Venture capitalists get pitched hundreds of times a year. And, even though countless articles have been written on the topic of how to present a startup to professional investors, entrepreneurs consistently fail to address the basic check points needed by the investor to make an investment decision. The following is a first-principles outline on how to approach this process. While many of the points raised apply to every VC pitch, some of the suggestions are specific to technology investors and blockchain VCs in particular.
Know your Investor
Many venture firms will focus on a few - if not one - vertical, and investment stage(s). As such, the first order of business for any entrepreneur approaching a VC, is to take note of these details, which should easily be obtainable by visiting the firm's online presence or the myriad of websites collecting this information.
Keep in mind, that the only resource that is truly limited is your time and attention; you will waste yours, and that of investors if you do not know their criteria.
If a project seems to be within the general area of interest of the investor, but the entrepreneur is unclear about what might pass for more as a seed-stage investment, elicit these requirements from the company via a succinct email.
How Do You Turn a $1 Million investment Into $100 Million?
It might seem like stating the obvious, but nevertheless is seldom enough put into good practice: Venture investors are buying equity in private companies today with the expectation to receive a return on their money at a future date (usually within 5-10 years). Depending on the stage of the investment (Seed, Series A, etc.) and the profile of the venture fund, the multiple expected of said investment might be as high as one hundred or more for a seed round and as low as two to three times for late-stage investment such as a Series D or E in a company slated for an initial public offering in the near future.
Your job as a founder seeking funding from VC is to provide the venture capitalist with believable values for the variables going into his expected return calculation.
Below you will find a list of some of the most common variables, the specific ones are usually derived from the vertical and/or niche the solution is addressing.
Total Addressable Market (TAM)
The starting point for any business plan — regardless of seeking outside investment — should be to define the total addressable market for a given product or service. It is important to be rigorous before arriving at a dollar amount that might sound impressive but does not describe the actual market opportunity for the product.
For example, an entrepreneur might be tempted to list the value of all properties in the United States, when pitching his real estate software. However, the correct value is derived from a multiple of clients the solution might be able to service and the price these clients are willing to pay.
Get as much data as possible to back up your assumptions. And, if your solution is offered cheaper than the competition, use the new lower value to define the total addressable market.
Customer Acquisition Cost (CAC)
As with the previous variable, professional investors will not find generic assumption that state the costs for acquiring a paying customer sufficient. While research into industry-standard metrics is a first step towards finding a realistic value for customer acquisition cost, successful marketing strategies often have to be adjusted for the specifics of the product and fine-tuned for a specific target of clients.
Complex products might require longer sales cycles with additional customer-care and on-boarding requirements. You might even find the need to offer your solution for free or at cost for some time to entice users to switch to your company from a competitor.
Experienced investors will demand that you establish sound CAC values, especially if you are planning on using a portion of the funds you are raising to fund marketing measures.
Life Time Value (LTV)
A logical next step, after establishing customer acquisition cost, is to establish the life-time value of a customer. Consider what it will take to keep a client (paying), and what percentage of customers will cancel (churn). As with CAC, this is an important - if not necessary - data point for investors to come to a decision whether to make an investment or pass on it.
Business Model
Prominent startups have in the past seemingly raised money from investors without a clear path to revenue and profitability. Some of these unicorns (companies with pre-IPO valuation of at least one billion dollars), only offered metrics showing user growth but did not provide investors much guidance on how the company would return the investment. However, unless your project shows exponential user and/or customer adoption that outpaces similar projects by a significant margin, your business model should show regular streams of income that will sustain the company before the funds that are being raised are depleted — ideally with several months to spare.
Exceptions
It can be difficult - and, sometime impossible - to determine the total addressable market and customer acquisition costs for solutions that constitute paradigm shifts and create entirely new markets. This holds especially true for blockchain-based solutions, the advantages of which addressing frictions points - such as middlemen and middle-ware - across many verticals. Nevertheless, the entrepreneur should establish the existing markets, and current pain points which the solutions will impact.
Product Market Fit
Experienced investors, have pointed out that the only thing that matters is getting to product/market fit. The single best data point for a product achieving this status are customers that are paying for the solution.
And, while consumers might be willing to spend money for lifestyle products such as music streaming services and designer sunglasses, the customer acquisition costs for these offers will regularly include significant marketing expenses.
Investors focused on technology companies are more likely to be drawn to solutions that address problems heretofore unsolved or poorly addressed by incumbents. However, entrepreneurs might frequently conflate the former with latter, not realizing that the existing service providers achieved their current position by solving an underlying need for their clients. As a result, the projects might offer a solution that solves a technological challenge while still being inaccessible to most consumers.
A prominent example for this fallacy is the "cryptocurrency" space: to this day many startups expect users to "adopt crypto", neglecting the fact that it is indeed a startup's requirement to adapt the technology to the user.
