It’s important to note that not all startups are eligible for funding. Typically, investments in the millions are made in startups that have demonstrated substantial growth in revenue or daily active users, have established margins, or have a clear and defined path to strong monetization. To be considered, your company’s growth metrics should be on an upward trajectory. If your startup meets these criteria, you may have a chance to secure funding.
BEFORE THE PITCH
Have the important discussions before you start scheduling meetings.
Consider your appetite for risk
Securing a growth round often eliminates many exit options, including acqui-hires and the possibility of a high-value exit that could provide financial stability for your family for generations. Ask yourself if you’re truly prepared to pursue a large outcome or to give up.
Dilution is a downer
The outcome can vary greatly depending on the amount of funding received and the valuation of the company. Receiving $20 million with a $200 million valuation is different from receiving $50 million with the same valuation. The existing investors may exercise their pro-rata rights, while the new investors will receive liquidation preferences. The inflow of new funds results in dilution of existing shareholders and the option pool may also need to be replenished, causing further dilution.
Changes to board composition
After a company raises Series A funding, additional investors should be added to the board. A good post-series-A board has two founders and one or two additional investors. This usually happens as a result of a growth round, which typically gives more power to venture capitalists. When I observe board members, both critics and supporters tend to voice their opinions equally. Should you consider asking your seed investor to remove himself from the board?
Soliciting support from existing investors
Ensure that your current investors fully support the idea of obtaining additional funding. Although this may seem obvious in the current climate (where venture capitalists often prioritize markups and financings for the wrong reasons), it’s crucial that your investors truly believe in the story you are about to tell. They will need to share it with you.
Balance risk and reward
Founders cashing out their shares can be a contentious issue. However, I am certain of one thing: If you are a founder and do not sell 10% of your shares, you do not understand risk management. This is a justifiable move as you remain invested in the company, but by reducing your risk, you become even more aligned with your new investors and can strive for greater success.
Assemble your documents
During the seed stage, investors should be motivated primarily by their belief in you. However, as the company grows and moves into the growth stage, agreement among the investors becomes more crucial. You will face more extensive evaluations than in the seed and Series A rounds, and you will need to rely on your strong performance metrics to sell your high-growth story.
The partner in the growth fund is your customer
Before advertising a sale to a typical customer, always ask “How can I help my customer win?” By providing information and stats to support your initial enthusiasm.
List of documents and data that growth-stage investors will need to see
Before you start pitching, have these docs ready and vetted:
- Basic documents: Monthly management accounts, budgets, and waterfall reports are all
- Audited financials: Ideally, at least a year’s worth, prepared by one of the big four
- Knowledgeable market/marketing analytics: This needs to be real market research that
helps illustrate industry dynamics, not a sexy projected market size number from
- Acquisition analysis: Being able to unpack your CAC and LTV at a deep level is critical.
Cohort analyses. Depth of knowledge on each channel (SEO, Twitter, FB).
- Sales pipeline: For B2B companies, be prepared to answer who is in the funnel, statistical
percentage of time at each stage, initiatives to accelerate stages, etc.
PREPARING THE PITCH
Sell the dream
People need to understand how your business will benefit the world through a story.
Consider Uber as a prime example of the sharing economy. The company takes a well-designed mobile app and a well-stocked market place, but its investors are selling an iconic brand, an unprecedented opportunity to improve civic infrastructure and miraculous financial success. When analysts compared Uber to taxis, its $40 billion valuation seemed insane. However, when considering that the company is considered the poster child of the sharing economy and rethinking urban transportation, it’s easier to see why this was.
Make a billion-dollar promise
You need to deliver at least a 4x return for your $30 to $50 million fundraise against a $200 million pre.
Growth investors who use Instagram, WhatsApp, Oculus and other apps need to prove their team has an extensive experience building a popular product. They also need a solid roadmap that enhances and amplifies their initial launch. If one of these apps’ partners doesn’t think you can 4x your current success rate, she won’t be able to sell the idea in her partnership.
Project a vision explained in slides
At this point, recipients are savvy and well-versed in your cause. They know you’re already successful, so they can add their own flare to your presentation by filling in the gaps in your story. Make every slide and question about selling your accomplishments so far to motivate them to help you finalize your vision.
Start with product/technology slide(s)
Focus on emphasizing the product upfront. Create a deck using screenshots of your app or hardware when it’s sitting on the shelf at an Apple Store or atop the iTunes leaderboard. This will be your company’s first major marketing push and you need to make sure all the important highlights are included.
Unpack macro factors
Why is this the best time to grow your business? Do you take advantage of a shift in buying habits? Are you more mobile-oriented than web-centric? Alongside the sharing economy’s larger trends, focus on smaller-scale details to create a unique perspective.
Experts have access to specific information thanks to the elevated status they hold in their field. As a result, they can perform in-depth analysis and scrutiny.
Provide social proof
Tech publications like Time don’t just publish articles— they use the PR slide to create a constellation of logos. This gives smart VCs an advantage when dealing with the press and advertising agencies, since it shows the logos have already been noticed. Independent experts can praise your company without you clamming up. Ideally, your single slide contains recognizable logos and headlines boasting your genius. By doing this, you don’t need to constantly boast about your genius.
Explain your CAC/LTV
Investors in a growth round will pay close attention to your ability to produce revenue and profit. They will thoroughly examine your cost of acquiring customers and the value they bring to your business. Questions you may face include:
- Which marketing channels are most effective for you and how can you prove it?
