Cyber Entrepreneur PitFalls You Can Avoid

pitfalls


I have the privilege of meeting a handful of new cyber entrepreneurs every week, but unfortunately, a very small percentage of the companies I meet with receive an investment for a variety of reasons. I point many entrepreneurs to my “Five Slide Pitch Deck” blog which asks them to clearly state what problem they solve, how they solve it, some proof that it works, what they want to accomplish with an investment and their long term vision for the company.

Even with those questions clearly stated, there is still a lot of opportunity for an entrepreneur to quickly lose the interest of a potential investor. In this blog, I asked several cyber venture capitalists about what bugs them during pitches, what “pet peeves” they have entrepreneurs should avoid and what I like to refer as “sins” entrepreneurs often make without realizing it.

Michael Denning, Early stage cyber investor, Principal at Blu Venture Investors, former COO of Science Logic and former VP Global Security for Verizon Enterprise Solutions

I don’t like it when a cyber start up comes in and tells me I have
no competition. That is never true.  Somebody is doing something to address a market pain point, even if it’s outdated and manual. Maybe you’re automating the problem, maybe you found a unique way to address the pain, but don’t tell me that you have no competition. If you are telling me you have no competition, then you have not thought deeply and creatively enough about the problem.

Greg Dracon - Partner at .406 Ventures

Founders (often native cybersecurians) thinking the best tech always wins. While this used to be the case, cybersecurity is now a mainstream problem across the world and buyers/users often aren’t deep technologists, so exceptional sales and marketing execution is now paramount to building a successful cyber company and can trump tech.

Stop the incrementalism – think outside the box and come up with entirely new approaches to the myriad of problems we face.  I’m a fan of injecting non-cyber talent into our cyber companies to start breaking away from the traditional cyber mindset (which relates to the sales/marketing comment above).

Ron Gula, President Gula Tech Adventures and former CEO of Tenable Network Security

One of the hardest lessons I’ve had to learn is that the absolute best cyber tech does not always win. This is even more painfully true for solutions that are clearly better, but only marginally better. For example, I’ve been pitched solutions that find more malware than CrowdStrike and even more vulnerabilities than Tenable. If you can prove that you could do a better job than an existing solution you have to then prove that customers are willing to switch from their vendor to yours. You also need to prove that the existing vendor, which has many more resources than you do, won’t close the gap.

Another hard lesson for entrepreneurs to learn is market traction. There are many really interesting solutions to a variety of cyber problems, but customers don’t always care about these issues. For example, I routinely get pitched “quantum resistant” cryptography and data storage solutions and pass on them because I don’t hear CISOs telling me this is a problem they are spending money on. Another phrase that describes this is “market timing”.

And lastly, we are all human – no one is perfect, and start-ups are not perfect either. However, some of the times when I pass on getting involved with a company, there was a moment where I felt the company was not being as up front as they should be on major issues. For example I’ve had second or third meetings with companies that did not disclose existing law suits, founders that have left the company with equity in hand, where code was developed, questionable ownership of intellectual property, hiding family members or romantic relationships on founding team and even lying or misrepresenting customers, revenues and funds raised to date. Sometimes life deals you a rough situation outside of your control. Putting yourself in a potential investor’s position may be hard for a first-time entrepreneur, but the earlier you can disclose a concerning issue, the sooner you can talk about how you have mitigated or addressed it.

Daniel Ingevaldson, Vice President TechOperators Venture Capital, co-Founder EndGame

Lack of consideration of viable GTM plan while raising an A round. Standing out amongst 1000+ vendors is more critical than ever.

When VCs are evaluating early stage infosec companies, they are more and more trying to figure out if the company in front of them has a shot at getting access to their market. Going big enterprise? CISOs get dozens of inbounds a week. Going mid-market? What is your outbound sales strategy? Product-led? Do you have a compelling narrative and a plan to create a push content to sell that story? You aren’t just competing with companies in your niche, you are competing for ever smaller units of attention from potential buyers. Take this as seriously as your product strategy.

