Is your business worth investing in?
To begin, you need to figuratively and literally go back to the drawing board. Many founders start off by wondering, “how can I grab the investor’s attention for my company?” However, the key is to address a more fundamental question that applies to all businesses, especially those seeking funding. That question is, “how can I capture the customer’s interest in my product?”. If your target market is showing strong interest, you’ve achieved product-market fit (or are close), and you’re seeing clear signs of commercial growth, pitching to investors becomes not just easier and more convincing, but also enjoyable. You’re excited and proud to tell your story.
This may seem obvious but a lot of founders skip this step and rush straight to asking for the cash money. The nerve! The business is the bread and butter. And investors want to see that the people running the show are fully dedicated to the task at hand and achieving traction efficiently.
In a separate article, I will outline the areas of the business that require careful consideration, provide guidance on handling each area, and suggest the order of priority based on the type of business (see here – coming soon). For the purposes of this brief article, founders must verify that their product addresses a crucial problem for a specific group of individuals (or companies), the market is showing a positive response to it, and there is a clear strategy for expansion and market capture.
Conveying your vision
So, you got a killer business and a product your customers/clients just absolutely adore (or at least will adore once it’s launched!). There are a few ways you can present your proposition to investors depending on the industry niche you operate in and the funding stage. However, there are mandatory talking points that need to be addressed no matter what. The following doesn’t need to be in order (we recommend it is in order so the story makes sense) but as long as the presentation/pitch impresses from the get go. Allow me to explain…
Beginning and final slides
The first slide is the very first impression potential investors will have when reviewing your presentation. Therefore, it must emphasise the most important point of your business, delivering a statement that clearly conveys the significance of your product and why it needs to exist!
Assuming your presentation deck manages to captivate potential investors throughout (continue reading to learn how to do that), the last slide should serve as a powerful reminder of the key takeaway. Reiterating the main point and providing contact information for them to get in touch will undoubtedly increase investor interest. It’s as simple as that.
Problem and solution (and product)
The addition of the product in brackets is important because the solution to the identified problem is brought to life by the product itself. Nevertheless, it is generally advisable to talk about the product in a separate slide, allowing for a more comprehensive exploration of its features and the user story.
For your problem slide, it is essential to articulate who is facing the issue, what the specific problem entails, and the extent of its impact—backing this up with statistics and real-world examples. The solution should clearly outline how the product addresses this problem, emphasising the primary advantages that the customers will gain as a result.
The market opportunity
Surprisingly, the market opportunity is occasionally overlooked. This oversight is a missed opportunity to showcase the market’s magnitude and future growth prospects, providing valuable information on scalability possibilities. Many investors are attracted to opportunities with significant upside potential. So, it’s important to get them excited and demonstrate the potential for growth!
The business model
This is the most straightforward of all. It showcases the revenue model, possibly the unit economics, sales prices, and the rationale behind these prices. It’s important to note that certain businesses may adapt or transform their business model entirely based on what suits their business and customers best, but this will be elaborated on in a separate piece (see here – coming soon).
Traction
This is an excellent chance to highlight your accomplishments to date. You should show significant milestones reached, notable KPIs met, and evidence of product-market fit. Including a timeline is a good idea as it will demonstrate to investors that your growth is on track, instilling greater confidence in your ability to meet future milestones (further details of this will be covered in the investment section below).
Competitive landscape
Many investors are keen on competition analysis, and it’s not a surprise. You should clearly indicate who your primary competitors are, how you are positioned relative to them, and how you offer a significantly better solution. A grid table is usually an effective way to achieve this. However, if you only have two areas where you differentiate from the competition, a quadrant diagram is suitable.
Go-to-market (GTM)
Another section that is sometimes overlooked! It really is a sin if you don’t tell investors how you intend to grow your company commercially through GTM strategies. You might as well call it quits. Here, you must, YOU MUST, detail your growth strategy, including distribution and marketing channels, while highlighting the uniqueness and appeal of your GTM approach. Additionally, elucidate on how and why these methods will work at scale!
