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Part II. Investors, the Pitch, and the Deal

Fundraising is a skill that can be learned and mastered. As a founder or CEO, job #1 is making sure the company has the funding in place to accomplish its goals. In this section of the guide, we break down the fundraising process into its subcomponents, highlight thoughts for consideration, and provide pro-tips on how to tackle each one. 

Which Investors Should I Talk To?

Let’s start with knowing which investors to talk to at each stage. While the milestones for raising Seed and Series A funding are clear in 2020, unfortunately, knowing which investors to talk to and how to label your financing round can be confusing. Don’t let the murkiness slow you down! Dive into Crunchbase and/or Pitchbook and start doing your research. We recommend taking the following steps: 

First, make a list of the firms and partners at those firms who have been the most active investing in startups in the same general category, and make special note of those who have had successful outcomes with businesses similar to your own. For simplicity, the broad categories are:

  1. Enterprise 
  2. Consumer 
  3. Healthcare

Next, from the list of firms that emerge that have the most relevant domain experience, make note of what stage (or stages) they focus on. If the financing round labels are confusing, consider three basic stages of maturity to simplify things:

  1. Pre-Product Market Fit (aka Pre-seed, Seed)
  2. Post-Product Market Fit (Series A, Series B)
  3. Growth and Pre-IPO (Series C, D, E, and F)

Make note of the firm’s typical investment size and compare that to what you believe your company needs at this stage to achieve the key goals. Typically, we recommend an investment amount that enables the company to execute for 18-24 months before needing additional capital. Raising too much capital translates to unnecessary dilution and too frequently, sloppy execution. (We believe optimal innovation comes from constraints.) At the same time, raising too little capital puts you at risk of falling short of the threshold goals and valuation inflection, and that’s the worst possible outcome. (Remember no partial credit in this exercise). If you find yourself with a set of goals that will take longer than 24 months to achieve, try breaking them down into more manageable increments. 

Third, make note of any companies you consider competitive and take note of which firms are investors. While many investors will invest in competitive companies, as a founder, it is something you want to avoid if possible to make sure there are no conflicts of interest. Lastly, identify which firms you believe will help you most with attaining the goals described above for the specific phase you are in. 

You now have your “big list,” so the next thing to do is break the list down into three tiers: Tier 1, Tier 2, and Tier 3. Tier 1 consists of the top 5-10 firms and partners you’d ideally work with. Tier 2 is that second, slightly less ideal list of 10, and Tier 3 are those firms you and your co-founders would consider, but not optimize for. If you have questions about which firms and partners belong where, find trusted, experienced people to ask! Do your homework and spend the cycles to educate yourself—you owe it to yourself and your team to be informed. At the same time, recognize that this is not meant to be a precise exercise, there is no 100% accurate way of doing this, so don’t stress. You now have your segmented list so it is on to the next step.

Managing the Process with Investors

Before diving into what will inevitably be a few weeks of mania, it is important to understand three essential facts about the pitch process itself:

  1. Practice makes perfect. You will get better with each investor pitch. Therefore, make sure you warm up with 2-3 meetings with investors from your “Tier 2” list. Think of this as testing your pitch “Off Broadway.” Then, schedule 4-5 “Tier 1 List” meetings within a timeboxed two-week timeframe.
  2. Limit the number of firms you engage with to approximately five at any time, only adding in new firms if existing ones don’t engage or drop out. We recommend you only speak initially to investors who are capable of leading the investment, as they will work with you to set the critical terms. While other investors may be interested in participating, finding the lead investor comes first and therefore deserves 100% of your initial focus. 
  3. Once you have identified the Partners at the Tier 1 and Tier 2 firms you want to engage with, find a way to receive warm introductions. We appreciate the debates around this idea. Being pragmatic, good investors receive a ton of inbound and yet, can only invest in a small fraction of the opportunities they receive. A warm introduction from a strong connection will help grab their attention. It also offers you the added benefit of a feedback channel after the meeting.

Once you’ve secured warm introductions to the investors on your list, the next step is putting together a top-notch pitch deck and telling your story in a way that highlights what the best investors are looking for. 

What Goes Into a Great Pitch?

