What Really Happens in a Greylock VC Pitch Meeting?

Josh Elman needs to fall in love. He needs to make this funding. But the startup founder sitting throughout from him—bland and too assured for his personal good—is making it tough. The founder shouldn’t be a lot taking part in laborious to get as clueless.

Elman is a associate at one of many tech world’s prime enterprise capital corporations, Greylock Partners. These days Greylock maintains not one however two places of work within the San Francisco Bay Area. One is on Sand Hill Road, in Menlo Park, lengthy the Wall Street of enterprise capital and roughly in the midst of Silicon Valley. But lately the middle of gravity within the tech world has shifted north to San Francisco, and Greylock, like many of the space’s main enterprise corporations, now leases area within the metropolis.

Elman is understanding of Greylock’s San Francisco places of work on a sunny Wednesday within the fall of 2017. It’s there, in a factory-chic workplace in part of city thick with startups and rival enterprise corporations, that I be part of him for a lineup of conferences that begins with this less-than-inspiring founding father of a mobile-app firm that’s been round for a number of years. “This is someone I’ve known a long time,” Elman tells me. “From before I was a VC.”

The floor guidelines of this fly-on-the-wall session dictate that I can’t title the entrepreneur or his startup. But there’s no stopping me from describing the person as an odd duck. I’ve sat in on my share of pitch conferences over time. I’ve witnessed awkward mumblers who can’t make eye contact. In the late 1990s, on the peak of the dot-com insanity, I attempted to not visibly roll my eyes over the hubris of the MBAs descending on Silicon Valley with their charts and projections however not a lot else past a easy, practiced supply and the promise of “ubiquity” for no matter they had been promoting.

But by no means had I come throughout an entrepreneur as buttoned-down-boring as this one. His background regarded good on paper and included a stint on Wall Street. He was older than the everyday founder. Yet he didn’t appear to have the character to guide a rising tech startup.

Gary Rivlin (@grivlin) is a longtime WIRED contributor, a former New York Times reporter, and the writer of seven books together with Katrina: After the Flood.

The founder, who additionally doubles as firm CEO, claims that he isn’t at Greylock on the lookout for cash. “We’re not in fund-raising mode,” he says to me as we’re introducing ourselves to at least one one other. As he tells it, he’s simply an previous colleague asking one other for pleasant recommendation as he preps himself to lift a big slug of cash. This will shortly turn into bunk.

The founder takes a seat throughout a convention desk from Elman and plugs in his laptop computer loaded with a multi-slide presentation geared toward convincing financiers to take a position at the very least $50 million. To his proper sits a prime government from his firm: a wiry man with a shaved head, a deep r´´ésumé, and an depth that implies he would crash via a wall if that’s what it took to win. “We literally were making changes in the car a few minutes ago,” the founder tells Elman. He’s aiming for nonchalance, however it comes off as an apparent ploy to decrease the stakes on a high-stakes assembly. He has little question been sweating this second—and each slide—for weeks.

It is likely to be overstating issues some to say that pitching Greylock (as a Newsweek contributor wrote in 2014) “is a bit like being a rookie pitcher stepping onto the mound at Yankee Stadium—with Babe Ruth walking up to the plate.” But there was no doubting the agency’s supremacy. Greylock had been an early investor in each LinkedIn and Facebook, when $27.5 million purchased almost 6 p.c of an organization at the moment price greater than $500 billion. (In different phrases if Greylock and its restricted companions—these placing up the cash that Elman and his companions make investments—had by no means offered a share, that $27.5 million could be price $30 billion at the moment.)

The additionally purchased early stakes within the music streaming service Pandora, which was price $2.6 billion on the finish of its first day as a publicly traded inventory in 2011; Instagram, the 13-person startup that Facebook purchased for $1 billion in 2012; Tumblr, the microblogging firm that Yahoo bought for $1.1 billion in 2013; Zipcar, which Avis paid $500 million to purchase that very same 12 months; Dropbox (a digital storage service), valued at $12.7 billion when it went public in 2018; Medium (a web-based writer); and Airbnb.