- How do your performance metrics compare to those of others in your industry, and what are your plans to improve them if needed?
In earlier funding rounds, the focus was on the potential of your product and its underlying vision. However, for this round to be successful, it will be crucial to demonstrate solid financial metrics. Everyone involved in discussions with investors should be ready to discuss how their role impacts revenue and profit margins.
The purpose of the team slide in a presentation is not to simply showcase the number of employees, but to demonstrate that you have brought together a highly skilled and capable team. Ideally, the slide should feature headshots of 30-50% of your team, along with one or more badges of credibility, such as the person’s educational background, former employer, or any notable awards or achievements. The goal is to demonstrate the team’s expertise and qualifications to the investors.
“Money in the bank.”
In your presentation, it’s important to include a slide that displays key financial metrics, such as your current burn rate. The ideal scenario is to have several million dollars in the bank or more than nine months of financial runway. Just as banks prefer to lend to individuals with a strong financial standing, investors are more likely to invest in companies that can demonstrate financial stability, showing that they do not solely rely on outside funding. By being able to confidently state “we don’t need your money,” it shows that the company is in a strong financial position.
What new capital problem will you resolve once the wire transfer is completed? What other problem will the wire transfer address? How soon?
A note on aesthetics
A prettier design doesn’t necessarily mean a better deck overall. However, aesthetics do matter and can significantly improve a deck’s overall quality. It’s best to spend less time on aesthetic polishing and more time digging into your data and metrics. It’s also beneficial to have a designer on staff who can help with the finishing touches. Alternatively, you can pay a small amount of money to an external design agency to polish your deck without distracting your team.
To earn credibility, you must present an audacious vision while maintaining your preexisting objectives. Your potential investor wants to think that your idea will be bigger than you know after meeting you.
Plan to pitch no more than half a dozen partners at well-understood firms. It’s your job to understand the business of the various growth funds and the motivations of the individual partners. Here are some questions to consider when pruning your list:
- Is this really a “growth” fund? Not all large funds are created equally. What’s labeled a “growth fund” at many VC firms is not a mechanism to write a first check into a promising growing business, but rather, a bolt-on fund used to double or triple down on winners from an “in-house” smaller and earlier stage fund.
- Does your company’s strategy match those of the investor’s? Just like startups, good VCs actually have a strategic intent to which they try to closely adhere. If you’re a consumer-facing company and the firm you’re pitching is known for enterprise SaaS investments, you’re in the wrong office. Pitching to “prepared minds” means spending less time convincing and more time compelling people to action. By definition…easier.
- Fund size is destiny. A $250 million fund can’t write a $50 million check. A billion-dollar fund won’t write a $20 million check. Be familiar with each firm’s average bite size and right-size your “ask.”
- Is the partner you’re pitching able to sign checks? How many partners will this partner have to convince to get the deal done? You require someone who has a visceral response to you and your business. But critically, is also credible enough to convince their partnership to write a $50 million check. Pitch the wrong partner and you’re wasting time.
Focus your team.
Throughout the month long process, you’ll be bombarded with innumerable requests. Your senior team will become completely focused on this process for at least a month. The pressure of completing this project is intense. Consider bringing in new team members or planning for your project to come dangerously close to shutting down other parts of their company.
Beware calendar dead zones.
It’s best not to begin a project after November 1 or June 15. Nobody wants to admit this, but the likelihood of getting sidetracked by vacations during these times increases. For the next six weeks, plan to focus on no meetings and almost no activity. Properly running an effective process is imperative if you choose to work with this kind of management team-consuming activity.
Be mindful of seasonality in your own industry.
Some people consider seasonal business fluctuations to be irrelevant, but savvy investors know better. They’re able to see past the fluctuations because they know how to read trends and other hard data. However, this is only possible if the fluctuation doesn’t cause a dip in business growth. If a company has significant fluctuation in their annual income, they are penalized by investors. This is because clear vision is impossible for an investor who can’t see past the dips in income.
RUNNING THE PROCESS
A perfectly run process would take a month from an initial intro email to signed term sheet. Diligence will take another month.
Here’s what you should expect at each stage:
Week 0: Identify all your target funds/partners, prepare your materials and schedule all your meetings. Try to arrange them in order of least-preferred to most.
Week 1: You’ll learn a lot presenting to the first firm and can improve the pitch for the next in the queue. If the pitch goes well, try to schedule follow-up meetings within 24 hours.
Week 2: You’ll likely have requests for info from the first meetings, so be prepared. Make sure your team has time allotted to help refine the deck. Also, schedule sessions with your senior team as they’ll likely be a part of the diligence process. As with the previous round, try to get the next meeting on everyone’s diary within a day or two.
Week 3: Firms will be in diligence mode at this point. Have reference customers, financials and other critical diligence items ready. Beware of warning signs, which may present themselves as a sixth request for more information. The initial excitement of a potential deal may fade quickly, as investors receive numerous enticing opportunities. Avoid letting the deal lose its momentum. If the potential partners seem disinterested, be cautious. If they delegate it to a lower-level employee, be alarmed. Having multiple potential firms in consideration is crucial. Having a credible alternative empowers you. Competition drives action and leads to the finalization of terms. A signed term sheet, no matter the source, is considered valuable. It prompts genuine interest from others.
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