Financials
Some leave the financials to the financial model, but I think it’s important to provide a brief overview of both the actual and projected financials to effectively communicate your vision, using the crucial bottom line that many investors are ultimately interested in. If you prefer not to disclose exact figures at this point, you can opt for using labels instead and ask the investor to sign an NDA before revealing your financial model. At the initial outset, I recommend simply presenting the actual figures and future projections for the next 3-5 years, including total revenue, total customers/sales, OPEX, EBITDA, EBIT, EBT, and margins. More on the financial model further below.
Team
I believe the management team plays the most crucial role. The success of a business hinges on the people involved and the decisions they make. Therefore, in this section, ensure to showcase the founder/s, management team, and advisor/investors, and for each, emphasise their relevant accomplishments and experience, including previous roles. It is imperative to demonstrate why the team possesses a competitive edge in carrying out this business venture. Having startup experience is a plus, especially if it was successful. However, any experience, regardless of success, is valuable. Executive level experience is crucial for more established companies.
The investment you need
To cap your pitch off, it is essential to clearly communicate to the investor the specific amount of funding required, the purpose behind the funding, and the projected impact on the business. Specific information you need to share includes funding amount sought, the type of capital and deal types you’re open to, current funding stage, existing capital commitments, primary use of funds, remaining runway, anticipated milestones enabled by the funding, and the next steps post-achievement of those milestones. As for valuation, I recommend to hold off on discussing it until you are closer to the term negotiations.
There’s more on the way
I’ve delved deeper into the process of crafting the presentation deck and the overall art of pitching, complete with a detailed walkthrough and a customisable template! The highlighted sections above are the primary focus areas, yet there are additional subjects that founders can delve into, especially as their business is more established (see here – coming soon).
Telling the story with numbers (the financial model)
Now that you’ve shared your story, it’s time to translate that narrative into numbers that are both realistic and thrilling! This will be a quick overview, but it’s crucial that the financials are backed up by solid, well-researched assumptions. For more established businesses, additional calculations will be necessary to cover other aspects of the business. The core financials will then consist of the standard three statements that every business should periodically keep up to date: the income statement (or P&L), the cash flow statement, and the balance sheet.
In this article (see here – coming soon), I’ve compiled a detailed guide on building a financial model for your business, maintaining it over time, and a free template for you to use.
Navigating the terms of the deal
This section is really all about ensuring that nobody ends up getting burned! Therefore, it’s crucial to be well-informed about the terms of the deal.
I’ve summarised the key points below, and typically, deal terms are detailed in a document known as the term sheet. I’ve penned down an article that delves into all the specifics regarding deal terms (see here – coming soon) which also includes term sheet templates for your perusal. Remember, a term sheet is simply a roadmap for the deal and not a legally binding commitment to invest. The legal paperwork for a deal is specified and signed separately. The term sheet also serves as a contract that obliges you to maintain confidentiality during negotiations and, in certain instances, may restrict you from seeking out other investors for a certain period. Prior to proceeding, also make sure to verify the trustworthiness of your potential investor.
Money raised so far (or capital commitment needs)
Your investor may ask you to raise a certain minimum sum of money before releasing their funds. It will be your responsibility to secure this amount, so make sure it is a realistic goal for you.
Financial instruments
In most cases, financial instruments for a deal are either priced (Equity) or unpriced (ASA/SAFE and Notes). More on how they work can be found (see here – coming soon).
Valuation (pre-money)
You and your investor must agree on the company’s valuation before any investment is made (or at least a valuation cap for unpriced deals). The discussions will focus on the total value of all shares issued and anything that can be transformed into common stock. This figure will establish the basis for calculating your investor’s ownership stake. A guide on how to value your company can be found (see here – coming soon).
Generally speaking, you need to make sure you’re confident you can beat the agreed upon valuation in 18 months time, that initial investors find it reasonable in the market, and is actually based on the amount of the company you want to give away.
