Entrepreneurs who have watched Shark Tank know the importance of perfecting their pitch. The pitch deck is a short presentation that helps potential investors understand your company and why they should invest. Some entrepreneurs give excellent pitches. Some give horrible ones. The best presentations are always upbeat with emotion, passion and creativity. I look for this level of enthusiasm as an investor because getting a business going requires a leader with enough zeal to carry the business through tough times. But, sometimes, that excitement and aggression can cause an entrepreneur to mislead or even fabricate important information. That’s what I call the “balloon pitch.”
At the Collision conference in New Orleans, a random entrepreneur stopped me on the show floor and asked to give me his pitch. He said his company was in the drones market. Drones are a very hot topic, so I took the meeting.
What followed was one of the most disastrous presentations I’ve ever heard. In summary, the man told me that his drone company was going to have revenues of a billion dollars by the end of the year, though no product existed yet. He claimed the company’s chief technology officer was a genius who had invented the next Google, though he wasn’t actually working for the company. And finally, he said they had lined up the most prestigious customers, though they had not signed one customer contract and, remember, had no product to sell.
The balloon pitch is full of hot air. Plenty of grandiose promises, but not much substance. The parts don’t fit together. The math doesn’t add up.
Some balloon pitches are a bit smoother. I had a charming and compelling entrepreneur come to me at another conference. He pitched his company with such fluency and ease, I thought it was a real business with customers and revenue. But, I asked one simple question: “What were your revenues last quarter?” The answer was zero. There were no customers. The company was just a potentially good idea with no existing proof points.
Here are the signs that a pitch is full of hot air:
1. Over-estimating the market size
Many entrepreneurs present a market potential that is way overblown. You’re not going to secure every customer in your market, and your target customer isn’t the whole world. Be conservative with your numbers. Investors are going to reduce your forecast anyway. Try to show that you’ve attempted to be realistic.
We have a saying in the venture capital world: “Don’t confuse the pitch with reality.” Some exaggeration is expected. But, misrepresentation is a sign the entrepreneur isn’t honest or hasn’t thought things through. Make sure you can back up your claims. It’s OK to be a bit aggressive or optimistic with your goals but you need to back them up with reasonable assumptions.
Some entrepreneurs are overly arrogant when they present to VCs. They name drop. “We’re also talking to this big firm and that big firm, so make a decision by this deadline, or you’re out.” Generally, I’ll respond to that kind of arrogance with a simple, “I’m out.” If you can’t be respectful to each person you meet, that tells me that you’re not likely to listen to advisors. But, more importantly, name-dropping tells me that your biggest asset is your connections, not your company or product, which is a good indication that this may be a balloon pitch.
3. No product or no customers
If you have a great idea, test it. Get a prototype built. Try that prototype out on a few potential customers. Get some feedback. Re-work it as needed. But, coming into an investor meeting with nothing more than an idea is too soon. You will no doubt have to manufacture assumptions. Until an idea has been tested, it’s just air.
These are the issues I probe when talking to entrepreneurs. Getting to the heart of these issues not only helps me identify balloon pitches, but also when an entrepreneur is under-selling themselves.
I recently invited four entrepreneurs to San Francisco for a month of intense learning with me and some other mentors. We called the program Neal’s Running Start. One of the entrepreneurs almost didn’t make the cut. She had excellent presentation skills but was much less confident than the other entrepreneurs. My first impression was that she might not have a solid company yet. But, again, I asked the revenue question. Turns out, sales were close to $1 million a year and she had some Fortune 1000 customers already, even without investors. She simply thought there was no way she was as savvy as a Silicon Valley entrepreneur because she was from a small town in Canada. Rather than giving us a balloon pitch, she underestimated her company. Just because her confidence wasn’t at Silicon Valley arrogance level, didn’t mean she wasn’t running a successful company. With the right questions, we ascertained that she had the real deal. I, along with several other mentors from Neal’s Running Start, invested in her company.
True, some notorious Silicon Valley companies have been funded on nothing more than hype. You’ve read stories of millions of dollars dumped into startups who blew it on parties, premature product launches, and lengthy and costly development cycles because the initial product didn’t work. As investors chase the next unicorn, there will be some bad investments by bad investors who throw in money and walk away without minding that investment. Most credible VCs are not like that. We get to know our portfolio companies and guide them. Outside of tech, an investor is extremely unlikely to invest in hype, as prototyped products are usually more tangible than software code.
The most important thing you can do in your pitch is make a human connection with your potential investor. Present your company in a succinct way, but find a way to connect and build early trust. Once we get past the pitch, investors will dig for evidence and concrete results. If you tell us in your presentation you have one thing, but it turns out it’s a balloon pitch, we won’t trust you again. Be honest. Because the phase before investment is called “due diligence.” During that due diligence process, we will discover everything about your company, including if it’s a bunch of hot air.