Pitching 101: The Competitive Matrix

Eric Wiesen

Pitching 101: The Competitive Matrix

In the last installation of Pitching 101 I applauded a company who had applied the best practice of doing research before pitching investors. Today’s chapter is about a practice of which I’m less fond.

As background, it goes without saying that we’re going to want to talk about competition in your space. We’re going to want to have this discussion first because we’re going to need to know whom you’re dealing with as a competitive set, but equally importantly, we need to get a sense of how you think about competition and about your competitors.

To this point, it has somehow become commonplace to include a “Competitive Matrix” slide that looks like this:

On the one hand, we get what you’re trying to say – you’re doing something very differentiated and very special. And in a sense, you’re trying to make good on the general investor worldview that if you’re going to compete with incumbents, your offering needs to be not just incrementally superior to them but a significant step forward.

But … come on. We know and you know that in only very rare cases is this slide even remotely accurate. In very rare cases can you legitimately cluster all your competitors, large and small, into the lower-left corner of the competitive matrix slide.

Most investors essentially ignore this slide except for the names of the competitors, about whom they’ll do their own research. At best, it’s a non-factor. But it also looks like you are hiding a scary competitive set of threats through chest-beating hyperbole. And at worst, it signals to investors that you don’t actually understand your competitive challenges. And that’s not something you want to communicate.

My suggestion for best practice is a willingness to have a frank conversation with investors about your competition. Below are some good answers I’ve heard from companies who do this well, answering the competitive question from different angles:

“Yes, XYZ company has raised a lot of money and was a year ahead of us, but they’ve executed poorly, their technology led them down a dead end, and we have won 10 out of 12 customer wins from them in the last six months, which is the real proof that even though they’re the big name, customers are looking for an excuse to leave them”.

“Sure, ABC company is the big name in the space, but they invested tremendous resources in building out a big global platform, and we use cloud services for everything we do. Until and unless they scrap everything they’ve done, we have a major cost structure advantage”.

“It’s true that Google could come around and crush us, but that’s true about almost every B2C web company. We’ve looked at what they’ve done in areas around our space, have talked to people at Google, and we’re comfortable this is not a high-priority area for them. But you’re right, you can never totally control for this.”

Ultimately, if you are really scared to give investors the true answer, and if that true answer is that you’re doing something incrementally better than an entrenched incumbent (or incumbents) or something without a lot of differentiation other than “we’re smarter and will do a better job”, you may be in the wrong business. Investors are going to figure that out whether you tell them upfront or not, but you’re much more likely to get constructive feedback and form a good relationship with investors if you play it straight with regard to competition.

The Truth, or What We Want to Hear?

Eric Wiesen

Years ago, when I was a Silicon Valley lawyer, a VC client related an amusing anecdote about being pitched by early-stage companies (I know, VC jokes are always the funniest). The observation he made was that every startup, regardless of sector, business model or average sale price has the same 5-year revenue projection: $50 million, plus or minus a few. The reason, he explained, was that if the 5-year number is much lower than $50M, the VCs won’t be interested, and if it’s much higher than $50M the VCs won’t believe the projections.

Last week, a company that didn’t follow this rule pitched RRE for their Series A round. This was a good pitch – a credible entrepreneur with deep industry experience and network, looking to take a “2.0” approach to a business where the entrepreneur had already had some success back in the 1990s with a “1.0” solution. It was all looking pretty good, and we were progressing smoothly through the presentation, checking off a lot of the boxes I’d need to see in order to start a process internally. Until we arrived at the financial projections.

As a sidelight, the financial projections for an early-stage company are always speculative. Entrepreneurs know it and so do investors. But they help us, if nothing else, get a sense of how a given founding team thinks about the scope of an opportunity. And in this case, the financial projections showed the company quickly ramping up to about $15M and then almost totally leveling off, to the point where the 7-year projection was around $25M. And while I didn’t want to play into the stereotype above, I was professionally obligated to ask why the growth slowed dramatically in the “out years” in the model?

There are a few possible answers to this question, frankly none of them particularly encouraging.

