How to Pitch Your Startup to a VC
Do you want to pitch your startup to a VC? In order to achieve the optimal result, you have to understand the audience – the potential investors. Only 1 out of 10 startups achieve success measured by an ROI of 10x. This is an extremely tricky game, so every decision is supported by an analysis of the risks, which in some ways relate to all projects. It is therefore crucial to prepare accordingly before presenting your idea or startup to an investor. Below we present the 10 most frequently identified risks to which a VC investor seeks answers. Preparing clear and precise answers to the following issues will definitely make it easier for you to successfully pass through the investment process.
1. Now is the right time to start your business
Market, technological and social changes make certain business ideas, sectors and new technologies suddenly more likely to succeed or vice versa. Structural vs. Cyclical impact: mental framework, developed by Dealroom which shows the direct impact of the coronavirus situation, combined with social structural changes, on individual segments of the economy. Entrepreneurs presenting their project should show that they have noticed a new opportunity – to show its relevance in relation to the current situation.
2. Do you have a clear business model?
When you show that you have a good sense of timing in relation to your product range, the question arises about your business model. You need to prove that you have a clear business model and know how to monetize your startup: What are the channels of customer acquisition? What is the CAC? What is the average basket size and LTV? Is the sales model based on one-time payments or subscriptions? Are you b2b or b2c driven? When does the startup intend to break even? What is the scaling strategy? Answers to these questions are the key to the investor’s risk assessment of the project.
3. If the solution is offered in a form of a pain-killer, customers will not be able to resist paying for it.
Do you already have your first customers? How committed are they? Why do they specifically use your product – is it because of its functionality or price? Is the market saturated with competition, is there a clear leader, or are addressing a whole new niche?
The first thing one must understand is that the product or service has to be a solution to the real problem of real customers. If the solution is offered in the form of a painkiller, customers will not be able to resist paying for it. You need to know how to position yourself in your market in relation to existing players. How will your new competitors react, will you be forced to change your model? Not everything has to be in bright colors, but the investor should see that you are ready for every possible scenario.
4. Is the target market big enough for a high growth startup to flourish?
Is the target market big enough for a high growth startup to flourish? How competitive is it? Since a great percentage of startups go bust, those that do not essentially have to cover losses incurred in other projects. Limited Partners can easily allocate their funds in a safer investment vehicle, therefore the risk on your startup must be compensated by an appropriate potential capital increase. One accurate investment can completely cover losses from failed projects and it is far easier to bet on the project that, if successful, can grow tremendously, than on one that has a limited potential from the very beginning.
5. Human capital is invaluable
Does the current team have the knowledge and experience to effectively implement new solutions and achieve the objectives? If not, does it have the perspective to bring on board the missing talent? What are the founders’ backgrounds? It takes great people to build great businesses, and particularly in the case of very young companies in the seed stage, human capital is invaluable.
Is there already a technology that solves the problem you have identified? If more technological development is planned, will the work be completed within schedule? It’s important to consider how likely system failures occur and what impact they can have on the business.
7. Quality of partners and cap table
A talented and experienced partner is a great asset for a startup, but if there are too many of them, it works against the company. The investor looks at the quality and commitment of each founder and whether there is enough of a balanced skillset. Another important question is whether the founders have a sufficient amount of equity at a given financing stage. Excessively diluted shares often contribute to fundraising problems. Read more in our article – Univestable Startup.
8. Platforms and dependencies
Is your company heavily dependent on any other entity? Do you develop your product based on YouTube, Facebook, Twitter, Shopify, Slack or other platforms? How strong is this relationship and does it allow for independent actions? It is important to understand exactly how close business ties with some of your partners are and whether they can eventually become your competitors. Consider the probability of different scenarios. History is filled with cases such as Meerkat – a live streaming application connected with Twitter. Overnight Meerkat lost access to the partner’s platform which resulted in a drastic user churn.
9. The coachability factor
Founders are often experts in their fields. However, there are areas where the support of an experienced advisor can be useful. Particularly active investors offering smart money (such as bValue) support their portfolio companies in the fields of optimization of the business model, marketing or even obtaining sales leads, just to name a few. It is worth discussing key business decisions, such as launching a new eCommerce sales channel with someone outside the organization. Perhaps a fresh look will shed a whole new light on the matter. If entrepreneurs do not give others a voice, it may result in a difficult cooperation between the startup and the fund.
10. Get in the head of the investor
Most emerging startups spend more than they earn and therefore need to look for external financing. It is crucial for investors to know for how many months of operations the new funds will suffice and what realistic milestones can be achieved in that time. Industry specifics are of great importance in understanding the situation accurately.
As can be seen, the risk aspects analyzed by investors are quite broad. Once you understand what risks are being analyzed by the investor, you can start preparing your pitch deck. Broad and insightful information on how to go about building your deck can be found on our blog.
Co-founder & Managing Partner at bValue VC
If you are looking for VC funding, visit our website bvalue.vc and write to me directly at email@example.com We invest from EUR 250K to EUR 1M, mainly in SaaS and marketplace with global potential.