Building a startup is hard work. Anyone who has been close to founders knows that it takes a special kind of individual to build a successful business.
Not only do you need to have an incredible ability to communicate and execute on an idea, but you also need resilience, adaptability and unwavering optimism. Now, although tech media outlets are proud to write about success stories and dazzling numbers, most founders often struggle to get started, especially in finding their first investors.
Over the past 5 years, I've been dedicating my time to helping startups gain visibility in the tech industry. My goal was simple, figure out ways to help these startups connect with relevant investors, corporates and mentors.
This took place via pitch competitions, conferences, innovation programs and/or direct introductions.
The bottom line → Get visibility and establish fruitful connections.
During that time, I reviewed over 3,000 pitch decks, and was fortunate to interact with founders from 50+ countries.
However, the more founders I spoke to, the more I started to recognize glaring patterns, and something wasn't sitting right. While the most talented founders were experts in their niche, had a great story to tell and potential to succeed, very few seemed to truly understand the rules of the game they were about to play.
While many startups choose to raise venture capital (VC) funds in order to fuel their rapid growth, not all companies are made for the VC model. A lot of founders tend to build one single pitch deck to tell their story without truly understanding the audience they are presenting to, or the expectations that those audiences might have in return.
In today's ultra-competitive market, not only do you need an incredible story in order to stand out, but you also need to be aware of what kind of company you are setting out to build as well as what resources will be required to build it.
Your pitch deck is considered to be the first step.
Building a great pitch deck is essential, as it's the starting point for any investment conversation. It provides an overview of:
- What it is that your business does,
- who is behind it and
- how much potential it has to succeed.
Regardless of whether you are planning on raising investment from a VC or other types of investors, when built correctly, your deck should provide enough information for an investor to decide whether your company is worth further evaluation or not.
What makes a killer pitch deck?
Making a great pitch deck requires getting a few key elements right.
- It's about communicating ideas and telling a great story. All great pitches start with a hook to grab your audience's attention and then finish with a "mic drop" 🎤.
- It entails checking a series of boxes that investors want to see in order to asses the long term viability of the company.
- It's about being able to clearly explain what makes you standout in a sea of other startups, all competing for the investor's time, attention and resources.
When presenting in a pitch competition, founders should keep in mind that they are not only competing with the other participants. Investors will also compare you to their portfolio companies, to the startups they considered investing in the past and with organisations you might not have considered as competitors (yet).
Below is a summary of the basic elements that are considered the golden standard for a killer pitch deck in 2021.
Most startups tend to focus on the following when pitching:
- A painful problem
- A clear solution
- The revenue model(s)
- A large market opportunity
- A go-to-market strategy
- Product market fit
- A strong (leadership) team
- The progress achieved/traction
- The competitive landscape
- An ask
- A call to action
When scouting we focus primarily on Team, Team, Team, market, traction, ideas. Team is there 3 times because it's that important - Jennifer Cabala (VP of Strategic Operations at Techstars)
5 things founders miss that VC's want to see:
1. Founder-product fit
For the past 5 years I've been hearing accelerators and investors proudly tell their founders "fall in love with the problem, not the solution" as if it were something obvious or easy to do.
The truth is, it's not. However, the more startups I worked with, the more I noticed that our most successful founders seem to have an obsession with the problem they were trying to solve.
This is often what kept them focused on the task at hand, enabled them to effectively pivot and kept their head above water when the times got tough.
This is why investors have a preference for individuals who started their company out of personal frustration and who are experiencing the problem firsthand. They understand the issues better than any customer and are driven by a vision for what the solution could become.
After all, we know that most of the investment decisions are nowadays made based on the capabilities of the founder(s), rather than the startup idea.
2. Key metrics (CAC, LTV, Burn Rate & Churn)
Know your METRICS.
This is probably the single most important piece of advice I can give to founders who are looking to pitch their company to investors, corporates or potential clients.
If you don’t know your metrics cold, you’re not ready to fundraise. Not knowing your metrics suggests that you don’t know your business well enough to know if you have product-market fit. That will cause investors to write you off. - Y Combinator
When you are pitching your startup at an early stage, the belief that you can build a successful company is largely based on your team's ability to execute on a vision.
With most early stage startups generating little to no revenue and requiring large sums of money to turn a profit, investors are placing bets without much certainty.
This is why certain metrics can be incredibly helpful in order to show your investors that you are on the right path as well as give them insights into the trajectory you are taking.
