Securing first investment for your startup is a long and hefty process that will inevitably involve taking a step or two in the wrong direction, but in order for a technology startup to succeed in attracting first round of VC funding, it definitely takes to make all the right moves. Here, I will attempt to exhaust all the right steps. Please, have in mind that this is not a post on how to make your pitch more appealing to investors. There are many worthy resources that provide detailed illustration on how to structure your slides. A valuable resource, and my personal one, is the self-acclaimed Pitch Doctor, Christoph Sollich, who is based in Berlin.
First, in the beginning you are most probably not a startup, but just a single person or a pair of entrepreneurs. So, you need to establish a good team. Actually, you need an excellent team. Chances are a potential investor will invest in your startup not because of your great idea or how he perceives the opportunity that it might create, but because of the individuals that make up the startup. Y Combinator, one of the best if not the most successful accelerator, has actually invested occasionally in a team with no concrete business in mind. Therefore, make sure your team consists of great personalities and achievers that complement each other’s skills. You should be able to define roles and responsibilities from the very beginning and decide on equity split to avoid future conflicts or decreased motivation among founders. For future considerations, you should also put aside some equity portion for your earliest employees. This is rather a US style, most European startups don’t do it, but I am particular a fan of this approach as it really makes a difference. Standard is between 10% and 15%.
Second, you need to target your ideal investors. Obviously, there are different types of investors depending on the stage: micro-seed, seed, early-stage, and later-stage VCs. In addition, you can differentiate investors by their fund origination or by the type of financing (or value-added services) they provide: angel, corporate VCs, regular VCs, strategic partners, etc. In any case, you need to be aware of what is your particular need in that stage of fundraising, be able to target the right investor you seek, and reflect on his goals in your pitch deck.
Third, you need to create a descriptive and intriguing pitch deck that leaves no questions at the end of the presentation, yet investors want to know more as they believe this is potentially a good opportunity. Most investors concur on what should be included in your pitch deck with hub:raum and Seqouia Capital among others having published their expectations on what a good pitch constitutes. Check the corresponding links here and here.
Here, I will elaborate on the 10 + 1 slides as per hub:raum’s blog, while adding some important insights.
- Problem – This is where most entrepreneurs fail, not only in creating a meaningful and convincing pitch, but also in creating a disruptive and customer-oriented startup. If you don’t fix a problem, then customers wouldn’t use your product or subscribe to your service and ultimately no VC will ever invest in your business. It doesn’t even need to be a big problem. For instance, in the instant messaging industry new startups have emerged to challenge Whatsapp’s dominance by reducing friction while messaging through one-tap picture sharing along with other techniques. While this might not be considered innovation by many, it undoubtedly settles text addicts’ inconvenience of sending a picture every minute using several taps. Anyway, try to come up with something more disruptive since most European investors, especially German, are rather conservative compared to their US colleagues. Whatever it is at the end – you should back yourself with some data that proves your statement. As I will mention on numerous occasions later in this post, investors love numbers, so indulge them.
- Solution – Well, if there is a problem, there must be a solution. You need to show how your solution is better than what people currently use and how you are going to make their life better. This is also where you must (!) show your product and not let it to the investors’ imagination as it might leave some room for misinterpretation. To raise confidence among investors, state why now is the perfect time to implement your idea mentioning technological advancements or changes in consumer behavior.
- Market Size – Tech investors are always on the lookout for unicorns, which means you need to be positioned in a very large market, to be considered an attractive opportunity. To adequately convey the market opportunity, you can use the TAM-SAM-SOM approach.
TAM – total addressable market – is the total possible demand for your product, i.e. everyone you wish to reach with your product
SAM – serviceable addressable market – is the market based on your current model, i.e. specific segment of people you are targeting
SOM – serviceable obtainable market – is the share of the market you expect to get
While this is pretty straightforward, you have to be cautious and avoid remarks like: “If we just capture 1% of the market, we will be billionaires”. Sounds good, but VCs are rather interested in how you get to that point, so you will need to impress them with your Go2Market strategy covered a bit later.
- Business Model – At the end it is all about how you make money, so specify your revenue model and your pricing strategy. In terms of revenue model, make sure you are using the most relevant and used for your product/service, e.g. games – in app purchases; software for SMEs – monthly fees (i.e. SaaS). In terms of pricing, always use willingness-to-pay pricing, not one based on costs. Structure your pricing strategy considering competition. For this slide and for the next couple of ones, I would really recommend using the Business Model Canvas by Alexander Osterwalder. Check it out!
- USP – Unique Selling Proposition, duh! This is an opportunity where you should make your business stand out. Disruptive startup means one that is doing something better than anyone else. Having said that, focus on rather one core thing, as being the best in everything is difficult and not sustainable. While in most cases that will be a product/focused case, it can also be a company-specific one. Also, you should not relate to the features your product/service has, but to the benefits it will create to the user. So, here is also the perfect place to show some initial product-market fit data. However, stating that your mother loves your idea is not the example investors are looking for and thus you need to provide feedback from your target customers.
- Competition – Simple, yet some startups manage to fail here by declaring there is no competition. Well, either your idea is so innovative that nobody thought of this, or it is so bad, that nobody was foolish enough to do it. Guess which one investors believe in when reading your confident statement? Do your research and compare yourself to a list of competitors and explain how you are positioned in this competitive landscape.
- G2M strategy – as stated previously, this is where you explain how you will manage your growth. Important aspects of your strategy include customer segmentation, marketing channels, and conversion rates. Include metrics such as customer acquisition cost and customer lifetime value. Many startups use buzzwords and phrases like “It will go viral”, which will impress no one as investors due to their extensive experience are immune to such expressions. Going viral is the result of a successful strategy, not the strategy itself. Again, talk about your strategy.
- Future Vision – based on your G2M strategy you should include info like international expansion, new product & feature offering. As long as you conceived a nice pitch so far, now you can talk about achieving market dominance or establishing entry barriers. This section plays a paramount role for boosting your revenues assumption and consequently your valuation. Don’t neglect it!
- Team – Team is about 3 things: collective skills, expertise, and diversity. If your team resembles the same notion, incorporate it into this slide and present yourself as friendly, yet very focused and motivated people.
- Funding Need & Spending Strategy (including some Financials) – after all you are presenting to investors to get funded. So, tell how much you have raised so far, how much money you need and for how long, and what investors can also be helpful with. In addition, you should elaborate more on your spending strategy including extra hires, marketing expenditure etc. Best-case scenario, you will provide a rough milestone of your plans for the next 6-12 months with concrete use of the funds. Here you can also include financials showing where you start generating revenues and reach break-even point. List your exit strategies to show some business acumen and logic. Don’t just say IPO. Include companies that will most likely buy your startup in 3-5-7 years.
- Elevator Pitch – This slide is particularly important for wrapping up the pitch. I personally recommend it!
These steps so far were sufficient for your startup to get through the screening criteria of VCs. Final hurdle for securing investment is the pitch meeting. But worry not. Only possible way to mess it up here is to not prepare enough. After all, practice makes perfect. Rehearse hundreds of times and try not to be boring during the presentation. Know your data by heart and back up yourself with additional numbers for the Q&A.
I tried to be as exhaustive as ‘not boring’ allows. Please, include additional relevant advices in the comments.