Two pieces of fundraising advice from Reid Hoffman

Reid Hoffman has just published the slide deck he used to raise LinkedIn’s Series B in 2004, along with explanatory notes about what he was trying to say with each slide and advice on pitching VCs. Reid is one of the smartest investors around (he now combines his roll of Executive Chairman and founder of LinkedIn with a partnership at top VC firm Greylock) and his advice is always well thought through. The whole deck is well worth reading, but if you don’t have the time, or want a taster first these are my two favourite bits.

Firstly, competition. If you take competition in the broadest sense to include other ways that customers satisfy the need that you are satisfying then I’m a big believer in the statement ‘no competition, no market’, every company, therefore, should talk about their competition. Reid explains why that’s true and how to show you will win.

Entrepreneurs often say they have no competition, assuming that’s an impressive claim. But if you claim that you don’t have competition, you either believe the market is completely inefficient or no one else thinks your space is valuable. Both are folly.

The market is efficient, eventually — if a valuable opportunity emerges, others will discover it. To build credibility with investors, you want to show that you understand the competitive risks and show why you’re going to win.

Express your competitive advantage. Why are you going to break out of the pack? What is your advantage? An understanding of product-market fit? Is it a technology advantage? What’s your differential business strategy? Your differential growth strategy? Your differential product? If you aren’t clear and decisive, investors won’t believe you have an edge that can lead to success.

Secondly, market size. Reid explains here why big market size projections from companies like Gartner often fail to convince investors.

Frequently, young entrepreneurs put in slides that show their business’ total addressable market (TAM) to establish some credibility. Problem is, most investors don’t trust the sources of that information, so entrepreneurs aren’t establishing huge credibility by saying they’ve claimed a market with a huge TAM.

TAM slides quote people who have incentives for artificial inflation, so entrepreneurs risk demonstrating that they have no real sense of how to take dominance of the market. If you do choose to include a TAM slide, don’t linger on it because lingering says that you don’t really understand that the game is played bottom-up, not TAM-down.