Pitching to investors

Apart from having a good business plan, which is of course the most critical thing, HOW you present your case to investors will determine whether you will get their attention and interest or not.

Because investors often listen to very bad presentations, good quality presentation itself offers a substantial edge while presenting to investors.

The most important thing to remember is that YOUR FIRST PRESENTATION IS AN ELEVATOR PITCH… NOT A FULL SCALE BUSINESS PLAN PRESENTATION WITH EXCEL SHEETS, TECHNICAL SPECIFICATIONS AND OPERATING DETAILS. In the first meeting, investors want to quickly judge whether they are interested in investing in the company.  Hence, the focus should be on communicating the concept and the potential and not the finer details.

Here are a few quick things to keep in mind

Start by introducing what you do and for whom… without any preamble

Investors will be interested in the details AFTER they have got excited about the concept, the scale and the team.

Hence, while presenting, ensure that your pitch focuses on what you intend to do, how you plan to implement it, how you will make money from it, what your scale of aspiration is and why you and your team is the one they should bet on. In fact, your opening statement should clearly state what you do and for whom. I.e. “we are an online music discovery platform where independent artistes upload their music and consumers buy or listen” or “we help small companies manage their sales processes”.

Most entrepreneurs make the mistake of diluting the pitch with a lot of detail of the operations, which of course will be of interest to investors… but only after and only if they have an interest in participating in your journey.

The initial pitch presentation should not be more than 8 – 10 slides. Click here to see template of the investor pitch presentation.

Investors are interested in the business case… not just details of the concept or the product

A concept and product is different than the business case for the same. Most first-time entrepreneurs make the mistake of thinking of the concept as the business. E.g. for someone presenting for a e-tailing venture, the investor would be interested in knowing your competencies or plans on supply chain, warehousing, procurement, customer acquisition, etc. Not just about how cool your web platform is.

One common mistake made by many first-time entrepreneurs is to elaborate on technical details. Technical details of your product/concept, and operating details will be relevant in the subsequent presentation… which will come about only if the investors get excited about the opportunity and you as a team.

Focus on key aspects rather than fluff around your business case

In most cases you will get a 20-30 minute window to present. You will have 10 – 15 minutes to make your case with 10 – 15 minutes for Q&A. In fact, in most cases, you would have either got their attention or lost them in the first few sentences. Rehearse your opening lines… once you get through this, the rest is the easier part. If you don’t get their attention and interest in the first few sentences, the rest really won’t matter that much.

“According to Gartner the market is 8 bn USD globally” has no meaning

At startup stage, investors are interested in knowing what you are going to do in the next few quarters. Of course, they would be keen to know whether the market is large and how large. But in most cases, industry reports on the size of the industry is no indicator of the size of the opportunity you are addressing.

You should focus on your plans and what you intend to get to in the next few years.

Be prepared with answers to questions

It is critical for entrepreneurs to know your business better than anyone else in the room. Be prepared with answers to questions, especially around assumptions about your business.

Know your business inside out. Know who the competitors are, know their business models, know the size of markets, know why consumers buy, know what the problems are with what your consumers are solving their problems currently with.

Explain why you are qualified to do this business

Investors are keen to know what you and the founding team brings to the table. So, a listing of your resume and career graph is not relevant. What is relevant within that is what you have done to make you a good candidate to pursue this venture. E.g. for an online retailing company, that “you have 11 years of professional experience in blue chip companies” is not as relevant as “I have handled supply chain and established relationships with vendors across the country” is important for investors to hear.

Be passionate. Early-stage investors, angels as well as VCs, invest in people

At the startup phase, investors are largely taking a bet on YOU and your team. They are betting on your ability to create a large company around the concept you are presenting. Hence, it is critical for them to see your deep commitment to the domain and your passion for the space.

Be clear about what you expect

Tell the investors clearly about how much money you need and what you intend doing with the money and what milestones you will achieve with the money that you are asking for.

End with a recap – end strong

Don’t end the presentation with slides of excel sheet numbers. End with a strong recap of what you have told them. Summarize what your concept is and say why this is a good business case.

