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How Venture Capitalists Really Assess a Pitch

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efore Lakshmi Balachandra entered academia, she spent a few years working for two venture capital firms, where she routinely witnessed a phenomenon that mystified her. The VCs would receive a business plan from an entrepreneur, read it, and get excited. They’d do some research on the industry, and their enthusiasm would grow. So they’d invite the company founder in for a formal pitch meeting—and by the end of it they’d have absolutely no interest in making an investment. Why did a proposal that looked so promising on paper become a nonstarter when the person behind the plan actually pitched it? “That’s what led me to pursue a PhD,” says Balachandra, now an assistant professor at Babson College. “I wanted to break down and study the interaction between the VC and the entrepreneur.”

Even before she began her research, Balachandra had some hunches. Most entrepreneurs believe that the investment decision will hinge primarily on the substance of their pitch—the information and logic, usually laid out in a PowerPoint deck. But in fact most VCs review pitch decks beforehand; the in-person encounter is more about asking questions, gaining clarity, and sizing up personalities. To better understand those dynamics, Balachandra spent almost 10 years capturing what happens in pitch meetings and quantifying the results. Some patterns were obvious from the start. For instance, entrepreneurs who laugh during their pitches have more success, as do people who name-check friends they have in common with the VCs. But after drilling down, she drew four broad conclusions:

Passion is overrated.

Working with video recordings of 185 one-minute pitches during an MIT Entrepreneurship Competition (with real VCs as judges), Balachandra had coders turn off the sound and use only the visuals to assess how energetic and how positive or negative each founder appeared. (The coders controlled for presenters’ gender and attractiveness along with the size of the market the start-ups were addressing.) Among both VCs and entrepreneurs, conventional wisdom holds that “passion” is a positive attribute, connoting high energy, persistence, and commitment. “There’s this mythology that they want to see that you’re dying to do this business and work hard,” Balachandra says. But when the coders looked at their assessments in light of which start-ups were chosen as finalists in the competition, they found that the opposite was true: The judges preferred a calm demeanor. Follow-up studies showed that people equate calmness with leadership strength. So temper the enthusiasm and project stone-cold preparedness instead.

Trust beats competence.

In a second study, Balachandra worked with a California-based network of angel investors who gather monthly to hear 20-minute pitches from start-ups. Immediately after each pitch, the investors filled out detailed surveys about their reactions and indicated whether they wanted to send the company through to due diligence (the next step before investing). The results showed that interest in a start-up was driven less by judgments that the founder was competent than by perceptions about character and trustworthiness. Balachandra says that this makes sense: A CEO who lacks a skill-based competency, such as a financial or technical background, can overcome that through training or by hiring the right complementary talent, but character is less malleable. And because angel investors often work closely for several years with entrepreneurs on highly risky ventures, they seek evidence that their new partners will behave in honest, straightforward ways that don’t heighten the risks. In fact, the research showed that entrepreneurs who projected trustworthiness increased their odds of being funded by 10%.

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