In Unusual Academy, we provide every founder a copy of Jerry Wiseman’s book Presenting to Win because it’s the best, most succinct content we’ve found for guiding fundraising founders. The key takeaway is that nothing matters as much as your story, and there’s a formula you can follow to guarantee you put your best foot forward. As a fundraising founder, you need to appreciate your audience—the investor—and understand what they will focus on in regards to making their decision. 

 

Note: Your investor presentation is not the same as your customer presentation. They have two very different objectives. While both are intended to sell, the investor presentation must include a compelling narrative on the team, the big opportunity for the company, the economics of the business, and the milestones that will be achieved on this specific financing. For more on how to put together customer presentations as a Seed stage company, see our Guide for Building Your First Customer Presentation.

 

Before diving into the slide-by-slide outline, please note: the investor presentation itself should be practically useless without the voice over. Investors want to work with a founder who has clear command of the business and strategy. The slides are your props, but the main attraction must always be you! A good investor knows that a successful entrepreneur must compel investors, customers, and future employees—part of the evaluation is showing how well you do it! 

In terms of the structure of the pitch itself, here’s what we recommend:

1. Opening Gambit - Start with a human story about the problem and benefit your startup provides when implemented. It shows the listener whether you are an authentic entrepreneur who found the problem and insight honestly. Investors will be assessing your true passion and reasons for starting the company.

Objective: Hook the listener. You’ve got <5 minutes to grab the investor’s attention. 

 

2. Team - Who is on the team today and what are your backgrounds? Investors will be assessing 1) if this group is uniquely qualified to best solve this problem, and 2) if they have what it takes to recruit the world-class team necessary to build any enduring company. The order of the team slide is a personal preference. Some people prefer to save this to the end. We believe it should be at the beginning of the presentation because it informs the audience of who is pitching and it is typically one of the stronger aspects of any pitch.

Objective: Introduce yourself and your current team in a way that helps the investor understand why this group is uniquely qualified to best solve this particular problem. 

 

3. Problem Statement - Zoom out and talk about the greater trend that’s happening in the world and zoom in on the opportunity (pain) you are tackling. 

Objective: Establish common ground that there is a clear market opportunity happening in the world today (or what we call a “disruption in the force” at Unusual). You are looking for nodding heads and agreement that now is the time to solve it.  


4. Market - Classic total addressable market (TAM) slide. For a venture investor, the market needs to be big enough that they don’t need to do the math. Revenue potential is in the billions of dollars (not necessarily today, but in a timeframe that is relevant for this company). That said, we highly recommend a bottoms-up analysis to prove the point. Example: 50,000 companies buy DevOps tools today. If 2% of the market purchases $100k worth of subscription software from us, we will be a $100M ARR business in seven years.

Objective: Investor feels “greed” for the opportunity and isn’t questioning market size after this slide. Leave no doubt that the prize is worth the fight. 


5. Solution - Explain what you do in 1-2 slides. First, explain it in 25 words or less. Second, highlight the aspects of your solution that are particularly important to a customer and difficult to build. Note: don’t go into every technical detail. If the investor wants to dive deeper on the technology, she will in a separate session. At this point, the investor is going to give you the benefit of the doubt that you can do what you say you can do. She is mostly deciding if the solution in theory is compelling.

Objective: Two objectives for this section. First, explain in plain English the big idea for the company. At Unusual, we refer to this as the “Vision” visual as it is the big picture for what the company will eventually do. Venture investors want to see that founders are thinking big and have an idea for the chapter book that will ultimately be written. Second, dive into the heart of what is unique about your solution that will enable you to win and is difficult for competitors to replicate. 

 

6. Competition - This should consist of a visual comparing your solution with alternatives. The comparison criteria should be those that a customer would use to evaluate in a buying decision, and should highlight where you are differentiated. This is often a 2x2 or a Harvey ball chart. We suggest you use one of the two. 

Objective: Enable the investor to easily see that your product is superior on the dimensions that matter most to the buyer/user.


7. Go To Market - Most importantly, highlight what you believe is your beachhead use case. Emphasize who you will sell to in this phase to achieve the current Traction goals. This is NOT the time to focus on the big vision idea. In fact, it is the opposite. In Solution (#5 above), you told them you are going to take Paris, now tell them where your Normandy is. 

