Martijn Hamann is a Partner at Van den Ende and Deitmers and a mentor at Startubootcamp Amsterdam. In this insightful blog post, he kindly shares with us the key elements of pitching to VCs.
Following the initial hard work and all personal sacrifices during the first months of your start-up, the day of finding external money arrives. It is a highly underestimated part of a long journey. Unfortunately, it takes longer than you expect. As a matter of fact, you will always be silently fundraising to ensure the continuity of your Company. So let’s make it more enjoyable!
Entrepreneurs are proud people: proud for their product, their team, their user base, and often -rightly so- proud on themselves. Personal achievement is one of the highest in the hierarchy of needs according to Maslow: self esteem, confidence and respect by others. Master that higher version of need for self-respect; it creates strength, competence, independence and ultimately freedom. Your Investors will benefit with you. Make use of that inner subliminal power in you: the Tony Montana entrepreneur who wants to ‘rule the world’. Branding of your own personality -in a balanced manner- works for a lot of Investors. They invest in you as one of the scarcest USPs of worldwide business: Leadership. Investors are not necessarily looking for the über tech product. Moreover, they are looking for the charismatic geniuses who can really make a sustainable business out of it; aka Steve Jobs, who passionately promoted both Apple’s tech and design, as well as his own personal brand like no one else.
All this as an intro, to emphasize that in any pitch -either to VCs, clients or employees- you should deliver personal energy, structure and knowledge to get attention. For VCs specific, please find below some key elements where I would typically focus on:
1. Make a difference. In 20 seconds, 2 minutes, 20 minutes. That’s it.
You, the CEO, makes the first key difference. When human beings meet individuals or groups for the first time, we mostly evaluate two metrics: Trustworthiness and Confidence. “What are this person’s intentions toward me?” [trust]. And we are also asking ourselves, “How strong and competent is this person?” [confidence]. Thus, it’s about whether or not you are capable of enacting your intentions. Research shows that these two dimensions account for 80-90% of an overall first impression. Don’t worry; very few people enjoy both dimensions. The VC on the other side of the table also has a challenging task: to make an accurate judgment of somebody to invest in you want to bring out their true nature. I typically try to make the CEO/founder feel comfortable. People need to trust me in order to be themselves and to create some form of interaction and connection. Short initial small talk or a subtle joke in the beginning of your presentation really helps to break the ice, but stay authentic. Do use a PowerPoint deck, it helps in structuring the presentation and info for follow-up reading.
2. Create something Sizeable, Scalable, uniquely Sustainable
Create a product or service that is meaningful, in terms of absolute market size it can grab. VCs are not interested in niches. If millions are invested, it should in theory be able to generate at least a 5x return to compensate for that risk. A Sizeable market potential is required, also to attract large Exit tickets to grow the business further under a strategic Buyer umbrella.
Have a theory, supported by facts and your customer/user experience. Make a compelling storyline of your product being a painkiller in someone’s daily life. Make it personal. YouTube’s painkiller story supposedly originated out of a frustration of early PayPal techies not being able to share a video filmed by one of them at a dinner party. Invent a market, destroy a market or remove a big friction in a market. Twitter created a complete new market (real time independent blogging feeds, #search). Uber created a complete new market of supply and demand for premium car travel, contrary to taxi apps who did not create a new market, but only removed a bit of low value friction. “Nothing is less productive than to make more efficient what should not be done at all” (Peter Drucker). Be very frank and critical to your own proposition: is it really creating a sizeable market, can it be executed in a scalable manner, is it sustainable enough (recurring usage, recurring paying customers!)?
3. DEMO DEMO DEMO
See you pitch fore and foremost as a product presentation. This should be a comfortable and energetic part of the pitch. Use all audio-visual possibilities available: mock-ups, apps, YouTube instruction demo’s, platform log-ins on the spot, etc. It sure has the technical risk of lack-of wifi, malfunctioning laptops, beamers, connectors, adaptors, and so on, but this is definitively the best chance to show how smooth your product works. The CEO should be the best salesperson showing the customer journey. The demo part is highly underestimated. Better spend extra time on this. It also strongly supports the Trustworthiness and Confidence test. Also in the PowerPoint deck -whether send in advance or not- should contain a lot of product info (e.g. in Annexes). One great product slide says more than all your words, mission statements and business descriptions.
