Charles Stack is a successful serial entrepreneur who listens to an estimated 600 pitches a year from aspiring entrepreneurs. After hearing so many pitches — and doing his own deals over the years — he has a good understanding of the right way to woo an investor.
“Most entrepreneurs, when they start an investment pitch, they start way too low,” says Stack, co-founder and CEO at Flashstarts. “They should start at the how do you explain this to your great-grandmother model and then work their way down to details. It’s incredibly important to get the right box in the investor’s brain so they can then know how to process everything that comes after.”
Stack started Books.com in 1992, the first online bookstore which offered millions of books and pioneered many of the features now present with today’s internet retailers. His company was bought by CUC Inc., and then by Barnes & Noble. He had many other ventures before starting Flashstarts in 2013, a startup accelerator and micro-venture fund.
In this edition of Dealmakers Live, Stack talks about how poker shaped his approach to dealmaking, the problem with risk in Cleveland’s investor community and the one thing entrepreneurs get totally wrong when making a pitch to potential investors. What follows is a transcript of the above video, edited for readability.
Dealmaking is a lot like bluffing
So I played poker. I was a bartender for a long time all through college and law school. And after hours, we played poker. While I can’t say I’m great at cards, I’m really good at bluffing. Dealmaking is a lot like bluffing because you’re dealing with somebody else’s expectations and their fear and the uncertainty. And that seems to have been a strength. While I certainly won’t claim to be a great dealmaker because I’ve only had a few, being able to portray that I don’t care how this comes out is a great strategy when you’re doing a deal because it results in the person with whom you’re dealing having to deal with uncertainty and stress and where I’m coming from. So you tend to get better offers in that scenario. So my dealmaking experience is somewhat limited, but it feels like at an amateur level, it’s a strength.
The value of empathy
There is one thing that stands out above everything else and that’s empathy. It’s empathy in an almost Machiavellian way, which may sound counterintuitive. But if you can truly put yourself in the shoes of the other person in a truly empathic fashion and understand what drives and motivates them both personally, professionally and in the context of that deal, it gives you an enormous advantage. Because you then know where you can compromise, what things are of value to the person with whom you are arguing or trying to make a deal with. It may mean less to you and more to them, and that gives you a bargaining chip that you can work with. Understanding at a deeper level what the person or organization is trying to accomplish is probably the key to good dealmaking.
A risk-averse culture
The biggest difference I see is the risk-averse culture in this community. It is very different in California, New York, Boston, Austin and even Raleigh-Durham, where there is an inherent understanding that startups are risky and an actual expectation that while some may succeed and some may succeed wildly, most will fail. That acknowledgement and acceptance of a high failure rate seems to make most investors in this region uncomfortable. That’s the nature of the game. You can’t change the equation particularly well. There is a high level of risk aversion in this community that makes fundraising more difficult than in other communities.
Believe in your business
There are two huge mistakes that most entrepreneurs make when they’re trying to get an investment and they’re not at all related. But the first mistake is you’re not asking for money. You’re not a charity. You are giving the investor an opportunity to make money. If you don’t believe that, you should shut your door and go home because that means you don’t believe in your company. I see a lot of entrepreneurs reluctant to ask for money because they feel like it’s a gift and an obligation. But it’s not. I’m giving you as an investor the opportunity to make money with my company. If you don’t believe that, you should just go home.
Context is crucial
The second mistake that we see very frequently is you as the entrepreneur live in the details. You live in your space and if you’re any good, you obsess about it. But when you’re talking to an investor, they live in the normal world. What you need to do is ground them in your space before you talk about anything. The brain has little compartments and if you’re going to tell me about what your business does, you first have to help me find what compartment in my brain you want to locate in. Most entrepreneurs when they start an investment pitch, they start way too low.
They should start at the how do you explain this to your great-grandmother model and then work their way down to details. Even with sophisticated investors because I can tell you as an investor, someone who listens to 600 pitches a year, probably, context-switching is extraordinarily difficult. So I greatly appreciate an entrepreneur who says, ‘Well, we write software,’ even though, duh. But it’s appreciated. We write software for engineering firms. It may seem high level and stupid and redundant, but it’s incredibly important to get the right box in the investor’s brain so they can then know how to process everything that comes after.