 

Objective: Investor clearly understands who the target user/buyer is for this product in the next phase. Worth commenting on the organizational design and product strategy aspects that facilitate the intended go-to-market (direct sales, inside sales, free trial, open source). The investor wants to get a sense of the associated costs (and capital) required to execute. 


8. Traction - This differs depending on if you are raising a Seed or Series A. 

Seed - Highlight customer conversations you’ve had and any possible early adopters or design partners you are engaged with.

Objective: Demonstrate you have a strong thesis about your initial use case and articulate why customers would opt to go with your solution 

Series A - Show logos and state of engagement with customers (Early discussion, POC, or current customer). Ideally have two case studies to describe problem and solution and an ROI to the extent possible. 

Objective: Communicate that your company has achieved Product Market Fit as evidenced by 8-10 customers and a robust pipeline of prospects who are similar in their use case, and are willing references. The investor is convinced you’ve found a repeatable sales motion and have clarity on your ICP (ideal customer profile). 

9. Operating Plan & Financials - In one slide, create a visual representation of the execution goals for the company for the next 24 months in terms of headcount, product releases, customer activity, and cumulative cash burn.

Objective: Summarize what the company’s key goals are for this period and the capital required to achieve them. Remember, on one level, this is ultimately a financial decision they are making so assist the investor in answering the question: “What will the company look like when it needs to raise money again?” They will use this information to decide if this financing is setting up the business for a future successful fundraise (a significantly higher valuation at the next “step” in the journey). 

We are not suggesting this is the only way to structure a good investor pitch! Based on our experience, these are the key aspects that founders need to focus on and this is a structure we’ve seen work very well thousands of times. 

Regardless of how you structure your presentation, as a founder it is important to realize that the venture capital profession has a distribution curve just like any other. There are average venture capitalists, below average venture capitalists, and premiere venture capitalists. You don’t want an average venture capitalist the same way you wouldn’t want an average heart surgeon. As a founder, you want and deserve the best. Studying the track records of the premier venture capitalists, history reveals that the very best investors consistently look for four things: 


Keep those four key things in mind as you put together your pitch. Here are a few additional tips to consider when preparing for your pitch:

Meeting and Process Tips

  • If the pitch is in person, arrive 10 mins early. Make sure you have the IT setup figured out so you don’t waste time fumbling around when the meeting starts.

 

  • We recommend no more than 15 slides and the ability to cover the entire presentation in 25 minutes or less, if necessary.


  • Assume you will get interrupted. But remember that it is your story to tell. It’s OK to confidently respond with, “Great question, I’ll get to that shortly in an upcoming slide. If you don’t mind, hold that thought and remind me if I don’t answer your question.”


  • Do not send detailed slides in advance of the meeting. That allows investors to turn you down before ever meeting you. (Remember: the investor presentation itself should be practically useless without the voice over.)


  • Throughout the process, you want to create the fear of missing out (FOMO). Psychologically, humans are motivated more by fear of loss, rather than joy of gain. (See: Kahneman & Tversky, 1979)


  • Never share specifics of who you are talking to in regard to other investors. Investors will assume you are engaged with others in parallel. Be clear about the timeline of your process. 

 

  • Never propose a price. You only receive an attractive price if you have alternatives (negotiating has little to do with it).


  • Founders often ask, “How will I know if an investor is interested?” The short answer is—You’ll know. Venture investors turn on the charm when they sense an attractive opportunity. They ultimately sell money and their assistance for a living—to survive, they have to be very good at pursuing deals.


  • Another common question from founders, “How should I handle an inbound request from an investor when I’m not currently fundraising?” Founders need to understand that investors would prefer to have an early look at an investment opportunity because they are better off if there are no competitors. Talking to investors when you are ready is the best rule of thumb. Just remember that every meeting, whether you like it or not, is an evaluation of some kind.


  • Investment decisions ultimately come down to greed vs. fear. Startups are, by definition, resource-constrained organizations that will inevitably make all kinds of mistakes. Venture investors want to bet on visionaries taking on large markets because they know most of their investments won’t work out. Venture capital is a game of hitting few, but massive home runs. 


Need help putting your pitch together? In the Unusual Field Guide, we prepared actual examples and tools for founders to learn from. One of our portfolio companies Vivun, graciously offered to work with us on a case study documenting their fundraising process and experience for their Seed round. You can find their case study here.