Liquidation preferences
Liquidation preferences typically prioritise investors over common shareholders in terms of returns during an exit. Nevertheless, it is possible to discuss a 1X plus interest non-participating liquidation preference. With a 2X preference, preferred investors stand to receive twice their initial investment if the circumstances permit. A guide on liquidation preferences can be found (see here – coming soon).
1:1 Conversion to common
Converting to common stock is a standard requirement in term sheets. This allows preferred stockholders to switch to common stock if it’s more beneficial for them to be repaid based on a pro-rata common basis rather than just sticking to their liquidation preference. More on conversion to common stock (see here – coming soon).
Anti-dilution provisions
In case you have to sell stock at a price below what the investor initially paid, this provision ensures that the investor gets more stock to maintain their original ownership percentage without having to put in more money.
The pay-to-play provision
Companies and investors typically look for this setup. It involves investors being obligated to take part in upcoming funding rounds in order to prevent their preferred stock from being changed to common stock.
Boardroom makeup
This outlines who holds the power over the board seats and, consequently, the company itself. The most favorable arrangement for founders is a 2-1 structure. Conversely, a 2-2-1 setup—where there are two seats for the founders, two for the investors, and one for an outside member—might result in the founders losing their grip on their own business.
Dividends
Dividends don’t take centre stage, especially for earlier stage companies. Dividends are a bonus and typically fall between 5% and 15%. There are two types, cumulative and non-cumulative. Cumulative dividends can sometimes pose financial challenges that need to be addressed before founders can see any returns. More on cumulative and non-cumulative dividends can be found (see here – coming soon).
Voting rights
Investors must be safeguarded from certain decisions founders might make that could jeopardise their investment. To ensure this, investors are granted voting rights that typically match the amount of common shares they can convert at any given time.
Drag along
A drag along ensures that the founders and common-stock majority cannot prevent the sale of the company. It’s important to maximise leverage by aiming for a high sales trigger point during negotiations to safeguard your interests. More on how a drag along works can be found (see here – coming soon).
Allocate parts of your raise to different classes of investors
A common error that founders often make is believing they must secure a lead investor before anything else. Although having a lead can simplify the process, it shouldn’t be the only thing holding you back in your fundraising efforts. By dividing your funding round into segments that cater to three categories of investors—lead funds, follow funds, and angel investors—you can generate much more excitement right from the start when engaging with these various investors.
For example, let’s say you allocate your $2M seed round as follows:
- $1M for lead fund investor
- $500K for follow-on fund investors
- $500K for angels/HNWIs
Given that, for a round like this, angels typically write checks in the $25–100K range, follow VCs write checks in the $200–300K range, and lead VCs write checks in the $500K–$1M range, you only have, roughly, room for the following:
- $1M for lead VC(s): 1–2 lead VCs
- $500K for follow VCs: 2–3 follow VCs
- $500K for angels: 5–8 angels
This is an important part of your fundraising narrative because your fundraise is not just about asking for money for your business—it’s about finding the right people to partner with. It’s not uncommon for an investor to ask you about what types of investors you’re looking for, and this is one of the ways you can answer that question.
Dealing with investors
In this section, we’ll cover the essentials that founders should keep in mind when engaging with investors.
Understand how the process generally works
Prior to meeting with investors and presenting your pitch, it’s essential to grasp the usual process involved. Even before that, preparation is key. This means having your supporting materials organised, such as your introductory deck, full presentation deck, financial model, and investment documents. Additionally, you should be well-informed about the deal terms, including your preferred financial instruments, valuation, liquidation preferences, and other relevant details.
Here is the process step by step:
- Initial meeting – when an investor shows interest in your company, it’s best to aim for an in-person meeting in a comfortable setting. If that’s not possible, a video call works well enough. Generally, these first meetings last between 30 to 60 minutes. They usually kick off with some casual conversation and introductions, then moving into your pitch, followed by a Q&A session, and wrapping up with a discussion on next steps. If a follow-up meeting is scheduled to gather more details, that’s definitely a positive sign!
