Written by Dave Parker, Venture Partner, originally published at DKParker.com
Fundraising as an Enterprise Sales Process. Which means it’s going to take time to get fundraising done and you’ll need a lot of prospects at the top of your sales funnel. As you prepare for your fundraising effort and you need to get the basic tools of the trade completed before you start the process. The Exec Summary, Presentation, and Financial Model are your marketing collateral to sell your product. You’ll build a funnel of prospects, requiring both research and introductions. The goal is to create competitive term sheets, from multiple investors, for your growth capital.
Traction First – before fundraising
Before we begin – I need to point out two not so obvious points for founders:
- Your need for capital does not mean you can raise capital. I’ve been there, you have constraints, lack of cash, lack of engineering resources, you need the money to pay for design. All of that is a reality that stands between you and the fulfillment of your product vision. Get used to it, even after you raise the capital you will continue to have constraints. You need to find a way to get customer validation and traction before you raise money. That’s what the investors will require you to do before writing a check.
- Completing these presentation tools doesn’t mean you’re ready to go raise money. All too often founders complete a pitch deck and confuse doing that work with the “Real Work” of customer validation, traction and revenues.
Your product offering and company need to be at a point in the maturity of the company that you have proven your concept with data. For example:
If the idea of the product or service is known to the market – e.g. you’re creating a competitive product, this can be a direct competitor or a derivative competitor in different markets then you have a known comparable or “comp”. Let’s say you are copying a former employer and building a competitive product. The investor risk, in this case, is mostly on your teams execution of your plan. You have to answer the question: “can you build a competitive product and market and sell it better than your former employers?” There are known unit economics, pricing, conversion ratios, etc. The competitor, in this case, your former employer, has an enterprise value or a comparable.
However, if you are launching a brand new product into an unknown market, e.g. AirBnB before it launched, the risk is greater than just execution. It is also now a question is anyone actually wants the product you are proposing and which market wants that product for what price. In this case, the unit economics are speculative and there isn’t a comparable. With that, the reward for the investor is also potentially higher.
That’s why customer development and traction is so important.
Remember, investors have opinions and checkbooks. If you have only an opinion. Your opinion combined with customer data will get you to the checkbook. If you have a new product, unknown market, and unknown channel you need to at least have 50 customer development interviews that show why people will want to purchase your product.
Business plans are dead – at least in the tech market. The reason is that a 40-80 page document is irrelevant given the dynamics of actually interacting with potential customers. Remember what Mike Tyson said – everyone has a plan until they get punched in the face.”
That’s not an excuse for not planning – just a reminder that a plan doesn’t reflect the reality of the world and that you are better off doing the customer interviews and getting traction than sitting in your basement writing a plan. Having the documents ready doesn’t mean the company is ready.
Startup Executive Summary
The Executive Summary is the two page summary of the business. It addresses the Pitch Deck content (problem, solutions, etc) in a narrative arch that tells a story. The purpose of the Exec Summary is to “get you in the door” for the meeting with the Angel, Angel Group or VC.
No one is going to write you a check from any of these documents alone. Think of this as a process, you’ll still need to do the meetings, build a relationship and pass the due diligence process. But without doing these docs you’ll look like a Nube and won’t raise any cash. Do the deck first, then draft the summary from the pitch deck. Remember, it’s only there to help you get the meeting and will be sent over in email as part of the meeting request, resist the urge to detail out all of your plans. It should match your website. You won’t need to send the deck in advance. It serves as the discussion guide for the conversation you will have in the meeting.
All of these documents should sync, from your website, summary, financial model. When they are out of sync you will get questions. Do the work, pay attention to the details.
Pitch Deck that raise Capital
Guy Kawasaki has written about is 10/20/30 Rule in the Art of the Start. I highly recommend that resource. The idea is 10 slides, 20 minutes and 30 point font. My 10 slide differ slightly, but I’ve found it to work for me.
Design matters here as well. Spend some money on design, sorry to offend the engineer here, but your design is like looking at a plumbing schematic. That’s not design. Make sure it’s consistent with your overall site design, color scheme, and logo. If you print it out, make sure you’re not consuming a massive amount of ink in the process.
The feedback you will get in each pitch will provide directional changes to the pitch – some will be major, some will be tweaking and anticipating the questions. You’ll know you have the deck dialed in when you get a question that is answered on the next slide. (hit right arrow to continue!)
Components of the Pitch Deck:
- Overview – you should start your deck with an overview of the company, problem, solution, etc… two reasons. First, investors are looking for early context – “is this the type of investment that I like or have made money in before” is likely one of the thoughts going through their head. So answer the question. You also will face circumstances in delivering a pitch deck where you will only have time for one slide – so be prepared
- This may be the only slide you get to present. I have literally taken an elevator to a parking garage with an investor that was double booked for a meeting – that one slide was all I had a chance to pitch, yes, in an elevator.