If you want to see an outline of a fundraising deck, download our Seed outline deck here and our Series A outline deck here.

The Term Sheet

Congratulations, you are now at a point in the process when investors will be making formal offers to invest in your company. Commonly referred to as a term sheet, the investment proposal details will be provided in a document that unfortunately isn’t exactly intuitive. Term sheets are legal documents that deserve serious attention. As is the case with most legal documents, the term sheet will have some language that you are unfamiliar with. If you want to dive in and learn about any of the specifics, there are many books on the topic. We recommend picking up a copy of Venture Deals by Brad Feld.


The best advice we can give you as a founder when it comes to evaluating term sheets is to make sure you have a top notch attorney working for you who is deeply familiar with the current market dynamics. Ideally, this is the same attorney who helped you incorporate your company and has agreed to defer all payment until after you’ve closed your funding round. If you need a recommendation we suggest:

 

 

As a founder, pay special attention to these Key Terms: 

 

  • Valuation (Pre and Post Money)
  • Total Investment Amount 
  • Available Option Pool
  • Founder Vesting 
  • Board Construction
  • Voting Rights

 

If you are looking for a quick explanation on the key terms or mechanics of cap tables, you can reference Goodwin Procter’s Deal Dictionary

The Decision

If you are fortunate enough to have more than one quality option, congratulations and be grateful for your “champagne problems.” Clearly you did a great job telling a compelling story and investors appreciate your insight and skillset. Nearly 100% of term sheets are negotiated, so expect to have at least a few discussions with your potential investors regarding the key terms. Use your attorney to manage the back and forth on the minutiae as they can do so with more objectivity and less emotion. Be wary of exploding offers (expiring term sheets). Allowing an investor to invest in your company is a big decision, and once the decision is done, it is nearly impossible to unwind. Having to make a decision with a gun to your head is the wrong way to start off such an important relationship. 

Founders frequently ask, “How much time do I have to respond?” The truth is there is no hard and fast rule. Most term sheet negotiations work themselves out in 2-4 days. When in doubt, follow the Golden Rule. Ask yourself how you would want to be treated if the situation were reversed? This is a relationship that is going to be core to you and your company going forward so manage it appropriately. It is absolutely acceptable (and expected) that you will take a few days to complete your process with other investors and any unfinished references. It is OK to tell investors you have other term sheets, but do not disclose any of the terms. Be direct about when and how you will make your decision. 

We highly recommend that you invest the time and energy to check references with founders who have worked with the firm and the Partner you would be working with most frequently. Investors will often provide founder references. Take the opportunity to speak with these founders, but also reach out to others directly. There is simply no excuse in the world of LinkedIn connectivity not to do some additional reference checking. 

Ask founders for specific examples of how the Partner and firm were helpful with building the company and assess the relevance for your company. Double click on who it was specifically who did the work. Unfortunately, many VCs take credit for successes they had little to do with. Be sure to find references where the outcome wasn’t a great success. Don’t be timid about finding out how the investor helped out during the tough times because it’s easy to be a good partner when everything is rosy.

Finally, it might be tempting, but don’t just fall in love with the firm brand. You are going to end up primarily interacting with one or two people from that firm. Ask yourself if they have the energy and capacity to be committed to your success. How much will it matter to them if your company succeeds or not? Do they have competitive investments? How many boards are they on? Make sure they will be a complementary addition to your existing board if you have one. 

Bottom line: optimize for the Partner you believe you will work best with for the long haul. 

Summary

Fundraising can be a wild, but rewarding process. Embrace it as an opportunity to learn and improve. Recognize that to build your dream business, you are going to need to execute the process successfully multiple times. Start by setting clear goals for your company at every stage, knowing what investors are focused on, and being deliberate about the investors you engage with. Practice your pitch and make sure it is an authentic story. As a founder or CEO, recognize your #1 job is to compel investors to choose your company as one of the few they will invest in this year. Ultimately, when it comes time to make your decision, take the time to do references and pick someone who will not only be the best partner for the stage you are at, but for the journey ahead. Have confidence and remember to enjoy the ride!


We sincerely hope you found this fundraising module valuable. Please submit any and all feedback to rae@unusual.vc and follow us @Unusual_VC.

You can also download the PDF version of this guide here.

Outline investor deck for a Seed Round

Outline investor deck for a Series A Round

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