VENTURECAPITAL

HowVentureCapitalistsReallyAssessaPitch
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B efore Lakshmi Balachandra entered academia, she spent a few years working for two venture capital rms, where she routinely
witnessed a phenomenon that mystied her. The VCs would receive a business plan from an entrepreneur, read it, and get excited.
Theyd do some research on the industry, and their enthusiasm would grow. So theyd invite the company founder in for a formal
pitch meetingand by the end of it theyd 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? Thats 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 pitchthe 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:

Passionisoverrated.
Working with video recordings of 185 one-minute pitches during an MIT Entrepreneurship Competition (with real VCs as judges),
Balachandra had coders turn o 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. Theres this mythology that they want to see that youre 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 nalists 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.

Trustbeatscompetence.
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 lled 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 nancial 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 dont heighten the risks. In fact, the research showed that entrepreneurs who projected trustworthiness increased their odds of
being funded by 10%.

Coachabilitymatters.
Particularly among angel investors, who get involved earlier than traditional VCs do, decisions arent driven only by potential returns; they
are driven by ego as well. Most angel investors are experienced entrepreneurs who want to be hands-on mentors, so they prefer investments
where they can add value. For that to happen, a founder must be receptive to feedback and have the potential to be a good protg.

Balachandra reached this conclusion by conducting surveys and evaluating video sessions with the same California investors network.
Coders examined the videos for behaviors, such as nodding and smiling in response to questions, indicating that founders were open to
ideas. When analysis and survey results indicated that they were, and when the investor was experienced in the relevant industrygiving
him or her knowledge that could add valuethe company was more likely to move on to due diligence.

IPreferInvestinginMissionaries
BongKohworkedforatraditionalventurecapitalrmbased
intheBayAreaandcofoundedthreestart-upsbefore
launchingKohFounders,aChicago-andLosAngelesbased
early-stageinvestmentfund.HespokewithHBRabouthow
hesizesupfounders.Editedexcerptsfollow.
MEIKOTAKECHIARQUILLOS
Genderstereotypesplayarole.
In Balachandras rst job in venture capital, she rarely encountered
other women, whether among VCs or among entrepreneurs; in fact,
she says, 94% of venture capitalists are male. (She then worked at an
all-female rm that focused on funding start-ups headed by women.)
In her research, she and her colleagues used videos from the MIT
competition to test the perception that VCs are biased against female
entrepreneurs. Coders noted whether the presenter was male or
female and then measured whether he or she exhibited
stereotypically masculine behaviors (such as forcefulness,
dominance, aggressiveness, and assertiveness) or stereotypically
female ones (warmth, sensitivity, expressiveness, and emotionality).
The analysis revealed that although gender alone didnt inuence
success, people with a high degree of stereotypically female behavior
were less likely than others to succeed at pitching. The study shows
that VCs are biased against femininity, Balachandra says. They dont

Doentrepreneursoverestimatetheimportanceofthe want to see particular behaviors, so if youre overly emotional or

businessideatheyrepitchingrelativetothewaythey expressive, you should consider practicing to avoid those things.
presentthemselves?
I100%believethattheydo.Althoughthebusinessideais The most important takeaway for entrepreneurs is this: You should
obviouslyveryimportant,Itendtolteroutideasand
approach the pitching process less as a formal presentation and more
marketsImnotinterestedinbeforedecidingwhethertoeven
takeapitchmeeting.Intheearlieststages,whenyourean as an improvisational conversation in which attitude and mindset
angelorapre-seedinvestor,thereisntalotofinformation matter more than business fundamentals. Listen hard to the questions
aboutwhetherthebusinesswillgaintraction.Youhaveto
youre asked, and be thoughtful in your responses. If you dont know
takeaneducatedguessaboutwhethertheresamarket,and
youhavetoevaluatetheotheraspectsofthepitch.Alotofit something, oer to nd outor ask the investor what he or she thinks.
comesdowntoDoyoubelieveinthisteam?Thatsrstand
 foremostformeonceIvedecidedsomethingisamarket
opportunityIwanttoexplore.Iwanttoknowifthe
entrepreneursarewillingtogrinditout.
Thisresearchsuggeststhatacalmdemeanorismore
attractivetoinvestorsthanpassionorenergy.Doyou
agree?
Iactuallypreferhigh-passion,high-energyentrepreneurs.
Peoplewhostartbusinessesareeithermercenariesor
missionaries,andIpreferinvestinginmissionariespeople
whoreallybelieveinthepainpointtheyresolving.
Dont react defensively to critical questions. And instead of obsessing
over the specics of your pitch deck, Balachandra advises, think
about being calm, cool, and open to feedback.
AbouttheResearch:Calm,CoolandCompetent:TheImpactofanEntrepreneurs
DisplayedEmotionsonInvestorDecisions,byL.BalachandraandA.Corbett(working
paper);PitchingTrust:InvestorsValueCharacterOverCompetency,byL.
Balachandra(workingpaper);InvestorMentor:EvaluatingtheEntrepreneuras
Protg,byL.Balachandra,H.Sapienza,andD.Kim(workingpaper);DontPitchLike
aGirl!HowGenderStereotypesInuenceInvestorDecisions,byL.Balachandraetal.
(EntrepreneurshipTheoryandPractice,forthcoming)
AversionofthisarticleappearedintheMayJune2017issue(pp.2528)ofHarvard
BusinessReview.

Howimportantisanentrepreneurswillingnesstobe
mentored?
Icantmakeacompanysucceed.Anyinvestorswhosaythey
canarearrogant.Thatsaid,Idolookforpeoplewhowillbe
goodpartners,whoareopentofeedback.Ifpeoplegettoo
defensivewhenreceivingfeedback,itcanbechallengingto
workwiththem.

Howhardisittoassessthesetraitsinasinglepitch?
Itrynottofocustoomuchonhowtheentrepreneurpitches.
Justastherearepeoplewhoexcelinjobinterviewsbutmake
horribleemployees,therearepeoplewhoarereallygoodat
pitchingbutarenotnecessarilygoodasoperators.Itryto
spendalotoftimewithanentrepreneuroutsidethepitch
settingbeforeIinvest.ThatsoneofthereasonsIdonot
investalotintheBayAreadealscanmoveveryquickly
there,soitcanbehardtospendalotoftimewithastart-up
beforereachingadecision.

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BRUNOAZIZA 10daysago
ThisarticleoffersaniceparallelwiththelatestHBRpieceaboutWhatSetsSuccessfulCEOsApart.Thetake-awayaroundcoachabilityisIthinkparticularly
poignant.Inaworldwheresuccessmeanslearningquicklyandproactivelyadapting,coachabilityisakeyattributetolookforinanyCEOandanyemployee.

IdowanttotemperthiswithawordonVCcontestandhowtoworkbestwiththedifferenttypesofinvestorsyoumightencounter.Theexpectationsinvestorshave
changebasedontheroundthestartupisinvolvedin.Angelinvestorsandlate-stageVCsexpectdifferentthingsfromtheteamindecidetoinvestin.Readersshould
takethisinconsideration.Forinstance,ifyouhavebuiltacompanybeforeandyouareaspecialistintheindustryyourebuildingasolutionfor,dontdiscardyour
expertise.Investorswanttoinvestinpeoplewhoknowwhattheyaredoing!So,whilelisteningtotheiradviceandopinionisalwaysagoodidea,neverlosesightof
thefactthatthisisyourcompanyandthat,ultimately,youareresponsibleformakingthedecisionsthatmakeyourbusinesssuccessful.

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