That is a question that we get here at Early Growth on a regular basis in regards to new fundraising. It’s important to know not only what to present to a venture capitalist, but how people get to that venture capital presentation in the first place.
This webinar was put together in part by the help of our friends at Black Founders. Our own Sirk Roh sat down with Marlon Nichols, Managing Partner at Cross Culture Ventures, to discuss the best ways to approach a VC, and what they are looking for in a pitch.
Here’s the recap:
Pitching to VC – Why raise funds for a startup?
Sirk: It’s really to accelerate growth. It could be a combination of the need to produce some sort of product, service or software. Or to hire talent. Mainly, it is about going after a big market opportunity & industry to invest in.
Marlon: At the seed-level, we are looking at companies with tested, working products that have a good sense of where they like to market that product and need funds to reach potential customers.
Pitching to VC – What fundraising options are available to entrepreneurs?
Sirk: You can look at the options along a timeline, starting with sweat equity/bootstrapping, and then possibly Friends & Family investors. Be very careful when considering this option. Early-stage companies can then look to an Angel Investor. Later stages of development could then require new investment at the VC level.
Marlon: Friends & Family, that’s usually at the level where it’s just you – you’ve quit your job to start this business, and need money to get started. The investment at this level is going to be relatively small. By the time you’re ready for an Angel Investor, maybe you have a co-founder at this point, and possibly even a prototype to demo. Investment can go up to half a million dollars, maybe up to a million. This money is put towards testing market fit/traction, which will lead you eventually to venture capital.
What about venture debt?
Marlon: Very important for businesses that are capital-intensive (such as a hardware company). Founders that are needing to raise large amounts of capital need to be aware of the amount of equity they are trading to raise money. Venture debt, coupled with a VC investment, can help balance the scales for founders by injecting additional cash into an investment without giving up more equity in the business. Venture debt providers usually won’t fund business ideas without a strong investment from a VC firm.
How do I get a meeting with a VC?
Marlon: The top VCs get hundreds of emails from entrepreneurs in the tech industry on a weekly basis. It’s virtually impossible to get to every single one, and the reality is we as VCs have to prioritize emails, based on where they are coming from. Is this an entrepreneur I’ve successfully worked with in the past? Is this an introduction from another VC that has shared deals with me before? Or is it from someone in my network that I trust? These are ideal ways to start contacting a VC – by leveraging your network.
Sirk: If you’re a first-timer, you need to get out and start selling yourself with other entrepreneurs. Also, use the tech industry startup ecosystem! Things like bankers, lawyers or accounting service providers. Everyone who you work with (partners, vendors, etc.) is a potential source for introductions.
Venture Capital Presentation – I got a meeting. What needs to be in my VC pitch deck?
Marlon: What I’m looking for is, what is the problem that you are looking to solve? This is a business of investing – I am investing a certain amount of capital to see a certain amount of capital returned, so this business must make sense at a certain scale. I love entrepreneurs that are solving real pain points that haven’t been adequately solved previously. Next, tell me why your solution stands out and, importantly, how. Is this solution sustainable? Who else is out there doing this?
Then, the financials…if you’re honing in on the right metrics, then I know you’re aware of what’s important. We want to hear something about where the solution is, where it’s going, and how the funds are going to help with this. Get help & advice from other founders or people in the industry. We want to hear about the team and why it’s positioned to produce this solution. Why are you the winning team?
Sirk: Keep it to 10-12 slides. Use Guy Kawasaki’s rule of thumb: 10 slides, 20-minute presentation, 30-point font on the slides. Don’t try to slam a bunch of information into your deck. Concisely send the message. Understanding your financials is what this is all about…do research on your market. What are the key drivers of your financial model? Where will the revenue come from? What are the costs associated with your solution? You will absolutely have to do a Profit & Loss statement.
We are big believers at milestone financing. Each round of financing should be targeted to major milestones/goals for your business.
Marlon: You don’t have to have every single detail in the venture capital presentation, just the important points. Just the details that pop, and make us want to learn more.
Is it necessary to include an exit strategy slide in a VC pitch deck?
Marlon: You better be thinking about it, and be realistic. It doesn’t necessarily need to be in the deck, but you should be ready to speak to it.
What circumstances would one forego fundraising and reinvest profits back into the company?
Sirk: It comes down to the type of company you have. If you have the ability to slowly grow, while putting money back towards the business, you can circumvent fundraising. If you need significant investment on the front-end, due to a market opportunity or accelerated business strategy.
Marlon: It’s a function of time and potential. If you’re building something based on market timing, venture capital is a great way to get ahead of the competition. From a potential perspective, can this business become a billion-dollar enterprise? Then yes, venture financing would be a way to go.
More questions on VC funding or how to pitch to venture capitalist? Contact Early Growth Financial Services for a free 30-minute financial consultation.