There’s something we always tell startups about pitching to VCs or seed investors – something that founders rarely get right:
Pitch the category first, and then why your company is the one to create and win it.
We know this works from experience, but if you pay attention to the way VCs behave, it’s what they’re telling you, too. Evidence of that can be found in a book by Scott Kuper, a managing partner at the giant venture capital firm Andreessen Horowitz. In 2019, Kuper published The Secrets of Sand Hill Road: Venture Capital and How to Get It. It is the most straightforward, honest description of how VCs think that we’ve run across. Here is just about the most important thing he wrote, and it says a lot about why a company would want to pitch how it can define and win a market category:
In VC, all we really care about is the at bats per home run. That is, the frequency with which the VC gets a return of more than ten times her investment—which we consider a home run.
The fundamental assumption here is that ideas are not proprietary. In fact, VCs assume the opposite—if an idea turns out to be a good one, assume there will be many other founders and companies that are created to pursue this idea. So what matters most is, why do I as a VC want to back this particular team versus any of the x-number of other teams that might show up to execute this idea?
Thus, every investment decision has infinite opportunity cost in that it likely prevents you as a VC from investing in a direct competitor in that space; you have picked your horse to ride.
In light of this, among the cardinal sins of venture capital is getting the category right (meaning that you correctly anticipated that a big company could be built in a particular space) but getting the company wrong (meaning that you picked the wrong horse to back).
OK, so let’s parse that for how you, as a company leader, need to think if you want to chase outsized success.
VCs are looking for home runs, not singles or doubles. (The assumption here is that you, too, as company leader, want to hit a home run!) Most home runs are companies that define and win an important market category – companies like Salesforce, Airbnb or Stripe. Singles and doubles are the copycats – the second- and third-place companies that win some market share but always operate in the shadow of the category winner.
So your first layer of thinking should be about identifying a new market category with huge potential.
When you go to pitch investors, remember that what they are first listening for is whether this is a new market category that will be a home run. Founders usually try to first sell the company to the VC. But the VC really wants to be sold first on the category. To do that, you need to deeply understand the category and know how to articulate it.
Once investors have an epiphany that this new category you’re showing them is going to be huge, investors’ next layer of thinking is about whether your company is going to win it.
A smart founder is going to present a plan for doing that, and such a plan is what you get from the category design process. You want to show how you are going to design the category in a way that favors your company and gives your company the best chance of winning it.
Developing an engaging category-forward pitch to raise capital from the best investors is one of the top reasons companies go through the category design process.
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Want to run your pitch deck through the category lens? Book an office hours slot with Mike Damphousse and Kevin Maney of CDA here.
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