1. You can (and most people, facing this question, do) argue that the assumptions in your model are so overwhelmingly conservative that while your projections say a small number, you really expect a much larger one. That doesn’t do well – while we appreciate conservative projections, it should be at the margin. If you really think this is a $100M business, your number should be relatively close to that.
2. You can tell us that this simply isn’t a particularly big market, and that the slow growth in the out years represent an early ramp to scale, and a tough fight for market share once the original ramp has been climbed. This is troubling, as early-stage VCs rarely want to get involved unless the addressable market is large enough to generate a big outcome.
3. You can tell us that the market is very fragmented, and that growth will be hard to come by as you fight with incumbents for share. This, too, isn’t something we like to hear, as it implies that it will be expensive and difficult to grow, and as Stuart sometimes says, “Some markets are just too hard”.

When pressed, this entrepreneur gave answer #2 – this is a market with a finite number of customers, and the financial projections he gave me reflect his (expert, I agree) estimate of his ability as a newcomer with a superior product, to gain market share – quickly at first, and more slowly in the out years.

The challenge is this – I appreciate the honesty this founder showed in telling me his genuine viewpoint on where the company can go. He also shared that he views this is a “good but not great” exit. A “double” if you like baseball metaphors. He’s doing this the right way, building realistic expectations for his business rather than telling me what I want to hear.

And yet – what I want to hear is that this can be a $100M revenue business that we can credibly see as a billion-dollar exit if everything goes according to plan. Because early-stage investing is simply too difficult to bet on companies where the best-case scenario is a $100M exit, even if that’s a great multiple on a couple million invested. Because best-case scenarios are rarely achieved, and when they are, it needs to be a real event for RRE.

So if I were this entrepreneur’s friend, and he asked me for advice on pitching RRE on this business, what would I tell him? I think the route he chose is admirable, but isn’t going to get him an investor. I simply can’t pound the table at our Monday meeting and insist that we have to do this deal, because even though I really like the team and the product vision, if they don’t think it can be a huge winner, I can’t. And I certainly don’t want him to lie to prospective investors about likely success, because that will simply lead to an unpleasant and combative Board of Directors/Management dynamic, when investors realize they’ve been sold a bill of goods.

No, I think what I would tell him is this: Go back over your plan from the beginning and see if there’s a way to make it bigger. Are there adjacencies you can exploit once you’ve established a beach head in your target market? Are there additional streams of revenue you can exploit? Underlying data assets, lead generation, marketing partnerships, greater distribution? Are there different verticals or other opportunities for value-added services within the vertical you’ve chosen?

If you want to be a venture-funded company, try to find a way to have a $50M business doing what you’re doing. Because while the anecdote at the outset is amusing, the risk profile of early-stage venture capital is such that you are going to get a lot of no’s if you can’t look us straight in the eye and get to some number close to that.

Please Hold the Google Comparisons

We get pitched on a lot of products that are designed to be hugely profitable primarily at very large scale, or which are platforms for the underlying monetization of otherwise less valuable digital assets. And with the aim of highlighting the scope of the opportunities presented by the business being pitched, many stray into comparisons to a certain successful company that is very profitable at great scale, and that succeeded in monetizing a big piece of the web. Whether your business is directly analogous (as a few are) or not particularly so (as most are), I’m asking you to please be very judicious with the Google comparisons.

Every investor you pitch knows that Google was the most successful venture-backed company of the past 10 years. And it goes without saying that every one of them would like to back “the next Google”. But please also note that every startup that wasn’t Google didn’t turn out to be Google. It’s ok to analogize your service to either consumer or advertiser modalities that have been proven out by Google. Generally speaking, we at RRE don’t like to see business models that require major shifts in user or customer behavior underlying the success thesis, so if you think either your users or your customers (to the extent that they are different) have been “trained” by Google (or some other highly successful company) to act in certain ways that enable your business, by all means demonstrate that you understand your users well enough to make the point, and that you have seen major proof in the real world that users will act the way you project.

Ultimately, though, please be mindful that making repeated references to Google is not going to cause investors’ eyes to turn into dollar signs as they envision a 1000x return on your company. The more frequently you repeat it, the less effective it becomes. If what you’re doing is deeply vertical, don’t say “we can be the Google of fishing” because the whole point of Google is its staggering horizontal reach. A corollary of this is only say that you are the “Adwords of ___________” or the “Adsense of __________” if you have a really good story to tell. Adwords monetized search and adsense monetized the long tail of content. Those are big stories. If what you have an interesting self-service model, try to figure out a way to tell the story without claiming to be Adwords. If you have a cool distributed content story, tell it in a way that doesn’t just try to associate with Adsense.

In the end, the investors you want involved with your company won’t be fooled by Google analogies, and the companies good investors want won’t try to do it.