Remember all the basics of good presentation skills

  • Few words per slide
  • Good looking slides attract attention – put some effort in designing the presentation well… at least it has to be clean and well-structured
  • Speak clearly and speak slowly
  • Be confident and passionate
  • Let one person present while the other handles the computers – don’t try to do all things together
  • Decide who will answer what questions
  • One person should present – don’t try to distribute the presentation among 2-3 co-founders – remember, the first meeting will be only 20 minutes or so. Others should participate in the post-presentation discussion.
  • Don’t go with an army of people if the others are not going to participate in the discussions – but ideally all co-founders should be present
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Understanding term sheets

A Term Sheet is a document that defines the terms of the transaction between the investor and the company. It outlines terms for the following broad categories:
  • Valuations
  • Control
  • Exit options
  • Downside protection

 

While most first-time entrepreneurs are more focused on the valuations, the terms and conditions that cover the valuations are as critical. E.g. a company raising USD 100,000 at a pre-money valuation of USD 400,000 may not necessarily have a better deal than a company raising USD 100,000 at a pre-money valuation of USD 300,000 if the terms of the second company are more favorable than the first.

 

While there are several terms that will require understanding, here we have outlined a few that are of importance to entrepreneurs. Disclaimer: Please consult your lawyer when dealing with a term sheet. If you need any information, write to us at startup@applyifi.com and we will try to provide you answers.

 

 

 

Term Meaning
Liquidation preference Liquidation preference defines how monies received on liquidation are going to be split between different classes of shares. [Just like different categories of creditors will have different rights in terms of liquidation.]

The term sheet will specify what ‘preference’ the investor will get over ‘common stock’ owned by the entrepreneur/founders/existing share holders. E.g. the term sheet may suggest that, in the case of a liquidation, the investor will get 2x their investment before the balance, if any, is split between common share holders.

A liquidation preference may also allow the investor to instead convert their holding into the proportionate % of common shares and sell, if it is higher than the money they would get on selling at the price they would get if sold at the preference value.

In some cases, if the term clarifies, the existing investor may be allowed to convert to common stock and hold their holding. They would do this if they believe that the new buyers of the company will increase the value of their holdings.

 

Liquidation is not necessarily only if the company fails. It could be merger or a strategic sale or whatever. In these situation, what level of preference multiple is offered will decide what is left for the entrepreneur [and other common share holders] in case of liquidation.

In case where the investor is allowed the option of converting to common shares AND holding on to their shares, it may cause issues with the acquirer if they do not see value in the investor holding on or if there is a strategic interest clash.

As with every other term, the negotiating power of an entrepreneur with a proven track record [professional career record or previous successful entrepreneurship experiences] wil be higher than the negotiating power of a relatively newer entrepreneur. In bad times, the preference multiples asked could be ridiculous.

 
Drag Along This term requires the minority share holders to sell their equity to an acquirer if a majority of the shareholders agree to a sale.

To illustrate with an example, if an entrepreneur owns 40% of the company with 2 VC firms holding the balance 60%, if they decide to sell their stake, this clause will force the entrepreneur to also offload his/her shares, even if he/she did not want to exit.

 

Implications are obvious. If the company does not do well and if the investors decide to bail out with whatever value they can realize, the entrepreneur would be forced to sell his/her stake even if they believe that there is merit in continuing with the venture.

Sometimes an investor may want to exit because the venture [or the domain] does not fit into their strategic thinking any more. In this case, if the investor wants to exit, even if the going is good, the entrepreneur may have to sell his/her stake.

 
Preference shares Preference shares are shares that enjoy more privileges than common shares. These could be in availing dividends before common share  or preference share holders may also have greater rights to the company’s assets and proceeds in the event of liquidation.

 

Here too, the implications on the entrepreneur are based on multiple factors including the multiple of liquidation preference, if it is included, etc.

In most cases, simple preference shares which give an investor rights over assets in case of liquidation and dividends before common share holders are not considered unfair by entrepreneurs as it represents only a fair demand that the investor is seeking to protect his/her capital and the entrepreneurs acceptance indicates a high level of confidence in the venture to allow an investor to protect his/her capital.