Greylock has the financial means to offer the CEO with the cash he must construct out his concept and likewise the connections of Elman and his companions, together with the companies of the eight full-time recruiters who work for Greylock and its in-house communications workforce if a startup workforce wanted assist with its messaging. (Loads of the massive corporations present these sorts of ancillary companies, to extend the possibilities that the portfolio corporations it funds are winners.) Quite merely, Elman might make his firm.

This shouldn’t be the founder’s first time pitching Elman. That’s apparent a minute or two into the assembly. “I want to start by thanking you for calling BS on our numbers the last time we met,” the person says. Elman fills me in later. A 12 months or two earlier, the founder had supplied income estimates based mostly on the brightest assumptions—“and then basically he doubled everything.” But apparently Elman has a smooth spot for the CEO. Or at the very least he sees potential in his firm.

The founder had been struggling to search out the precise enterprise mannequin, and Elman has been serving to him discover the precise marketplace for his app, even when he hasn’t been prepared to take a position but. Now, a number of enterprise fashions later, the founder is for certain the corporate is positioned the place it must be. “We really appreciate all you’ve done to help us hone the business,” he says. A small smile seems briefly on his face however disappears instantly, as if somebody has snapped shut the blinds.

“I’m just trying to be a blank slate here,” Elman says helpfully. Elman is of common top, with the chunky construct of somebody for whom train is essentially pace strolling between conferences. He has thinning hair and blue eyes behind a pair of fashionable metallic glasses. On today, he’s wearing a blue T-shirt beneath an untucked plaid shirt, denims, and trainers. He’s an upbeat, if fidgety, presence within the room, with a puppy-dog spirit, all nods and smiles. He virtually leans into the presentation, as if primed to be delighted by no matter an entrepreneur may utter subsequent.

An early slide boasts of the tens of thousands and thousands of enterprise {dollars} his firm has already raised. The smile dissolves from Elman’s face. His fingers absentmindedly discover a pen and start taking part in with it. The VC inside appears virtually offended {that a} founder is boasting of blowing all that cash looking for the precise market. Elman lets one other slide or two go however then asks the founder to return. “You save that for the end,” he says of the quantity of enterprise cash raised already. After the assembly, Elman is blunter: “He had burned through”—right here he provides the precise quantity, however, suffice it to say, it was nearer to $100 million than to zero. “And he’s putting that up at the top of his slide deck like a selling point?”

Elman’s temper brightens when the founder begins speaking in regards to the competitors: fats, established manufacturers not tech-savvy sufficient to supply a lot in the best way of the competitors due to “legacy systems” hobbled by “the pre-mobile economic model.” He boasts that almost all of his development has been “organic” reasonably than paid, which has allowed them to choose up customers with out a lot in the best way of customer-acquisition prices.

All of that is encouraging information for a mobile-app maker eager to be on the smartphones of lots of of thousands and thousands of individuals across the globe. Millions have already downloaded the app. True, most aren’t but paying prospects, however the founder shares some intelligent concepts for getting anxious dad and mom and others to pay month-to-month for the premium companies they’re promoting.

The smile returns to Elman’s face. “This is the first time in a meeting with you where I get the investment thesis,” he says. Third events are already paying thousands and thousands to achieve entry to the viewers they’re aggregating: to promote their companies or to entry information about its customers. And there’s the promise of way more. Elman does some fast math in his head and encourages the founder to be bolder in his pitch. “Play up that this is a ‘billion-dollar opportunity,’” he suggests.

Elman is observant, fast-thinking, fast-talking; he doesn’t appear to overlook a lot. The founder, against this, is sluggish to choose up on social cues. Dour and unexpressive, he plods via the ready presentation—which Elman continues to interrupt. “The big question is defensibility,” he says. “Couldn’t any number of big companies do exactly what you’re doing?” He lists a number of, together with Google and Facebook. “How do we know you’re the only ones who can cash in on this honeypot?” Looking at me, Elman says, “That’s always the question.”

