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COVID-19 isn’t changing what investors want

/ September 28, 2020

Published originally on Chicago Booth Review.

The economic landscape is likely to look different after the threat of the COVID-19 pandemic has subsided. Changing social habits may doom some companies, while new norms open doors for different types of businesses and business models.

What’s unlikely to change, however, are the factors that attract the attention of venture capitalists. Those investors will be looking for new companies to back, and it may soon be a great time for pitching to them.

During my years in academia, I’ve sat in on countless business pitches to venture capitalists and surveyed nearly 900 of these investors from more than 600 companies. Venture capitalists are all unique, but they all want one thing—to make a significant return on their investments. And most of them tend to focus on two factors when determining whether a business is worth the investment—the team and its customers.

Let’s look at teams first. If you’ve ever watched shows like Shark Tank, you’ll hear some of the investors say they’re buying into the CEO or founder. They like not only the idea, but particularly a founder who signals to them that he or she is passionate about the business and will drive toward success.

Investors know that things aren’t always going to go smoothly in business, and they want a team built on the foundation of a strong leader who will fight for the company and attract others with significant talent. It doesn’t hurt to have a strong sales, marketing, or tech team in place before the pitch.

The biggest mistake I’ve seen business founders make in a pitch is falling in love with their ideas without spending enough time talking to and about their customers.

Maybe even more important to investors, however, is customers. They want to see evidence that your business can attract people who are willing to pay for a product or service. That is, after all, an important if not key component to getting the venture capitalist a return on his or her investments.

You can have revolutionary technology and innovative ideas, but those aren’t investible if they don’t attract people willing to open their wallets.

In fact, the biggest mistake I’ve seen business founders make in a pitch is falling in love with their ideas without spending enough time talking to and about their customers. If they get 30 minutes with a venture capitalist, they spend 25 of them talking about their product and then get to whether or not they can actually sell it.

Remember that these venture capitalists want to get their money back and then some. So, flip the script. Talk about the technology or product for the first 10 minutes, and then sell the investor by pointing to a strong team, early adoption, and data that can forecast strong future sales.

If there’s a silver lining in the COVID-19 pandemic, it’s that innovators will have new opportunities. And they can gain the advantage if they sell the right things to potential investors.

Steve Kaplan is the Neubauer Family Distinguished Service Professor of Entrepreneurship and Finance, and Kessenich E.P. Faculty Director at the Polsky Center for Entrepreneurship & Innovation at Chicago Booth.

This column is part of the Chicago Booth Insights series, a partnership with Crain’s Chicago Business, in which Booth faculty offer advice for small businesses and entrepreneurs on the basis of their research.