By Katie Bronnenkant
Most entrepreneurs know they should avoid the obvious mistakes when creating their pitch deck: pitch is too long or not clear, it says there are no competitors, etc. But what a lot of first-time entrepreneurs do not know is what venture capitalists are actually looking for.
In a way, VCs are like clients. You’re trying to sell them on your idea and vision for your company in exchange for their investment. That means you need to understand what they are looking for. Your customers will not buy from you if your product does not solve their problems. And if your business does not meet a VC’s minimum criteria, they will not invest in you. It’s just that simple.
In working with early-stage founders over the years, I have seen a few areas where smart entrepreneurs with great ideas consistently make mistakes.
So let’s start from the beginning. What are VCs actually doing?
The ABCs of VCs
Venture capital firms raise funds (money) from banks, corporations, and wealthy individuals to invest in private startup companies. Banks, corporations, and wealthy individuals know there is a higher risk investing their money in unproven startup companies, and because of this increased risk, there is an increased chance for higher returns than with safer investments. Therefore the risk is worth it to them.
So now that we know where VCs are coming from, we can understand their investments must have the potential for higher rewards, and they will only invest in companies that meet that criteria. That means a lot of companies are not suitable for venture capital investments. It’s not because these companies don’t have good ideas or won’t be profitable—it’s just that they don’t fit the profile of a VC-backed company.
So now, what are the biggest mistakes entrepreneurs make when trying to get VC money?
1. A weak go-to market plan
The go-to market plan is how you intend to get customers. I see a lot of entrepreneurs either omit this slide or vaguely describe how they plan to do their marketing and sales.
The go-to market plan, however, is one of the most important areas for a startup. Why? Because if you aren’t focused on getting customers, your company will not make money and it will shut down.
Recently I spoke with an entrepreneur who started a tech-enabled virtual assistant firm. He said he initially thought he could get customers through direct sales, meaning having his sales team find leads and reach out to them directly. This method did not work because his price point was too low. It was too expensive to pay salespeople and too hard to predict which leads would turn into prospects. Instead, this company ended up testing paid search—and it worked; it was the most efficient way to reach and convert new customers.
If your go-to market plan is simply “marketing,” then it is very weak. You need to create a marketing plan that has actual numbers, showing how much money you will spend and how many customers you expect to convert.
Let’s say your go-to market plan is to spend heavily on marketing: $50,000 on paid search, Facebook ads, etc., and you expect to reach 100,000 people and convert 20%. If the price of your product is $5, you would be paying $50,000 to get $100,000 in sales—not a good investment for a $5 product. These are made-up numbers, and you would actually need to include benchmarks, but this gives you an idea of the level of detail that should go into your go-to market plan.
If your product or service has a high ticket price, direct sales will probably work better for you. In this case, your go-to market plan should show how you plan to get leads and the expected conversion rate.
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2. The numbers aren’t good
Let’s tie this back to what venture capitalists are actually doing. VCs are investing in startup companies, which are risky investments because they are not proven, but with the expectation that a startup will provide a much higher return than a safe investment.
This means your projected profit-and-loss statement needs to show really big revenue numbers. If your revenue isn’t expected to grow to tens of millions within five years, and close to $100 million shortly after, your company is probably not a good investment for a VC.
In your early days, don’t focus on profitability. If a pre-revenue startup is reaching profitability in a couple of years with a few million dollars of investment money, this will not provide a good enough return for a VC. Remember the objective of VCs is to maximize returns. If they invest $2 million for 25% and your company sells for $10 million, they are only getting $2.5 million back. VCs are looking for returns of at least 10 times.
What you would do in this case, if you have a huge market, is raise another round to invest in customer acquisition. This would help you to quickly penetrate the market and increase the value of your company significantly.
3. A too-small market
Venture capitalists need to see there’s a huge market for your product or service. This again ties back to how they need to provide higher returns to the investors who have given them money. A huge market shows the potential for your company to grow big.
So, what is a huge market? Hundreds of millions, and even billion-dollar markets, are huge.
Check out the pitch deck LinkedIn founder Reid Hoffman used to pitch LinkedIn to the venture capital firm Greylock Partners in 2004, and scroll down to the slide titled “LinkedIn’s Market Opportunity Is Large” (slide #22). LinkedIn has a multi-billion dollar market. What Hoffman did here was really smart—he compared LinkedIn’s product offerings to other companies in the same markets.
If your market size isn’t big enough, you may want to (a) not seek VC investment dollars; or (b) go back to your product and see if you can develop something that would be appealing to a larger market or add features which will increase your market size.
Remember to keep your pitch deck as succinct as possible; create only one slide for each topic. But if you really feel that you need more than one slide to fully describe a particular topic, create one slide that contains only essential information, and then create one to two additional slides with more details as backup. Later when you are going through your deck, and if it seems like the VCs haven’t understood you or if they have specific questions, you can turn to your backup slides to provide more information.
Good luck fundraising!
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