- Basic analysis – the investor will evaluate your opportunity to determine if it’s worthwhile to proceed with a more thorough investigation. They will consider aspects such as revenue strategies, the three-year plan, interactions with comparable portfolio companies, and an analysis of competitors.
- Due diligence (DD) – the investor will conduct a thorough examination of your business, which includes cohort analysis, customer calls, reference calls, product roadmap, technical review, competitor analysis, etc. Their aim is to create an investment memo that can be shared with others at the firm, highlighting the key aspects and risks of your investment opportunity. This structured approach is typically followed by funds, but angel investors can also assess your business in a similar manner. It is important for you to actively engage in this process by responding to detailed follow-up questions, introducing key team members, customers, partners, personal references, assisting with technical reviews, sharing information on key accounts, customer pipeline, fundraising history, and more. It is crucial to act promptly in these matters. While you may not anticipate every question an investor might have, once you receive a request, you will be better prepared to provide the same information to other potential investors. If you have set deadlines, funds will usually respond with their decision within the specified timeframe. In case of delays, it is advisable to follow up, offer additional information, and inquire about their decision-making process.
- Partner meeting (only for funds) – firms that have several partners typically hold regular partner meetings where new opportunities are presented. If you have reached this stage, the partner you have been collaborating with will usually invite you to pitch to the entire partnership. Partners might ask for additional information from the DD team before arranging a comprehensive partnership meeting.
- Term sheet – if the investor chooses to move forward with the investment, you will then progress to the term sheet phase. During this phase, specific terms will be finalised, and a final round of due diligence will be conducted (typically focusing on financial and legal aspects, as well as employee references). We recommend that you thoroughly understand your own deal terms (refer to the previous section), and take the lead in sharing these terms.
- Money in the bank – remember, a deal isn’t final until the money is in the bank. Even if an investor appears fully committed, it’s crucial to secure the funds to close the deal. Therefore, strive to expedite the process of getting the money deposited.
- Pass – an investor may decide to pass at any point in the process, but it’s crucial to understand the reason behind it. Depending on the rationale, you might be able to convert a “pass” into promising investor leads, unless they simply don’t see your company as a good investment. However, if they do see potential in your company but it’s not a fit for their firm, or if they believe in your company and it aligns with their firm but they are unable to proceed due to operational constraints or portfolio diversification, then you’re in good shape. So, what should you do when an investor passes in this scenario? Explicitly ask if they believe it’s a strong enough investment to share with other investors, and offer them an easy way out by saying, “if you’re not comfortable sharing this with others, I completely understand.” By doing this with every investor who passes, you can ensure that you don’t waste time with lukewarm introductions and may even uncover some qualified investor leads that you hadn’t considered before.
I haven’t touched on investor outreach yet but it’s an important step that falls between this one and the previous steps. You can see a separate article to it (see here – coming soon) because it truly deserves its own focus and consideration.
Understanding the angels perspective
Angels and HNWIs have a wide range of investment motivations compared to funds or institutions. Family offices, where family members invest their own funds, can also fall into this category. Understanding the motivations of angels is crucial for establishing a successful business relationship with them, especially since they retain 100% of their investment returns, unlike VCs. Thus, angels typically have lower return expectations than VCs, making them an attractive option for many founders. However, it’s important to recognise that each angel investor may have different investment preferences, ranging from high-risk moon shots to more conservative opportunities. Asking angels about their investment goals is key to determining alignment and tailoring your pitch to address their specific motivations.
Understanding the VCs (and funds) perspective
VCs invest using a fund that primarily consists of money from other investors, along with some of their own capital. VCs need to raise specific funds that have a specific strategy, and they pitch Limited Partners (LPs) to invest in these funds, much like how companies pitch to investors. These LPs can include other VCs, family offices, institutional investors, pension funds, and others. To secure more funding, VCs must show that their current funds are yielding strong returns.
