In the Sunday NY Times, the newspaper related the story of a personal injury attorney who pocketed the case winnings from his clients totaling over $5 million dollars. One memorable quote came from one of his former client, “…never imagined I could be so taken advantage of.” Another used the word, “betrayal”. His clients believed that the lawyer had a fiduciary duty to deliver their legal winnings in a timely and effective manner. Instead he betrayed them.
How this real life incident relates to startups comes from how startups handle their relationships or pitches to potential investors? – how to build or establish credibility. In a recent phone conference, the lead speaker introduced his friend, stating knowing him for several years. His mistake: he called him by another name, obviously not his. The other parties to the conference call would be wondering whether this person really knew this person that well and was simply passing him off to them. (In this case, one can attribute that mistake since the speaker’s age was over 84 years.)
In another real life scenario, a Shark Tank company was undergoing a follow-up after the initial investment of $1 million. When the startup CEO was asked what were his annual earnings so far, he stated $4.2 mill. The investor then says that number was far short of the predicted $10 million. Then the CEO added that he has changed his product line, as of yet to be marketed. Then the investor asks what is your valuation? The answer was $50 million, but the investor commented that is “on paper”. Why did the investor reply with that? Already, the startup CEO is undergoing greater scrutiny. His credibility is being questioned.
On Wall Street, there is a saying, “under promise, over deliver,” when a company presents future revenues through its public relations. Analysts have long term memory. If a company severely overestimates its earnings per share, its stock value will drop. And, if this is the second instance of the same type of projections, the credibility of the management team is questioned, maybe irreparably so.
That Shark tank company was given a severe reprimand already. Had the revenues been only a few percent off, the negative results would not have been so harsh. But the variance exceeded minus 60%, in an environment where investors expect 10X or more growth. The investors expected the leadership to deliver and it did not. But can that be repaired? Yes, and only if whatever is delivered in a year’s time exceeds any expectations.
Since potential investors place every company under the “credibility magnifying glass”, that same scrutiny is applied during pitches or even phone conferences mentioned earlier. They are looking at any minute discrepancy in a presentation. And at times, I have seen that discrepancy identified during the meeting, from Paris to Beijing.
That is why I always prepare myself by writing complete business plans, knowing ever major financial number in the spread sheets, and preparing the presentation as if taking the bar exam. Why the business plan? I explained that, during a pitching session, anything can happen. Just a week ago, a five-minute pitch is converted to an hour one. More and more discussions relate to the products and the market. Questions arise about details and numbers not mentioned in the pitchdeck, but articulated in the business plan. Yet, one has to respond quickly and with authority, or lose the credibility of the potential investor. I remember in pitching session in Boston, in front of the fintech investment arm of Capital One, part of the discussion related to the economic theory at the University of Chicago business school. In a session in front of JP Morgan, I was asked that beyond Moore’s Law, which law applied to networks (Metcalfe’s law).
These examples only confirm that one’s interaction with potential investors are tests to determine credibility: Do you know market (How familiar with the issues related to the market?)? Do you understand your industry (How precise are the projections?)? Do you know the names of your critical team members (did you collect these names randomly or have you known them well beforehand)?
As I keep repeating, raising capital is a marketing problem. Part of that marketing is to establish credibility early – by knowing your numbers, the team, the market, the products, and competitive environment. And going back to the NYC lawyer, any discrepancy would be a betrayal to the fiduciary duty to the clients, in this case, the investors.