Pitching VCs can be an emotional rollercoaster. As Ecosystem General Manager at RocketSpace in San Francisco and a mentor for Alchemist Accelerator and Founder Institute, I’ve had the privilege of advising and connecting top startups with top VCs. Over the years, the same questions often come up when founders are prepping for pitches.
With the help of some founders of startups at RocketSpace and some of my VC friends, I’ve compiled a list of tips and best practices that hopefully make your fundraising rollercoaster more productive and less daunting.
Ecosystem General Manager
This tip goes hand-in-hand with “Prepare for the Long Haul.” I can’t stress enough how important it is to manage your runway. Your “runway” is the amount of time you have until your startup runs out of cash assuming your income and expenses remain constant. You need to be able to confidently, and credibly, back up your runway explanation, too.
The danger of raising money with too short a runway means founders can get backed into a corner. What happens when it takes nine months instead of six months to raise capital? What happens when the investor realizes you have six weeks runway left and delays to bleed you dry and get a better price? Be sure to explore other funding options, such as debt, grants, and crowdsourcing. Relying solely on investors could put you in a tough spot.
I know it sounds obvious, but you have to practice. Get feedback from as many people as you can and iterate on your deck and your pitch. Ideally, find someone who knows little to nothing about your company or the industry you’re in. Having fresh eyes and ears are invaluable. This will help you look at your idea or problem in a new light and usually can also tell quickly if the storyline of the pitch is not complete since they will not understand your business. Many entrepreneurs dive right into their product or service without outlining the problem they’re solving and “fresh eyes” will notice this very quickly. Recognize common questions and concerns based on the feedback and address them in your deck and how you tackle those questions in your pitch itself.
It’s important to address areas of concern, or perceived weaknesses, in your business model head-on. For example, perhaps estimating pricing is difficult. Investors are smart; they know when founders are avoiding a particular topic. Don’t wait for investors to ask the tough questions. It will inspire confidence if you don’t shy away from tough topics.
Avoid common pitfalls such as, “If we capture just 1 percent of the market we will make 4 trillion dollars.” I find market size metrics useless. They are frequently inaccurate or irrelevant. Most VCs have a clear sense of what markets they think are large. They are typically more interested in the confluence of trends that your company is looking to capitalize on. For example, artificial intelligence continues to grow and represents a large market opportunity and has a variety of applications.
Have your pitch, metrics and answers to some common questions memorized. It’s best to write them down, read and say from memory. It’s also good to practice answering questions with your
Yes, it’s true in the fundraising process too — pictures are worth a 1000 words. If your product is highly technical, include visuals. Visuals are key. Drawing analogies can be helpful too, such as “The Airbnb of ….” If you have a physical product, bring it along if you can, or even a prototype. It’s easier for consumer-facing products that they can touch and feel, or for businesses with comparable companies, i.e., the Airbnb of… This helps to bridge the gap, but in the end, commercially relevant images and metrics are key.
A one-pager is good to have as well, but most investors prefer to see a deck. Make sure your pitch deck looks impressive, as well as your one-pager if you decide to do one. In my experience, it’s worth the money to hire a good designer and/or copywriter. Check out Upwork, Freelancer or Cloudpeeps. There are people out there who specialize in this stuff — helping startups prep their fundraising materials.
In addition to the deck, it’s important to have a suite of due diligence material that is persuasive and presents sharply. As the conversation progresses, it will move from a deck to perhaps a more detailed deck that includes information about how you will use funds, to financial projections and other materials an investor would want to see in a due diligence process.
Have financials ready. You need a spreadsheet with expenses and revenue projected for three years. The first 18 months should be rigorously well thought out projections. The following 19-36 months may be a high-level extrapolation of metrics and future evolutions/expansion of the go-to-market strategy. You need to prove your company can generate high revenues. Show a clear path based on your current revenue and how your marketing and growth strategy will get you to reach significant increases in year two or three.
The standard expected return time on a startup investment is five to 10 years, and that should be an exit or an IPO. In addition to standard income and cash flow, investors want to understand exactly how you plan to use their money and what you will accomplish with this round of funding.
Be prepared for common questions such as: What milestones will you hit? What metrics will you collect? What will you prove? What is the next round for? What will be the milestones for the next round?
Expect to get grilled on your metrics — not just revenue but user acquisition numbers too. For example, if you have a consumer-facing website, most investors will ask detailed questions about your user acquisition strategy. In this case, you would need to be able to show the ratio of your customer acquisition cost (CAC) to
Most VCs are so busy that they’ll push the projections to an associate to analyze the data. But as a founder, you should be able to communicate the key metrics such as lead acquisition, churn rates, and customer lifetime value to the investment partner(s).
Bottom line is the venture capital firm must be certain that you not only fully understand the microeconomics but, more importantly, you have a scalable business model.
It’s important to find appropriate investors for your stage. You want to target an investor that has a lot of experience with early-stage startups so they can help you in this phase of building your company. Take a look at their portfolio companies and make sure they invest in mostly seed or Series A rounds. Industry expertise is also important. Research investors who invest in your space and type of business (B2B or B2C). Find startups most similar to your business model and industry who already had an exit, or moved to their next round, and see who invested in them. Only people who really understand your industry will get your vision — find those people. Some VCs and investors are more likely to invest in your company if your startup could partner with another company in their portfolio (win-win). I cannot overemphasize the value of having investors that understand your industry.
Not only will you gain access to their network, referrals, and talent, perhaps, more importantly, they understand sales cycles, timeframes, competitors and set the right expectations from the beginning. They ask questions about issues that you might not have thought of because they see others struggling with them.
In addition, most founders I speak with suggest saving your ideal or top-tier funds for later meetings. The thought process is that it’s best to test out a few smaller funds, gain learnings from those meetings, and have a stronger chance when meeting with tier one funds. Each funding stage is different, with changing questions and requirements. It’s always a learning experience, and the cap strategy and offer may change. Plus, you’ll start to understand the capital markets better.
Most entrepreneurs love the idea of raising seed funding from a top tier, big name VC. Let’s say you manage to get a seed round from a “big name” firm, but they decide not to go in on your Series A? That’s called a “signaling problem.” That top tier VC has sent a signal to the venture capital community that something may be wrong with your startup since they decided not to double-down on their initial investment. The is a real problem. Some VCs don’t do seed funding because of this exact issue. There isn’t always a problem, but the perception is there that one might be present.
You can avoid “signaling problems” altogether if you go with a firm that only focuses on seed funding, or angel investors, as they typically only participate in seed rounds of funding.
Make no mistake about it: At the early stage of a startup, an investor is investing in you as a founder — and your founding team. Why can you execute on this idea and compete more effectively than others in the space? The
First-time founders scare off a lot of investors. You need a credible story about