Wait… don’t you want to make a good first impression with VCs? Yes.
So, why talk about the bad stuff up front?
Here's why: investors know they are underwriting risk at the early stage, so make them comfortable that you are aware of the risks, and can mitigate them over time by acknowledging them early.
One thing founders seem to avoid in early discussions is their (or the Company’s) weaknesses. However, the ones who own their shortcomings, and the risks associated with their business typically leave the best impression (on me at least).
Tell me what sucks. Highlight the risks early. Make it clear that you are aware of the risk profile. Talk about how you will mitigate those risks. Be willing to admit which risks an investor will just have to be comfortable with (or underwrite) in order to make an investment. When you speak about the risks with confidence and let an investor see that you’re OK with them walking away over certain risks, it actually inspires confidence in you as a leader, in my opinion.
Here are a couple of things you can focus on when guiding this part of the conversation:
1) What Are Your Personal Weaknesses
I think it is likely impossible that a founder / CEO is strong in product, tech, sales, hiring, fund raising, finance, leadership, and just about every other aspect of running a company. So you have to own your blind spots, and know when to ask for help.
Identifying your weaknesses, articulating them, and knowing who in your network can help you in those areas is key at the early stage in any business. Avoiding the topic on these blind spots is potentially devastating to the company.
Bonus points for seeking out investors and letting them know that they are key to helping you fill a blind spot and you have sought them out for that reason.
2) What Are Your Company’s Weaknesses?
In early stage investing, we are always underwriting a certain risk profile. As a business advances and grows, it de-risks. Consequently, the valuation goes up as risk goes down, or said differently, the price of risk goes down as the valuation goes up.
Are you most worried about not having a technical co-founder, or intense competition, or new entrants, or how about hiring or financial projections? What will make this company win, and what can make it lose? Which of those risks can be reduced by actions taken by the team, and the investors? Have you thought through this for each risk?
In conclusion, if the conversation around risk and weakness goes well, then I suspect a lot of investors will want to work with you. If it seems like there are too many blind spots, then I’m not sure how good the idea has to be to overcome that (if even possible).
Stephen Hays is Managing Partner at Deep Space Ventures, VC firm based in Dallas, TX that invests in esports and B2B startups.