Focus On Your Customers' Problems
Startups that fail to deliver a completed product frequently move their focus to marketing their solution to an audience that seemingly did not recognize its obvious advantages.
This theme can readily be observed in a myriad of companies in the blockchain space, busy advertising their solutions while proclaiming to investors that adoption of the technology is near. Especially headlines pronouncing “cryptocurrency adoption” leave experienced investors shaking their heads in despair.
Entrepreneurs wanting to avoid this semantic trap, should complete the headline (“Adoption by who?”) and their products before approaching the market or investors.
Breakthrough technologies are adapted by technologists who create products by tailoring it to users and their behavior. After all, consumers did not learn to use voice-over-IP but adopted the use of Skype, WhatsApp and other products that made use of the protocol, providing the same — or better — communication services than legacy phone service mostly without charging a fee.
Fundraising Strategy
More often than not, fundraising is not a one-time endeavor. Most startups will require several rounds of funding, starting with seed rounds to cover developments of minimum viable products to later stage rounds that provide data towards 'proof of concept'.
High valuations in early rounds, can make it difficult or impossible for investors to allocate to later rounds. Therefore, startup founders should have a strategy in place that considers valuations for later rounds.
Corporate Structure
Your corporate structure should be a C-Corp, as investors will - and quite often cannot - invest into "pass-through" structures such as LLCs. US VCs prefer - and often require - that your startup is incorporated in Delaware. The main reason for that is, that the State's law gives preferred stock investors with voting control of a corporation the unilateral power to merge that entity into another, or otherwise have it get acquired, without need for approval of the founders or other early-stage participants who typically own most of the common stock. Also, most corporate lawyers will be familiar and comfortable with the Delaware frameworks.
Demonstrate Flexibility
It is true, that venture funds seek out missionaries over mercenaries, which is to say that a desirable quality in a start-up founder is that of a strong conviction to solve a particular problem. The latter, however, should be combined with a flexible approach to the solution.
Most often, VCs will have seen projects fail to address particular markets in the past. Entrepreneurs are well advised to listen to feedback based on these experiences. It is a 'red flag' for investors if project leaders defend their positions, unless they can provide an equal amount of empirical evidence, as it reflects on the founder's approach and adaptability.
Please don't!
There are many ways for a start-up founder to lose credibility with professional investors, outside of not knowing the above-referenced data points. And there may be no greater giveaway for a VC that he is dealing with a novice, than a request to sign a non-disclosure agreement. VCs see hundreds of pitches and get many more unsolicited emails from founders, it would require full-time personal for these investors to keep track of this information, and potential conflicts. Additionally, it may incur legal fees for the review of these contracts.
Intellectual Property
Intellectual property protection is useful and valuable for inventions where this particular moat is required to keep competition at bay. However, in many situations "a patent might be the best way to avoid consumer adoption" and make a solution unattractive to investors. As a rule of thumb, this holds true for fast-moving software development - i.e. blockchains, and solutions building on open source technologies.
Considerations for "Web 3.0"
Many VCs have adopted popular labels such as 'Web 3.0', 'fintech', 'blockchain', and 'Metaverse' to theme their investment vehicle for marketing their fund to limited partners. However, thesis-driven funds will back up these claims with their own research papers, taxonomy and definitions - and so do you!
Hint: As part of our own thesis to 'Web 3.0' (more here) we generally don't consider solutions that custody user assets or user data as defensible over a longer term investment horizon, due to the inherent friction, and often regulatory exposure associated with having control over assets, including.
Summary & Checklist
When approaching a technology investor, make sure that your startup fits the VC's framework, and that the technology solves a problem that users have and want to pay you for; know how many there are and how much these customers are willing to pay you.
Develop a sound theory of your total addressable market in as much detail as possible, but than condense it to the most important value. The most successful pitches allow venture capitalists to calculate returns without needing a calculator or pen and paper.
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Checklist
1. Explain the one problem that your solution is solving
2. What is the size of the problem (TAM)
3. Who are others trying to solve the problem (competition)
4. How is your solution solving the problem (Show & Tell)
5. What qualifies you / your team to solve this problem
6. Have you tested your thesis (do you have traction)
7. What is your business model, and your KPIs
8. How does that model create 100x ROI in X time
9. The ‘Ask', and the 'Price' (how much are you raising at what cap)
10. How will you use the funds, and what goals will you reach
2. What is the size of the problem (TAM)
3. Who are others trying to solve the problem (competition)
4. How is your solution solving the problem (Show & Tell)
5. What qualifies you / your team to solve this problem
6. Have you tested your thesis (do you have traction)
7. What is your business model, and your KPIs
8. How does that model create 100x ROI in X time
9. The ‘Ask', and the 'Price' (how much are you raising at what cap)
10. How will you use the funds, and what goals will you reach
P.S. We previously published a shorter version of this on Forbes.com as Pitching a Blockchain VC
P.P.S. Interview with the blockchain VC here. - And Hackernoon interview with the author here.