The 'Raggedy' Elevator Pitch
The idea goes like this.. If a VC finds himself persuaded to invest in a charismatic entrepreneur at a generous valuation.. he should first find someone non-charismatic... and let that person pitch it to him. If he's still convinced then he can go for it.
In the last week I saw several businesses that seemed like they got bloated valuations/funding for their core fundamentals
When I thought about the core fundamentals of the model... and how they were likely going to scale.. it just didn't coincide with the valuation they were given.
And sure i'm not a VC... but having spent 7 years in strategy consulting playing with spreadsheets and P&L's gives me the right to at least call out when something just doesn't look right.
And in at least two of the cases I know a bit about the CEO/founder and he is what I would consider fairly charismatic.
As in I know that the person is one of those people that can generally sell you sand in the dessert.
But I also know in at least one of the cases that this gift has made the person weak in other areas... like structure & organisation. Two things I consider that I understand quite well and am a fairly accurate judge of.
And so I thought to myself... If the founder wasn't so charismatic would the VC have given such a good valuation? Would they have funded this thing at all?
Why should VC's be careful of investing in charisma?
Now, nobody is questioning whether charisma is a good thing. But does it in any direct way impact the economics of the business? Ie. if the company has poor unit economics is the CEO's charisma going to help?
I would argue that it does not help much and can in fact work against him. Because often charisma results in the person relying a lot on others.
So maybe they managed to recruit and onboard the right people that can fix the problem. But if they did not, my experience with these 'charismatic' people are that they are quite bad at fixing the problem themselves.
Probably because they were that charismatic kid in school that convinced the other kids to do his math homework... and so never had to learn how to do it himself lol
And if I were a VC, i'd ask someone non-charismatic to pitch the idea to me
Why? Because it would force me to evaluate the idea/model more unemotionally. Do the unit economics make sense?
Will it scale easily? If it was instead this uncharismatic CEO (who is just as smart, etc) would I still invest?
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Now VC's are often taught to 'invest in the founders'... but forget sometimes that this means a lot more than how well they can pitch/sell you on something. And so they get lazy on their homework... for example...
Homework VC's should do:
I would guess that charismatic founders who are bad managers are probably one of the biggest sources of bad investments for VC's
I take my own experience in making this conclusion.
I've been part of various companies (both as employee & contractor) and have had insights into others. And the ones that were able to continue to raise money despite quite crappy fundamentals were almost always the ones that had a CEO with a gift for sweet talking investors.
And in the end.. it was the VC's that paid (or will pay) the price. Because they were seeing shit through rose-colored glasses. The city was on fire... and yet they were still seeing the Greek Isles... lol
Non-charismatic founders/CEOs that make it beyond a certain point are pretty consistently successful in my experience
One example of a tech company with a CEO who was remarkably un-charismatic was Ozon's Alex Shulgin. A person i got to know fairly well some years back.
Relatively soft spoken to the point where at the beginning I was like... "hmmm is this guy really gonna be able to run this thing and control these people?" But as I was to find out... also an extremely determined and hard worker.
He made it to where he was without much charisma. Which meant that he had to work harder, he had to be better at other things.
He had to learn to make sure that shit got done... because if it didn't he didn't have a sweet tongue to sell it to the investors.
And when you see that at work.. you realize why he's successful. I may not agree with everything he does, but do I think he's effective.
And thus I call this the 'Raggedy' elevator pitch
Because a VC should pretend that he was pitched in a beaten up, old elevator where the creaks and noises nullified any charisma the person pitching to him might have. And thus he makes his decision more soundly on logic and analysis.
Read it on my blog: https://www.endgameken.com/post/the-raggedy-elevator-pitch