Ask Slashdot: How Do You Sell an Algorithm To Venture Capitalists? 205
dryriver writes "Dear Slashdotters, We are a two man crew who have spent almost three years developing a video processing algorithm that 'upgrades' the visual quality of digital video footage. We take video footage that is "of average quality" — think an amateur shooting on a cheap digital camcorder or on a smartphone camera — and use various mathematical tricks we have developed to make the footage look better — optically sharper, better lit, more vivid colours, improved contrast, enhanced sense of three-dimensionality and of 'being-there realism.' In about a month, we will be presenting our algorithm to some venture capitalists. We have the obligatory before-and-after video demos prepared for this, of course. But there will also be a short PowerPoint presentation where we explain our tech in some detail. Now here is our main question: What, in your opinion, should we — or indeed should we NOT — put in the PowerPoint presentation to impress a Venture Capitalist? Should we talk about how we developed the algorithm at all — what kind of R&D and testing was involved? Should we try to walk the VCs through how our algorithm works under the hood — simplified a bit for a 'non-engineer' audience of course? Or should we stick to talking about market potential, marketing strategy & money-related stuff only? If you were in our shoes — presenting a digital video-quality improvement technology to professional VCs — what would and would you not put in your PowerPoint? Any advice on this from Slashdotters with some experience would be most welcome!"
Tell them (Score:5, Insightful)
ROI (Score:5, Insightful)
Don't Do It (Score:4, Insightful)
Don't give your future away by taking money from VCs for this. It sounds like you have enough already to write a small standalone processor for video files and charge money for it. You give up a lot - everything if you're not careful - when you do a deal with VCs. If you can build a company with any profits at all on your own, do it.
from experience (Score:5, Insightful)
Re:Tell them (Score:5, Insightful)
how it will make them money.
Bingo. VCs don't invest in algorithms. They invest in businesses. They will want to look at your business plan, and you need to have one that looks professional. Make sure you spell check it. They will likely also ask if your algorithm is patented, and if not, what is going to stop someone else from using your idea. If your plan is to license your algorithm, then they will want to know if you have any OEMs lined up. If you plan to produce your own products, they will want to know what experience you have at marketing and production. They will want to see a team with a balance of tech, finance, marketing and operations.
Here is question for you: Why do you think you need VC money? Businesses are often better off without it, and even those that benefit from it often seek it too early. It is best to only seek VC money when your business is viable and growing, and you are ready to "get big fast".
Are you sure you want VC money? (Score:5, Insightful)
I've worked directly with a lot of VCs and private equity guys.
First question you have to ask is "do I really want VC money?" Make no bones about it, VCs will scalp you. They will take control of the company and there is a good chance you will be pushed out. (No you will not retain control ala Mark Zuckerberg in all likelihood) Furthermore the cost of capital from a VC is VERY VERY high. They expect a big return on their investment. If you can fund your company with Angel investors, loans, friends and family, etc, then do that. You'll come out better in the long run most likely. Most people that think they want VC money really don't. I know it's a bit of a cultural thing in Silicon Valley but even the VCs will tell you that you don't want their money if you don't need it.
If you decide that VC money is still the best way to go then yes they will want to see the technical details of your product. They will do considerable due diligence regarding it and they will call in experts they trust to look it over. However you don't need to get carried away with technical details in the initial meetings. What they are going to be looking for is a business model around the technology that they can develop. VCs aren't typically going to want to develop the business themselves - they want to invest in people who are going to develop the business. They may bring in their own people to help or take over if needed. So what you need is to be able to explain very concisely who you are and why you are worth investing in, why this technology matters, what the market opportunity is, who the competition is and how you will overcome them, and how the VCs will be able to get a return on their investment. You should be able to say all of the above in 60 seconds or less.
Don't assume your technology is unique from a business standpoint - it probably isn't. There will be competing products out there and you'll need to explain why your technology is special and more importantly why you and your team are especially positioned to take advantage of whatever market opportunity you see.
Frankly VCs will be less interested in the technical details than in is your business plan and especially in the team you have around you to execute said business plan. VCs really don't invest as much in technology as they do in the people who are trying to bring that technology to market. They are investing in YOU more than anything else. Tell them about your leadership team. Show them your team has a track record of bringing technologies to market successfully. Guys like Elon Musk can raise money for almost anything because of their track record. If you don't have a track record of building successful businesses, get people on board who do BEFORE you try to talk to VCs. Get a team of advisors who can poke holes in your business plan and help you get on the road to success.
