Founder vs. Fund: The Answers Venture Capitalists Need to Invest in Your Startup
“Only 2% of startups that pitch to venture capital funds get funding.” This statistic is true across most venture capital funds—with the number of entrepreneurs and small businesses on the rise, venture capitalists have no problem attracting deal flow. But how do you ensure that your company of one of the 2%? In this article, we’ll walk you through the sections necessary to have in your pitch deck, the key points featured in successful pitch decks, and most importantly, the answers venture capitalists need to invest in your startup.
Size of the Market:
Founder’s Pitch: In most pitches, a founder will start by describing the origin story of the business, which is centered around the problem their product or service solves. For example, if a founder has created a better-for-you superfood, they may start by describing the current products on the market, the issues with the current products, and then will transition to the gap in the market that needs to be filled. An ideal product or service should have a business model or social impact that can be clearly summarized in one line. In this section, founders will often speak about three metrics: The TAM (Total Available Market), the SAM (Serviceable Available Market), and the SOM (Serviceable Obtainable Market or Share of Market). The TAM is the total market demand for a product or service, the SAM is the segment of the TAM targeted by your products within your geographical reach, and the SOM is the portion of the SAM that you can truly capture. If a product is creating a brand-new category, then a founder should lay out data to show how that market size is over $1B, as that is typically the market size threshold a venture capital fund requires to get their returns.
Fund Questions: Although starting a pitch with a strong story is crucial, a fund is bound to have several follow up questions. We’ve listed a few questions below that founders should have answers for before pitching to venture capitalists.
- Is the size of the market growing or is the category in decline?
- Who do you see as your target demographic?
- What percentage of the market do you plan to take, and over what time period?
- How many active users do you have currently?
- Can you provide the source of your data for your TAM, SAM, and SOM?
- Where are you headquartered?
Founder’s Pitch: After describing the initial issue that a product or service is solving, most founders will then transition into the details of their business model and value proposition. In this portion of the pitch, founders should describe their core revenue streams and key products or services that are the basis of the business. Founders will often include their main clientele demographics, and detail out processes that are critical to the success of their company. For example, if a startup is an apparel company, then it’s important to describe manufacturing process, distribution channels, and an omnichannel retail strategy. If a company is a B2B SaaS company, then technology development costs and clientele pipeline may be the focus areas. Regardless of the industry, this section should clearly articulate your value chain end-to-end.
Fund Questions: By this point in the pitch, a fund should have a clear understanding of your product. However, venture capitalists will need to know a couple factors about your business model before investing, which we’ve included below.
- Are your revenue streams recurring, or will you have to attract customers repeatedly to maintain revenue levels?
- What is your Customer Acquisition Cost? (CAC)
- What is the Lifetime Value of your customers? (LTV)
- What are the unit economics of your product or service?
- Do you act as the full supply chain, or are there third parties involved for distribution, manufacturing, and other aspects of the business?
- What are your marketing efforts as of now?
Founder’s Pitch: After deep diving into a business model, it’s best if founders are clear and open about the competitors they have, and how they have a competitive edge over other players in the marketplace. At this point in the pitch, founders will typically put together a visual to demonstrate a product’s competitive advantages over similar products. For example, founders will often create a chart with competitors listed in the first column, and aspects of a product listed across the top. For a better-for-you superfood, aspects of a product could include “Low Calories”, “High Fiber”, “Gluten Free”, and more. Another alternative would be creating a graph with four quadrants, to showcase the qualities your product contains to sit in the top right section. The key to this section is to demonstrate why a consumer would overcome switching costs to purchase your product or service.
Fund Questions: After reviewing this section, venture capitalists should understand why your product has a competitive advantage over other companies that already exist. However, below are a few follow-up questions that founders should have answers prepared for.
- What are the barriers to entry? Is your product or service easily replicable?
- Is there regulation in the industry that your product or service sits in that could affect your growth trajectory?
- What sales channels are you utilizing right now, and what competitors exist in each vertical?