4. Laser beam Focus
Clearly present your Product, Territory and Client focus. And keep it stupidly simple as long as possible. Booking.com is one of the most focused product companies, still. They did not add extra product segments like villa’s, air-travel or cruises. They simply offer the most relevant supply of comparable hotels in a smooth, personalised, easy to book platform. Knowing your destination is half the journey.
Be patient. Do not get too excited about land grab plans, new product launches or extra client segments to support your growth strategy. It adds exponential more complexities to your organisation. Focus first on optimising the organic growth strategy and your key 5 operational KPIs, including one alarming one. If this KPI is declining, you are the most alert person in the world. Your financial report will always lag behind, it only shows the decline when it is already too late. Most companies do not die from slower revenue growth, they fall off the cliff due to an instant lack of cash flow (too little revenue coming in, too high expenses flowing out). Track your fuel burn rate and calculate the months of runway. VCs ask for this number. The CEO is like the 747-pilot who had to learn to fully rely on his dashboard data, even though sometimes things are perceived differently looking out of the window. Metrics do not lie, perception does.
Your business KPIs will show problems or traction, way in advance. We had companies in our portfolio growing nicely in revenues and profit, but the number of active users and time spent on site were declining. What to do? Be most alert on your key KPIs and then check/balance with your financial reporting. Surprises should not exist. Slowly changing, wrongly chosen KPIs are the worst: like a frog being boiled, adjusting his body temperature to death.
Most pitching plans are written around the idea of raising growth capital to expand the business to other markets and new product investments. Why? Is it really needed? Use the capital to optimise the scalability, the team and get your core product and KPIs solidly proven. Make sure you have a substantial share in your home market before you break out. In the pitch, elaborate on your product and KPI’s, like the AARRR model: metrics to manage the Acquisition of users, how to Activate them, how to Retain them, how the users make Referrals and how to optimise Revenue generation.
5. Profoundly explain how you can Execute better than anyone else
Show proof of your Talent, Dedication, personal Struggles and sense of Timing. Most founders are specialists, rather than generalists. Show your specific Talent, i.e. in online marketing, tech. This supports you drive and Dedication to change the world with your vision on the market and product offering. Explain the struggles to get there, deciding to start your own business. The Struggle is a great story telling opportunity in the pitch to validate how you manage problems and to explain that you are not delusional, but a real entrepreneur. Finally, the difference between luck and sense of Timing is vision with preparation. Timing meant you were open and ready for new opportunities. Show it in your pitch if you have examples where this turned out well. Closing of a venture deal, a big client or Exits have not much to do with luck. It is Timing; matching between opportunity and preparation. Every VC has good and bad timing examples in their portfolio, but they can diversify. You can’t.
The bottleneck is always at the top, and that is you. Leadership really makes the key difference from Good to Great in terms of the Company’s growth story and subsequent VC exit. That’s why Boardmembers (=VCs) are so focused on the CEO. They are typically responsible for the hiring and firing of top execs. If the Company fails, the Board is to blame. If the Company is successful, the credits should go to the CEO.
6. Pricing and Valuation
During the presentation, it should be clear why you need a certain amount of growth capital. The whole deck is about pitching for money and finding the right Investor. However, it helps if there is a separate section to discuss this in more detail and be specific about the anticipated range of share percentage you offer for the amount raised. It saves a lot of time and frustration if this becomes clear sooner rather than later in the process. If you expect a high price, please support that with market data like comparable transactions, listed peer multiples, user data comparables and so on. Idem for Exit potential. Just requiring a high price because the Company is your baby, does not help much. If you sell your house or car, comparable data is used, even when you think there is no comparison possible. Also take into account that the Investor typically requires at least a 5x return, so you better be prepared on the question of what the Exit candidates and Exit value reasonably good would be in a European market where we have limited exits above EUR 50m. Please note that US Exit buyers are exceptional.
Finally, it is your pitch and your dream. It is the marketing of yourself and your Company. Enjoy it. VCs can be quite un-energetic during a pitch. They see at least hundred pitches per year. Do not get distracted by this potential tired or frosted reaction. Move on. Try harder. Stay calm, try to take deep breaths between the slides. Speak slow and with a lower voice than you normal do to make an important point. Learn the audience before the meeting. Check out which Partner is joining the pitch. Check their blog, Linkedin and Twitter profiles. Find his YT or Slideshare presentation. It is 5 minutes work to figure out. It could help in your small talk or making connecting dots in your pitch (‘our product good be great for your portfolio company Y’). It is a great trick to have more interaction with the audience.
Pitching is like Investing: it seems simple, but it is not easy. No guts, no Glory!