make for competitive differentiation.  The only other superlative that differentiates would be “cheapest”.

I have challenged some of the companies Valhalla Partners – my firm – invests in to come up with a “Hammacher Schlemer” promise of their own:

We are the <best-or-only> <maker> who makes <widgets> for <benefit>.

Some examples:

• We are the best social network for staying in touch with your friends (Facebook?)
• We are the only web retail site with all the books in the world (Amazon?)
• We are the best word processor for making sure your doc will be readable by someone you send it to (Microsoft Word?)

There are some finer points here.

First of all, an “only” promise is significantly better, but harder, than a “best” promise.  “Best” is debatable.  “Only” may be false, but it’s not debatable in the same way.

Second of all, a promise is as much a challenge or an aspiration as a statement of fact.  Are there some books you can’t get on Amazon?  Undoubtedly.  Do you have a better chance of getting a book there than elsewhere on line.  I think so; that’s where I head first.

Third of all, an “Amazon-style” promise – a promise that, if you come to my site you will find all of something – is a very powerful promise.  New York Times: “all the news that fits the print”.  Visa: every merchant, not just (like Amex) some.  Etc.

When you present an investment idea – a company or a service or a charity or a new business line – your listeners will want to hear 1) a respectful treatment of your competition and 2) a Hammacher-Schlemer promise about how you’re going to get the better of them.

It’s pretty common in pitches I see for the entrepreneur to give short shrift to competition or to ignore them altogether.

Unfortunately, competition is usually a big deal to the audience of potential investors.  And how the entrepreneur treats the competition is an important element in sizing him or her up.

The basic rule: Be respectful of your competitors.

There are several aspects to this:

• Take their competitive threats seriously.  It’s a real turn-off to hear an entrepreneur say that Competitor A is “no threat”.  Every competitor is a threat.  We want to understand how you think of them, what you say about them, and, most importantly, how you go against them.  “No threat” = “No thought” in the investor’s mind.
• Know them as thoroughly as you can.  A big confidence-builder in a presentation is an entrepreneur who can speak knowledgeably about their competitors.
• Don’t just count immediate competitors.  Usually the stiffest competition is not the other startups that do just what you do, but the gorilla with a product that’s “good enough” or the newcomer with an inferior product which, however, has disruptive potential.  Entrepreneurs who say they have no “real” competition (and who aren’t just talking through their hat) generally mean they have no direct clone competitor.  They are not taking account of – or at least not sharing their views on – the more serious competition that can come from a gorilla or a disruptor.
• Articulate a competitive differentiation.  I want to say more about this in a subsequent blog post.

Nothing in “respectful” means you should cave in the face of competition.  But it does mean you go into battle with them with a plan instead of a blustering sneer.  And it does mean that you share your plans with your potential investors, because it’s part of how we’re forming a judgment about your capabilities.

The world is changing, and the “supplier power” of VCs is eroding.  It doesn’t cost what it used to to start up a startup, and the more nimble of us VCs realize it.

So, to make a long story short, we need to hone our pitching skills.  Which means we need to pay attention to Solution Pitching ourselves.

Imagine if we didn’t.  Imagine what an interaction with a VC would be like if we dwelt on the Market Problem the way less Solution-Pitching-savvy entrepreneurs do:

Entrepreneur: Hey, how’s it going?

VC: Are you aware how acute the capital shortage has become?  Many entrepreneurs today tell us that they are literally starving for capital, starving for relationships that will move their business forward, and in deep need of answers to these problems.

Entrepreneur: Huh?  Are you a VC looking to fund me?

VC: I’ll answer your questions in a second, but for right now just let me picture to you the terrible situation that everyone in the technology-innovation business is going to be in when capital shortfalls for startup investment reach $200B in 2015 as they are projected to do by VentureSource.

Entrepreneur: Are you offering capital to people with businesses like mine?

VC: Some sources of capital provide only partial solutions to this problem.  So-called “angels” can offer smaller amounts of capital, but their Rolodex is significantly smaller than what entrepreneurs need.  And bank loans, which many think would be a good solution, are poorly adapted to the risks of a startup venture.

By now the entrepreneur has gone from confused to irritated.  His questions are not being answered, he’s not sure if he’s wasting his time, but most of all he’s being talked at rather than talked to.

It’s not the road to a Solution.