- How does your customer acquisition strategy differ from your competitors?
- Do you have a patent / IP specific to this product?
- How much of an advantage do network effects represent in this industry?
Founder’s Pitch: After describing the competitors a company or product has, a founder will often jump into financial projections. Financial projections are not only a reflection of the growth of a business, but also a reflection of the founder’s understanding of the business. A founder should demonstrate basic financial acumen when speaking to the core revenue streams of the business, and should be able to create a basic income statement with top line revenues and expenses. Additionally, a venture capitalist does not need to see 10 years of projections for an early stage business—often times, 5 years will do. Another way a founder can demonstrate intellect on the industry is to assume aggressive, but achievable, growth targets based on data points. Growth targets should be based on comparables, historical data, and a company’s projected clientele pipeline, and funds should understand that projections on your slides are not just arbitrary numbers.
Fund Questions: Once a venture capitalist understands your financial growth projections, the fund will likely need to conduct due diligence and deep dive into your financials. We’ve provided a few questions a VC will likely ask next.
- What assumptions did you make in your growth projections?
- What is your ARR/MRR? (Annual Recurring Revenue / Monthly Recurring Revenue)s
- Geographically, where are your sales concentrated?
- What is your pre-money valuation and post-money valuation, and are those set in stone?
- What is your biggest cost right now, and how do you plan to bring it down?
- How many months of runway will this capital raise provide?
Founder’s Pitch: After deep diving into the financials of a business, most founders will transition to showcase the skillsets of their team members. In any early stage business, the most important aspect of a company is the team. A team should be experienced in the industry of the new product, easily trainable and adaptable, and be able to speak with a balance of confidence and humility. Ideally, a team should come from varied backgrounds, and should have an element of entrepreneurial experience as well. It is also helpful (but not necessary) if a team has a strong advisory board, or ringing endorsement from an experience professional in the industry. Lastly, a team should have a clear structure of company roles. A company with a CTO, CMO, and CEO will be able to allocate work much more efficiently than a startup with three CEOs.
Fund Questions: Once a venture capital firm gains a clear understanding of your team and their core skillset, the fund will typically ask the below questions to see if your team is the best fit for the industry.
- What are the main advantages of your current team—do they bring in key clientele or partnerships?
- Who on your team is full-time and who is part-time?
- How do you plan to scale the team as the business grows?
- Is any of the next capital raise dedicated towards bringing on new team members?
- What motivates the founders?
- What has your team learned since the initiation of your product or service?
Founder’s Pitch: Once a founder has showcased the competence of their team to a fund, they lastly will dive into the go-forward strategy and vision of the company. Founders will need to show they have a clear understanding of how the business can scale, and demonstrate they have the knowledge on how to best scale it. Founders should speak about the primary marketing and sales channels they plan to utilize, the customer acquisition strategy they plan to employ, and the business lines they plan to expand to. A common red flag funds will see is when founders try to enter into too many product lines—for example, if a company’s core business is selling jeans, it would appear as a red flag if that company is then expanding into shoes, umbrellas, and coats, and expanding to brick and mortar, online sales channels, and pop-up shops over the next year. These categories represent completely different markets to the core product, and the best drivers of additional revenue are products or services that can leverage the ground work already completed for the core of the business.
Fund Questions: After a venture capitalist understands your vision going forward, they will want to understand exactly where their dollars are being allocated. A founder should ensure they have responses prepared for the below questions.
- How do you plan to expand your partnerships and clientele pipeline?
- What are your top priorities to achieve by the end of next year?
- How do you plan to allocate the next capital raise?
- What do you see as your exit timeline and opportunities?
- What is the capital raise, and where does it stand right now?
- What introductions would be helpful for us to make?
To recap, your team should have six main areas covered in your pitch: Size of the Market, Business Model, Competition, Financials, Team, and Vision. These areas all contain critical information that a VC fund needs if it makes the decision to invest. If you can confidently showcase each of these areas to a venture capitalist, you stand a much stronger chance of raising money in your next capital raise.