“False-summit” product-market fit

If you have been in infosec for a while, you know people. You have probably worked with people two or three jobs ago that are now Directors of Infosec, CISOs, or trusted staff engineers. Selling to those people early is great, but don’t confuse true product-market fit with selling to friendlies. The mark of product-market fit is sales execution within your go to market model that you have invested in, staffed up and tuned. Don’t fall for false summit product-market fit.

Seeking huge valuations too early that you may struggle to grow into - even when the company is growing fast

Big valuations limit founder dilution and are a badge of honor for entrepreneurs. You look at your husband or wife and say that the thing that you created from nothing a year or two ago is worth $50 million? How did that happen? However, your Series A valuation is not what your company is worth, it’s the number that you need to double when you raise your Series B. It is difficult when you are doing well, growing your business like crazy, but you can’t grow into the number you signed up for 18 months earlier.

Technical founders making bad sales hires

Technical founders generally have a hard time making sales hires. Good salespeople are good at selling. Interviewing well is easy for them. Hiring your first VP of Sales is going to have a massive impact on your company post Series A. Get help. Have your board line up candidates, screen candidates, meet them in person. Your board members will likely have hired and fired more sales leaders than you have ever met.

Not understanding the venture process. When it makes sense for companies and when it doesn’t.

We see companies all the time that just don’t fit the venture model. There are thousands of successful entrepreneurs who never took a single dollar of venture capital. High-growth, high gross margin businesses like SaaS, enterprise software, infosec (where we play) fit the venture model well. If you have a cash flow positive services company growing at 20-30% a year, why do you want to raise venture money? That’s a great business, don’t screw it up by raising from a VC!

Mike Janke - Data Tribe CEO, former Silent Circle CEO and Navy Seal

False Traction

Just because a few enterprise customers are talking with you and your team has had a few meetings with Government agencies, does not mean these are actual customers, nor that they are actual indicators of product-market-fit. Do not over-hype or confuse a bunch of cool meetings with actual market traction. Showing a deck with a bunch of logos and revenue expectations based on customer conversations and not on pilots or contracts, simply shows a propensity to over-hype and be immature.

Stage Appropriate Funding

Please no more early stage decks that ask for $4M-$8M seed funding. Understanding the normal range of stage funding (seed, A round, B round, etc) for your startup is critical to your credibility. When I see decks showing the “ask” for $5M at seed stage when the startup is pre-revenue and still building the product out - you have immediately lost credibility with investors. This also applies to revenue assumptions. If you are showing $20M in revenue in year #2 of your startup, this immediately shows me you have no idea of how the industry and company-building works.


Justin Label, Founder of Inner Loop Capital and former partner at Bessemer Venture Partners

I think it is crucial that founders are familiar with the competitive landscape. How does your new product fit into a “cyberscape”? You have to know how analysts, investors and customers are going to categorize you at an elevator pitch level.
 
If your company fits squarely into an existing category, name it, name the other players, and quickly explain how you will beat them at customers.
 
If it is a new or somewhat new category, that’s fine. But explain how it fits between or takes parts of existing categories, why we need to name a new category now, and how you will define and dominate the new category.
 
It’s a big pet peeve of mine when a team says they have a solution for cyber and don’t seem to know how customers categorize the existing solutions — there are thousands!
 
I use and like to refer founders to Momentum Cyber’s “cyberscape” which has an excellent overview of the entire cyber ecosystem and is updated regularly. 

Jonathan Lehr, Co-Founder and General Partner of Work-Bench, and formerly Morgan Stanley Office of the CIO in IT

Overplaying Your Traction 

We know the difference between a deal with a Wall Street bank, an early POC, and just a simple intro conversation. Key to our model at Work-Bench is having extensive IT relationships across the Fortune 1000 which we use to diligence investment opportunities. So when catch startups overplaying their hand it makes them look unsophisticated and/or untrustworthy which is a bad way to begin a potential long term relationship with an investor.