VC firms typically follow the “2 and 20” model, with 2% in management fees and 20% in carry. The 2% management fees are based on the assets under management, incentivising VCs to raise larger funds and subsequent funds quickly after initial success. These fees cover expenses, team growth, and salaries, but the real wealth comes from the 20% carry, which is a share of the capital gains once all investments have been returned.
VC economics revolves around the need for VCs to secure a few massive returns from their fund investments. Seed VCs typically operate under the principle that each investment should have the potential to yield the entire fund’s return.
VCs typically allocate a specific fund over a period of ten years, as it may require a significant amount of time for companies to exit and for investors to see any returns. Consequently, it takes a considerable amount of time for investors to conclusively determine if a fund’s returns are favourable. Given that VCs are unable to immediately showcase fund returns as a measure of success, they instead use their portfolio companies’ fundraising achievements as an indicator of fund success. This is why VCs are motivated to help you secure the next funding round at a higher valuation.
One of a VC’s biggest assets is their deal flow pipeline. The more companies they are able to monitor, the greater the chances of finding successful investments. While VCs are becoming quicker in their decision-making process to maintain a positive reputation with founders, the longer they observe startups without committing to investment, the more confident they will be when eventually deciding whether to invest or not. This situation often leads founders to feel like they are being led on by investors, when in reality, they simply haven’t created a sense of urgency for the investor. If you fail to convey to investors that there is a limited window of opportunity to invest in your company and that they need to act swiftly, they are more likely to continue monitoring your progress rather than making a definitive decision.
It’s important to remember that time can have a negative impact on deals. Often, the longer a VC takes to do their research before offering a term sheet, the less confident they are about your company. Most of the due diligence should come after the term sheet, and it should confirm what you’ve already told the VC to get them excited. If a VC is really convinced, they’ll act quickly. The VCs who do the most research are usually the least convinced. I’ve discussed the importance of preparing for investor due diligence and making sure you’re fully prepared to make a good impression on them in a separate article (see here – coming soon).
It’s also good practice to connect with the current or previous portfolio companies of the VC and funds you’d like money from. Not only can you get recommended and introduced, but you can also do some of your own due diligence into their experience working with that VC/fund.
How to speak with investors
This is partly to do with your personality and it gives investors an insight on what it’s like to work with you. It’s not just significant in the early phases when you’re engaging with investors during due diligence and negotiating deal terms, but it also plays a vital role if you choose to join forces and work together going forward.
You should be direct and confident, but respectful and human. If you handle the fundraising process with efficiency and courtesy, you might find some pleasant surprises from unexpected places. Be honest or a bit reserved about how quickly things are moving, but avoid dishonesty. When dealing with angel investors, frame your request as seeking guidance and support, as well as financial backing.
Put yourself in a position of optionality, if possible
In an ideal world, you can position yourself in a way that eliminates the necessity of raising funds, even if you plan to do so. You will find yourself in this situation when several investors are genuinely keen on putting their money into your business. This will empower you during the fundraising process from the start, allowing you to conduct it smoothly without feeling like you’re pleading for money. Having this leverage and the choice to not raise funds will influence your mindset and interactions with investors. The more you excel in the areas discussed in this article, the higher your chances of gaining leverage and flexibility.
Conclusion
The article I’ve shared today touches on all the key points, but only in a brief manner. There’s certainly much more depth to explore, and if I were to dive into that, it would probably turn into a book. Honestly, I might just do that in the near future! Nevertheless, it offers a solid foundation for founders to utilise and expand upon.
You may have seen while reading that I’ve included links to other articles that provide more information on the topic, so there’s no shortage of expanding your knowledge! I realise that founders are extremely busy with their businesses and may need assistance or guidance, which is where I come in to help!
Regardless of whether we collaborate, I truly hope this guide has provided you with a strong platform to secure the funding necessary to realise your company’s vision!