This is Part 8/18 in the series “How to Build an Innovative New Product or Company” on the topic of writing what used to be called a business plan
Business plans used to be the recommended way to put down the story of the opportunity as you see it and the steps that you propose. As written documents have been replaced by PowerPoint presentations broadly and as a lean / agile mentality has taken off (i.e. that you should make the first few months of a company about learning and not pretend to have all the answers and a perfect plan in advance), business plans have become less useful, even unhelpful.
Pitch decks are a simple way to explain your strategy (which should be in place before your lean startup journey), why the team you have is the best one to execute the strategy, and your request from (and proposition to) potential investors.
Building your investor pitch deck
Your document for investors should roughly have these parts:
- Opening page
- The five bullet-point summary showing what you will do, in terms of attracting a big value pool and creating unique value for your buyers, users, and investors.
- What’s the value pool and how big is it?
- One page. It’s a big problem. Lots of $. How much it costs an average buyer/customer not to solve it.
- Why buyers have this value pool; why existing solutions don’t work
- One to two pages. Ways people are solving it today. The economics of those solutions. The major competitors that use each approach—ideally in a simple grid showing two different dimensions that competitors can be segmented based on and that there is no one in our grid area. The dimensions can be that the product is focused on buyers versus users (e.g. as Microsoft versus Apple differentiated); the different ways to solve the problem; those that use new technologies and trends versus those who don’t.
- What we’re going to do and why it’s different and better
- One page on our product. A screenshot mockup is a good idea. Otherwise an investor will be thirty minutes in and say “wait a minute. What’s your product again? Is this a mobile app or what?”
- How the market forces and trends have made right now a pivotal moment for a new approach
- One page. Maybe a quote or example from how this trend has revolutionized another industry.
- Who we are and why we’re the best team to tackle this value pool
- 1-2 pages. Say a lot about the founders. Are they working full time on this company? What successes have they had in the past? If there’s a Board or set of advisors in place, who are they? How close is this new company + business model to the experiences and success of these key people?
- What our milestones are; some projections of how we plan to grow revenue and costs
- Assuming company will be valued at the greater of 6x revenue or 15x EBITDA (if it’s a fast-growing SaaS company), what will be its valuation in four years?
- Potentially a page on potential acquirers.
- What we’re looking to raise
- How much is already locked, if applicable: the more money committed by the founders, the lower risk the investment will appear
- The pre-money valuation
Note that almost all of these come directly from the “4 Steps to Develop a Strategy”. If you’re this far down the process and you don’t have clear, well-articulated answers to these questions, my guess is you skipped through the strategic thinking steps and no pitch deck can cover up gaps in good thinking.
Some advice for pitching to angel / seed round investors
All investors (regardless of stage and size of investment) are fundamentally looking for the same thing: to invest at an inflection point in the company’s growth that will allow them to have a meaningful part of the next few years’ growth. Investors are investing in the value pool (a real problem that exists) and in you and your team as the best people who can solve it. They’re not investing in your technology or your widget. A lot of young companies become enamored with their approach or their product; smart investors know product ideas will as customers use them.
There is a difference in whether you’re able to get connected to potential investors through a warm connection or if the outreach is cold. Ideally, it’s someone you know. In that case you can aim to have a conversation with them over coffee and share your story. If it’s a cold outreach, the investor may ask to see your pitch document in advance by email and you may have to send out many documents in order to get a few meetings.
If you’re worried about investors seeing your secrets before you even meet with them, do what the HotMail founding team did: send out a pitch that’s a more generalizable instance of your technology than the actual product. If they pass on you (e.g. because they believe your team is too junior), you learned the outcome without risking anything.
Try to meet the potential investor over coffee. Try to tell your story for the first ten minutes before opening the pitch deck. If you can avoid it, don’t send the deck in advance: they may read it and come to certain conclusions and misconceptions about it and you won’t know what those are or how to navigate them. If you can avoid using the document at all during the meeting, even better—you can keep it as a follow up to send by email afterwards. Don’t ask them to sign an NDA; investors see so many pitches they cannot do so.
Keep your document simple. Less graphics. Don’t let presentation and design get in the way of your story and the value pool. Focus on the message.
A rough outline of one effective story (of course your actual story will vary)
“I have been working in this industry for a long time—first as a buyer and a user and, most recently, a vendor. As a vendor, I saw my customers had a problem and we couldn’t solve it. The problem is large—the value pool is large. I realized I had to stop working at the vendor because the problem needed a new solution, one that could only be built from the outside. I thought, in my prior role, that the existing vendors were part of the solution; however, we were getting in the way. Ten years from now, we’ll look back and say, ‘of course that’s how this problem is solved now.’ The transition to this new approach is going to happen whether we are in on it or not. We have a chance to be in early and to shape the direction. Others may attempt this approach too but the opportunity is large enough for there to be multiple winners. This is not a hypothetical idea. It’s been proven. It’s real. We have a proof point that it’s working. What we need to do is scale it. I’ve put together the best possible team to take this on.”
The main aspects of this story, which is one you can tell over coffee, naturally lead you to the key pages in the document outline proposed earlier in this article.
The feedback you’ll get and the reasons they’ll say “no” … and what to do about it
A company I was advising recently was building a learning platform for doctors. Doctors have to take a certain amount of learning every year to remain certified. Their platform was loved by its early users because they found a way to make the learning so fast and easy. The company billed themselves as a better “annual learning” platform for doctors.
The first investor they pitched to said “no … because doctors have many free ways of doing annual learning.” At this point, alarm bells should go off for the strategist. The value pool that this company is playing in is not annual learning, it is saving busy, highly-paid doctors time. Their time is the most valuable thing they have. They either want to be billing $400/hour or to be home with their families. My advice was the company should instead position themselves as a platform for doing that. In that case, the argument that “free learning is a competitor” no longer applies.
The reasons investors will turn you down after hearing your pitch may fit into these categories:
- The value pool is not large enough to grow a business that will be interesting to them. Hopefully this is solved because you completed the “4 Steps to Develop a Strategy”.
- Too many potential competitors. See the anecdote above for one way to avoid this. Make sure you are positioning yourself around the value you create, not the thing you do.
- They don’t invest in x or y types of companies, of which yours fits. For example, some funds only invest in certain industries, that are alums of their college, at a certain valuation level, or that have specific business models (e.g. B2B SaaS). Not much you can do about that objection, although, for the latter case, it’s worth reconsidering if you have chosen the best business model. Very few investors I’ve talked to will fund a B2C technology; most prefer B2B.
- No lasting sources of competitive advantage; too open to copycats. If you’ve got a rock-solid answer to the question, “Why us? Why can’t two kids in a dorm room do this?” (from Step 3 of the 4 Steps), then you just need to make sure that you’re articulating it.
Is there value in your investor pitch deck after you complete the fundraise?
You may never refer to it again. Your strategy should be reviewed and referred to regularly and you may find value in comparing your actual milestones and cash spend to the ones you proposed. But if you are being agile in your product development and using your first few months and years spending time with customers and learning what the actual product should be, then your original plan will be out-of-date as soon as it’s written. Startups fail when they use a fixed plan and then blindly execute on it. Learning is the job of a startup, not adhering to a plan. Boards and investors may need to be educated on this. One litmus test about whether you are on the wrong track is whether, a few weeks into starting your product development, you have a clear idea when your “product” will be completed.