Underappreciating TCO (Total Cost of Ownership).

We hear so many startups tout being better/faster/cheaper than existing solutions, but there's often not an appreciation for legacy environments, especially in the Fortune 1000, where ripping out an existing solution and all of its associated integrations could cost on the order of many millions, which far outweigh the cost savings of a "cheaper" startup solution being priced at a few hundred thousand annually.


Defining Your Ideal Customer Profile

We like to roll up our sleeves and help early go-to-market startups with customer development. Key to being able to help though is knowing who in our network to tap for a particular startup. It's critical for founders to know who they are targeting and why, and then we're happy to help make those introductions to potential early customers. This is another validation point to demonstrate that you know all of the nuances of your market and supports a reason to back your business.

Michael Sutton, Founder Stonemill Ventures, Principal at Blu Venture Investors and former CISO of Zscaler

Not Utilizing Investors/Advisors

If you've done your job, you've brought on investors for more than just their ability to cut a check. You've selected investors that bring additional value to the table. They have previous experience in the industry that you are taking on and you feel that they can open doors for you or provide invaluable advice. Perhaps you feel that a particular board member can serve as a mentor to help you in the areas where you lack experience. Regardless of the motivation, it's up to you to drive the process and you shouldn't be afraid to do so. Sure, they're busy people, but so are you and they're certainly incentivized to lend a hand. Having trouble landing a new head of sales? Send the job description to your investors - they have a deep Rolodex. Struggling to set a pricing strategy? Ask them for advice. Most importantly, you want your investors to be your biggest cheerleaders, but they can't brag about all of the great things that you're doing if they don't know about them. Send a quarterly update to your investors to keep them appraised. It doesn't require much effort as this is content that you should have already prepared for other purposes. A good strategy is to send out the update following a board meeting, as you've already had to pull together significant content for that effort and the investor update won't go nearly as deep. Not only will your investors be able to better articulate the value that you provide to third parties, they'll also be more likely to participate in future rounds as they'll already feel close to the company and not feel like they're starting a fresh round of due diligence. 

A related but separate pet peeve involves forming, but not utilizing advisory boards. Far too many startups form an advisory board simply because they believe that they're supposed to. Simply forming an advisory board accomplishes nothing other than giving away valuable equity if you don't do anything with the board and that part is up to you as the entrepreneur. Don't form an advisory board until you have a plan on how you will utilize it. That plan should operate at an overall level as well as individually. Individually you're likely targeting an advisor for a specific skill set that they bring to the table. Perhaps you admire how they were able to scale a sales team or respect their vision of the industry. Whatever you targeted them for, kickstart the relationships that need to exist within the company to fully utilize their skills. Make the appropriate introductions to the internal teams and task those teams with having regular follow up with the appropriate advisor and continually track the progress. At an overall level, book quarterly or bi-annual calls/meetings with your advisory board to ensure that they are all up to speed on your progress and know what you need from them. Most importantly - if an advisor isn't providing the value that you'd hoped for - replace them. 

Telling Tall Tales in Pitch Meetings

While I appreciate aggressive entrepreneurs that are willing to do what it takes to get funded, honestly is non-negotiable in a pitch meeting. All founders should know that the investment community is small and incestuous - we love to talk to one another. Stretching the truth in a pitch meeting is one thing, but an outright falsehood is a career limiting move. Don't, for example, ever state that another investor is about to join the round when that's not the case - we will ask and if the response contradicts what was stated in the pitch meeting you've not only closed that door but likely many others. Transparency is a good thing. Had a failed venture in the past? No problem, be up front about it. Trying and failing should be worn as a badge of honor, but trying to bury portions of your resume doesn't help build the trust that is critical for a successful investment. 

Conclusion

I’d like to thank each of the contributing venture capitalists for taking the time to share their thoughts and experiences with the cyber entrepreneur community. The most common theme was lack of market traction understanding or awareness. Other common themes focused on how the best tech doesn’t always win, valuation sensitivities and lack of knowledge of competition.