- Problem – what is the problem that your product or service is really solving? Is it really a problem? Be ready for the painkiller vs vitamin question here. Have you talked to enough potential customers through customer development interviews to really validate the problem? What will they pay for the solution?
- Solution – what’s your solution to the problem? Is it a website, a mobile app, a bricks and mortar store? Get out of your head and be very clear about the solution. Think about the drill bit and the hole analogy here. No one wants a drill bit, they want a hole. What is the solution you are delivering, how will it make the customer feel or what result will it give them?
- What is your secret sauce? What makes your solution novel?
- Target Market – How big is the market? What is the TAM, SAM, SOM and Launch Addressable Market or LAM) (detailed post here). You need to show that this is a big market that places value on your solution. Rich target markets are better than poor target markets. Do they have money to spend?
- How will you get to them? This is the marketing and sales component.
- Traction – have you shipped an MVP or prototype? Do you have revenue and customers? Traction will be required before you raise capital. The days of “back of the napkin” ideas getting funded are over in all of the cities where I have been. Your need for funding and your ability to get funding are directly connected to traction.
- Traction is a priority in your presentation – it changes the discussion from a theory to reality – keep it at the top of your presentation. If you have good numbers, LEAD with that data!
- Economics – what are your unit economics? Have you built out a spreadsheet with both revenue and expense growth for a three-year (not five) model? Everyone knows the model is wrong, that’s OK, investors want to see that you’ve taken the time and the discipline to actually do the work to understand the model (Venture Ready Model Template here). You’ll need to understand your Customer Acquisition Cost (CAC) as well as Lifetime Value (LTV). You can put a chart here if you’d like, but the unit economic discussion is more valuable.
- Investors know that this is going to be wrong. The question is just how wrong – see below in financial models.
- Competition – every startup has competition, even if the competition is to keep doing what the customer is doing without your product. What is the competitive product map? Having no competition is a major red flag.
- Team – what makes your team the right team for this challenge? How long have you known each other? Investors like to see you have a track record of working together. Do you have complimentary skill sets? Overlapping skills sets are generally bad unless it’s in engineering.
- Sometimes you will see people lead with the team. The only time I recommend you use that model is when you are trying to communicate a complex solution and the PhD’s (or experience) of your team are the solution
- Ask – what do you want? In the venture world asking for cash usually gets you advice and asking for advice will occasionally get you cash. Do you want introductions to potential customers?
- If you are asking for cash, don’t simply explain that it will pay yours and your cofounder’s salary for a year. That is not what the investor is interested in, tell them what it will actually get the investor – raising $500k will get us through MVP launch and the first 100 customers. Pick real (believable) milestone you can hit with capital requested
- Summary – what do you want them to remember. Keep in mind that you are likely to pitch a Jr Associate. Their career at the firm is based on their ability to pitch your idea to their partner (without sounding stupid). If you summarize for them they should be able to make your pitch. If you don’t summarize – you risk them doing it (or not doing it if they feel like they can’t repeat your “concept”). Don’t forget your call to action – is your contact information on the deck?
Financial Models for Startups
Investors know your financial model is going to be wrong – the question is how wrong? Financial models are difficult if you don’t have experience or training building a model from scratch. I’ve written about this extensively on Venture Ready Models. Don’t start from scratch if you don’t have to! There are standard formats and GAAP language that needs to be used in your financials. Like the design comment above, this is another place you should spend some cash to get it right from the start. You will still need to “own” the document, even if you’re not a finance person. At some point, some investor is going to ask a question that will drive you to the spreadsheet. You need to know where to find the formula.
You need one tab with all of your assumptions. That way the investor can clearly find your unit economic assumptions that are in both your deck and summary. Keep these synced over time, it’s easy to tweak one document without doing the others and have numbers that don’t match. Don’t make rookie mistakes.
Again, the investors know that you are likely wrong at this point. However, you are showing that you have the discipline to engage in this process, you’ve put numbers into fields that require a hypothesis and you’ve spent time thinking through your core assumptions.
Tracking your sales process:
Remember, at the start, I called this an enterprise sales process. That means you’re going to need to implement a tracking process for your funnel. Most founders don’t do one pitch and get one check. Track your process just like you track your customer process
- Create a Google Sheet to track your contacts
- Research the contacts first
- Use Crunchbase to review their recent investments – do they invest in:
- Your stage of the company?
- Your vertical market?
- If not, move along, they aren’t likely to invest in you
- Use Crunchbase to review their recent investments – do they invest in:
- Track company, names, emails, add links for Crunchbase as well as links to LinkedIn profiles
- Get introductions via LinkedIn – cold calls are not preferred by investors, but that’s not a reason to write them off. When you can use warm introductions do so.
- Track notes of what you discussed – they will likely remember and you will likely forget
- Have your documents ready to send
- Build an email list with Mailchimp
- Ask for permission to send regular updates
You’ll find your groove in this process, but remember, you’re in it for the long haul. Someone that says no today might say yes next year in your your next venture.