The CEO doesn’t assault the query a lot as brush it apart. But right here his sidekick provides a much more convincing argument that will get Elman nodding and smiling fortunately. Another slide will get him speaking about burn fee: the cash an organization spends on salaries and different prices every month. At this level, the founder’s firm is burning via lower than $1 million a month. “If you ramped up your burn rate to closer to 3 million, no one would freak out,” Elman advises.

From the place I’m sitting, the message is unmistakably clear: Elman is telling his previous colleague to mash his foot down laborious on the gasoline pedal. Spend extra now to dominate the market and put distance between your self and any potential rivals. Prior to changing into a enterprise capitalist, Elman had labored at Facebook and Twitter. He is aware of one thing about rising a tech firm. Yet reasonably than pause to contemplate the VC’s remark, the founder bats it down, saying dismissively, “I’m like a Depression baby when it comes to spending.”

Every enterprise deal ultimately reduces to the “valuation”: the paper price of an organization. Coming up with that quantity is important for the buyers to determine their possession stakes. For instance, a startup is valued at $20 million (the “pre-money” valuation) if the enterprise capitalists are spending $5 million to purchase a 20 p.c share within the firm, or one-fifth of $25 million (the “post-money valuation”). The CEO, maybe feeling emboldened by Elman’s encouragement, provides, “I think it should be a $750 million valuation.”

Elman squirms in his seat. He pulls at his face and tugs at his garments. It’s by no means straightforward to carry up what enterprise capitalists name a down spherical. The tech graveyard is crowded with corporations that had been valued at $400 million after they raised a C spherical (a 3rd spherical of funding) however solely $200 million (reasonably than, say, the $800 million valuation the founders had been relying on) on the D spherical.

That situation dilutes the possession stake of the founders and the corporate’s preliminary buyers—and likewise all these early workers who had been employed with the promise of proudly owning a sliver of the corporate. Elman suggests the potential for a down spherical, however the CEO shudders on the unpalatable prospect of bursting the bubble of all his hotshot programmers banking on a giant payoff as soon as the corporate hits it large.

“My engineers would mutiny if I even bring up a down round,” the CEO says, slamming shut the door on additional dialog. There’s extra speak: about probably altering the corporate’s title, its slogan, and methods they could enhance their pitch. “It’s time to pull together a narrative,” Elman tells the 2 males.

The artwork of being a enterprise capitalist means by no means saying no, even in the event you hardly ever say sure. Greylock Partners met with a number of thousand entrepreneurs in 2016—and made 16 investments that 12 months. Yet what if the startup that struck you as a dud in a primary spherical—the A spherical—catches fireplace, and also you and your companions need in on a B or C spherical? Or what about that entrepreneur’s subsequent firm? Elman provides the founder solely encouragement as we are saying our goodbyes.

“This is great. I want to lean in and talk to the team,” Elman says, referring to others inside Greylock. “The last time we met,” he tells the founder, “I was 75 percent sure what you were proposing would work. Now I have a higher confidence range.”

On the best way to the following assembly, Elman provides me the arguments towards investing, beginning with the CEO himself. “If we were to invest, we’d have to have a difficult conversation about whether he would be the CEO moving forward,” he says. The valuation was one other potential deal killer—particularly when the corporate’s founder had simply instructed him that they might in all probability lose their greatest engineers if pressured to just accept a down spherical.

“But for argument’s sake,” he says—after which proceeds to stipulate the opposing views: Yes, the corporate has blown via some huge cash looking for a working enterprise mannequin, however it nonetheless has a number of thousands and thousands within the financial institution. More importantly, he provides, the corporate has been reserving vital income, and all of the numbers level in the precise route. “They’re no longer scratching and clawing the way they were,” he says.

Maybe a 40-fold enhance in income over the following 18 months, because the founder imagined it, is on the giddy facet of optimistic, however what in the event that they develop 20 instances? Elman does some fast calculations in his head and imagines a time in only a few years when, based mostly on even these comparatively extra modest development numbers, the corporate is producing $300 million or extra in annual income.

An enormous smile flashes on his face. “Then,” he says, stopping to take a look at me, “it becomes interesting.”

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