Finally, VCs tend to specialize. Odds are most won't be interested in what you have. Kind of like publishers you have to look around for the right one and you'll probably get a lot of doors (politely) slammed in your face. The VC community is a small one and they tend to all know each other. Don't be rude or talk smack about anyone else because word will get around.
Re:Tell them (Score:5, Insightful)
The #1 mistake techies make when talking to investors is that they don't have the financial picture worked out. They think the tech will impress, and sell itself. If it will at all, then only to other techies, who are commonly not the ones you call VCs.
If you don't have someone on the team who knows finances yet, get them before it is too late. If they ask you what your revenue will be after 6 months, have the answer ready. If they ask you what your profit will be after 2 years, have the answer ready. As for the tech, forget about it, anything they are going to ask about that (haha, as if) you can answer straight away or draw out on the back of a napkin. Get your figures in a row, nicely tabulated and worked out. Tell them exactly how much it's going to cost them, when, how long before you break even, how long before THEY break even, how much profit they are going to make after 2 years, 3 years, 5 years, etc etc.
Keep in mind that you may not get a second chance. I have no idea what tech you have developed but the days of huge, unexpected advances in video processing are over. You may be ahead of the curve now, but if you don't get your show on the road, 6 months from now someone else will come up with something better. So get it right this time, there are no practice runs. Frankly if you already have the meeting set up and at this point need to go to ask/. to get advice, I'd say you may already be too late with that though.
Re:Answer: You Don't. (Score:5, Insightful)
* Market
* Product
* Customers
* Technology
* Development Plan
* Distribution Plan
* Team
* Competition
* Financial Projections
* Exit strategy
If you drone on about the specifics of the technology, they will get bored, and will think that you do not have interest in putting in the "other" work necessary to get a business off the ground.
Lastly, avoid VCs if you can. They care only about ROI and will be constantly breathing down your neck. Rather, get a few articles into trade mags if you can, then solicit big companies. Your best bet may be an exit strategy of "Exit upon sale" of the technology. The buyer may also hire you on for a while, but don't count on that lasting after you've spilled all of the beans.
And last-lastly---at a minimum, file a Provisional Patent with the USPTO. That protects you for up to a year, and costs like $75. A full patent is more like $15k.
And keep your secrets close to your chest. Tell people what it does, but not how it does it.
DISCLAIMER: I'm a small-business owner and patent holder.
Re:Tell them (Score:5, Insightful)
"VCs don't invest in algorithms." Not just bingo, but double bingo. They do invest in products and in people and you damn well need to know which you're pitching to them.
Do you just want to sell your software product? And please think of it as a product, not an "algorithm". VCs want to get in on the next Microsoft or Apple or Adobe or whatever - none of which sell "algorithms". And they typically don't want to just buy an idea around which they have to build a company.
Or do you want to build a business selling that product? If so, do either of the two of you have heavy sales and/or management experience? If you don't (or even if you do but don't come across as "dynamic" and "take charge") you will be replaced by the team chosen by the VCs. Which will leave you out in the cold wondering what happened.
And VCs are looking for high multiples of return to investment. They may promise vast sums of money but there will be strings and milestones and penalties for missing the milestones. They often demand a large percentage ownership of your company if you succeed and ownership of your patents if you don't.
Enter this with your eyes wide open while remembering that there is no free lunch and that although you may need their money, they don't need you.
Re:Tell them (Score:5, Insightful)
how it will make them money.
This. This is step one. Always has been.
Step two is to explain what is going to stop Microsoft/Apple/Google from copying incorporating your algorithm (patented or not) into their existing products/services and making you irrelevant. This has been step two since before Web 2.0, though it traditionally referred only to Microsoft.
Step three (optional, but helpful in pitching to VCs) is explaining how you plan to get Microsoft/Apple/Google to buy your company before it reaches maturity (or even adolescence in some states/Valleys) so they can incorporate your algorithm into their existing products/services. Hint: user base. It doesn't matter if your algorithm is the most obvious thing in the world... if you have millions of people using it for free they will want it. This has emerged as step three in the last 5-10 years.