Additionally, keeping track of a number of key metrics will enable you to make a series of decisions around who to hire and how fast, what to build next, what problems need attention or what your customers want and care about.
Finally, while there are a number of metrics that most startups should keep an eye on, each company will put greater emphasis on some specific ones depending on; their industry, business model and stage of development.
As your company grows and evolves you will have to adjust the focus on certain metrics (e.g lowering your CAC or increasing your revenue).
3. Unfair advantages
Your unfair (competitive) advantage is what tends to separate good business from a great business! Unfair advantages include elements that are are making it incredibly difficult for your competitors to compete and challenge your dominance in the long run!
The most successful startups tend to have several of the following unfair advantages and the more they have, the more they're able to set themselves up for success.
Examples of unfair advantages include:
- Market growing 20% a year
- Product 10x better
- Network effects
- Switching costs
- Brand recognition
4. Clean cap tables
In short, who did you take money from early on and for how much of your company?
It turns out that the ownership of your company is a pretty big deal to investors.
Indeed, depending on how it is structured, the cap table can be a deterrent to new investors. The reason being is that this ‘broken’ ownership structure can create a series of issues associated with how founders are incentivised to perform (do they hold enough equity at a later stage as their shares get further diluted?) as well as the speed at which certain key decisions are made.
The best way out of a bad cap table situation is to never get into one in the first place. - Christian Lassonde
Some obvious cap table issues include:
- Having a small ownership position held by the founder or the founding team (Less than 50% after the seed round would often be considered too small)
- Having what is often called "dead equity", or equity that is held by a founder or an employee who no longer works at the company. (Co-founder dispute or poor fit)
- Not planning on having an option pool for employees would also be considered a red flag. Investors often want to see employees being incentivised to stick around when times get tough.
5. 10x, 20x or 150x return potential
Most founders understand that VC's invest in order to generate a significant return on investment (ROI). However, unless you've looked closely at a VC fund's mechanics, you might not fully grasp the magnitude of the ROI required or the expectations of your investors.
The Pareto principle*, when applied to venture capital, means that VCs generally expect 80 percent of their ROI to come from 20 percent of their investments.
This implies that only a minority of portfolio companies will be responsible for most of the profit and thus, a VC is always searching for that special startup that will produce 10x or 20x returns.*
According to Patrick Mathieson, venture investor @ Toba Capital, the ROI for a fund doesn't vary much by stage and will be considered "good" when situated between 2.5x and 3x the fund size.
However what makes a good ROI for each investment will vary tremendously at each stage, which is something that founders should keep in mind when raising funding.
- Seed: A "good" deal ROI is 15x. Target failure rate of 70% (deals returning less than 1x).
- Series A: A "good" deal ROI is 8x. Target failure rate of 50%.
- Series B: A "good" deal ROI is 4x. Target failure rate of 35%.
- Series C: A "good" deal ROI is 2.5x. Target failure rate of 25%.
Taking this one step further, some investors argue that depending on the fund size (e.g. A 50M seed fund) the exit required in order to truly move the needle should be 150x the original investment, in order for 1 great exit to return the complete fund.
Why? To balance the high risk of failure of each startup in the VC's portfolio, making this 5x exit a "missed shot" explains Jyri Engeström, CEO of YES.vc.
I know, while some of you might be thinking that these numbers are wild, don't be confused. This isn't to say that a 5x exit isn't desirable for investors, especially if it's for a few hundred millions.
There are plenty of investors who would be delighted with such results. This simply means that:
VC's - who operate with a high risk → high reward model
... have higher expectations for the bets they are making. That is why they create a portfolio of investment to balance their risk and deliver results (3x) to their LP's (Limited Partners).
While there is no single best way to tell a story, build a startup or raise capital, there certainly are guidelines to help founders decide on a course of action that will be right for their company.
The journey to raising VC funding often entails investing a lot of time and energy to be hearing a lot of NO's.
With their eyes on the target and always aiming for success, it's easy to forget that rejection is an integral part of the process and it's your resilience and adaptability that will make you successful.
Even though I believe that learning from failure plays a key role in creating success stories, you don't have to be the one making all the mistakes. Learning from others about what investors want and how to play the venture game can increase your odds of becoming successful and allow you to jump straight to the next level.
Thank you to Jyri Engeström from Yes.VC & Jonathan Hollis from Mountside Ventures for their take on the mechanics of European early stage VC's.