That’s why I’m out

Or how pitch competitions can skew perceptions of how to get investment

Last week, a young entrepreneur who has been actively taking an interest in startups for years (her entire 4 year student career at least) told me about a placement she’d completed in an incubator last year.

She told me this was the first time she realised just how long the fundraising process is for investment. Before this, everything she’d seen and experienced led her to believe that as a founder raising capital, you need little more than an idea and a 5 minute pitch and an investor will more or less make a decision there and then, based on your presentation.

Experienced entrepreneurs and investors will be shocked by this, know it is absolutely not the case, and wonder how on earth someone might come to believe it is. But this is a variation of a conversation I’ve had with several people… and not just young entrepreneurs. And when you think about it…

Almost all concept and startup competitions for young people revolve around the pitch. And there are some sound reasons for it…

1. Experience. As an entrepreneur, you’ll likely have to be able to present your business succinctly and effectively in all kinds of different scenarios.
2. Planning. The process of putting together a pitchdeck is useful in organising your thoughts about your business.
3. Practice. Standing up and pitching to an audience or panel of judges is terrifying the first time you do it, but ultimately a great opportunity to grow your confidence and public speaking skills.
4. Efficiency. It means entrepreneurs at concept stage don’t have to write long and laborious business plans that nobody wants to read, they’ll never use again and that won’t survive first contact with customers (incidentally, business plan competitions would also give a false impression of what you need to do to launch an innovative new startup).

Fine, so what’s the problem? Well, despite all these positives, when you really think about it, we’re essentially telling young entrepreneurs to write and deliver a pitch to a panel of decision makers who will assess their startup on the spot and make a decision within the hour. And we expose them to that experience over and over again in slightly different ways. With no explanation of how that differs from the real world.

TV makes this even worse with…

Dragon’s Den (or Shark Tank if you’re in the US): The ultimate pitch competition. The show where entrepreneurs and inventors publicly humiliate themselves before the entire nation/world in the hope that they’ll get investment for their idea. Participants walk into an intimidating room and pitch/demo their startup/product to a panel of dragons who glare at them, insult them a bit and tell them they might as well go home and kill themselves… or that sure, why not, they’ll invest in the company. This whole process takes around 10 minutes per company. Or does it?

Sure, the edited version does. And logically we know there’s a before process and an after process. Firstly, there must be an application and filtering process to get onto the show. And afterwards, if an investment decision is to be made, there will be term sheets, a due diligence process, etc. In fact, half of all Dragon’s Den deals fall through after the show. Not surprising when ‘angels’ are taking 79% equity from 18 year olds for a ￡50k investment. Then rebranding the company in their own name…

Cheers, Kid!

But that’s not what you see. And seeing is believing.

And, although there are many other subtle inferences to the ‘all you need is a pitchdeck and a great idea’ myth, one of the strongest social conditioners is also known as…

The Silicon Valley Complex (I just made that up… I think): Boy goes to university, writes some code and launches a product, it goes viral, he has investors knocking on his door right away, becomes overnight success, drops out of university, lives happily ever after.

OK. We’re not that naive. We know there is a high failure rate in Silicon Valley and in startups in general (although we don’t really share these stories as inspirational tidbits to encourage entrepreneurship), but even the term ‘fail-fast’ makes it seem like everything always happens very quickly.

The truth is, unless you do happen to stumble across the fabled unicorn, relationships with funders and investors often take months to build. Whether angel or venture capitalist, there’ll then be a formal process including due diligence, and term sheet negotiations. Once an investment decision is made, it can take a couple of months to finalise things (once the lawyers get involved). And in the UK, there’s generally a higher risk aversion to early stage investing compared to the US, so the disparity between myth and reality is even more pronounced.

Some institutional investment firms are working to streamline this process, but it’s a world away from a 5 minute pitch competition or investment ‘reality’ TV.

To be clear, the answer here is not to stop running pitch competitions and their lookalikes. The answer is to educate young entrepreneurs on the investment process as it is in reality; to be clear about the difference between pitching at a competition and pitching for investment; and to understand how and why investors make decisions (SPOILER: They’re mostly economic rather than philanthropic).

We must stop contributing to young founders’ naivety through reinforcing potentially inaccurate views of the real world with processes that mirror those inaccuracies. Insert caveats. Encourage young entrepreneurs to educate themselves and do their own research. And inspire ambition, while keeping them grounded in the real world.