 
Indemnity Well, this is a pretty straight forward one in which the investor who sits on your board seeks an insurance cover to as an indemnity cover should there be a legal case and the investor needs to protect himself/herself.

 

Depends on how much protection is sought and how much the insurance premium is, and how that amount is in relation to the amount that is raised.

I.e. the investor and entrepreneur need to evaluate if and if yes, how much, indemnity insurance makes sense. Especially if it is going to cost a lot and if the amount of capital raised is little.

Also, if the capital is raised for, say, concept testing where the exposure to liability is nil or limited, then it may not make sense to invest in insurance premium [again, if the capital raised is limited]

 
Anti- Dilution Protection Anti dilution protects the investor’s capital in case the entrepreneur decides to, for reasons of market conditions or strategic relevance or whatever, to accept capital from a new investor at a valuation that is lower than that at which the investor had invested.

In a situation where a subsequent round is raised at a lower valuation, anti dilution right allows the company to revalue the original valuation and thus issue additional shares to the investor.

 

This, in my view, is a fair clause and entrepreneurs should be confident enough and accept it. Fighting this clause would necessarily mean lack of confidence in estimating a higher value for the equity in subsequent rounds.

 
Right of First Refusal

Or ROFR

ROFR allows investors the right but not the obligation to invest in the subsequent round of fund raising. With this clause, in the next round(s) of funding all things being the same i.e. as long as the existing investor too is offering the same value, the company will have to accept investment from the existing investor.
 
Vesting Vesting means that the stock will be available to the person after a pre-determined time or on reaching a pre-determined milestones.

 

Often used for stocks offered to employees e.g. ‘xx’ number of shares will vest on completing 24 months of employment.

 

Vesting is also common in the case of early-stage companies to protect the investors from one or all founders quitting the company after the funding. In the case of vesting for employees, the term sheet may specify a ‘cliff of a year’ followed by monthly vesting thereafter. This means that if the entrepreneur leaves within the first 12 months, he/she would get no equity. However, on completing 12 months, the entrepreneur would get a significant portion of his/her equity and the balance will vest monthly over a period of the next 2-3 years.

 

In the case of vesting though, there will be clauses which protect the entrepreneur in case of events like next round of funding, acquisition or even firing by the board.

 

While it seems unfair, it also provides protection to the entrepreneurs. For example, if one of the founders leaves or does not perform as expected and is asked to leave, then vesting ensures that he/she does not get the full benefit of the equity due and gets only as much is vested till leaving or being asked to leave.

 

Webinar by The Hatch Institute on MVP – Manish Singhal

According to Start up Genome report‚ almost half the start–ups do not celebrate their first birthdays. Once they are past that hurdle‚ almost 90% of the ventures fail while scaling up!

As an entrepreneur, with limited time & resources at your hand‚ you feel like a pilot trying to take off before you outrun the runway! You have to find who you are as a business & who your customer is quickly and with minimal investments. That is what will give you a significant advantage in the marketplace.

This webinar explores how to use MVP (Minimum Viable Products) as a strategy to ensure your venture’s smooth and safe take–off!

Take aways from the workshop :
1. Concept of MVPs
2. How to apply MVP strategy on your business
3. Fine Tune your MVPs

 

 

Market sizing and estimating revenue and growth

Estimating the size of the market, and then predicting how much revenue the startup can achieve and at what growth rate is indeed a tricky exercise. But going wrong on this could either kill your company, or if in a rare case you have underestimated your revenues, you may end up diluting more equity at a funding round than would have been necessary.

Market_share_of_mobile_os_s_2008

It is therefore very, very critical that entrepreneurs focus on working and reworking on the market size and revenue potential based on sound assumptions and with minute detailing.

Many startups make the mistake of taking broad brush reports from large consulting or research firms, and estimate the size of their market on the basis of those reports. Often we hear entrepreneurs mention “According to Gartner, healthcare is a 80 bn USD industry with a 23% growth rate”. Now, while this could be broadly true, for an investor, and even for the startups, these figures have little relevance. Here’s why…

In most market segments, the investors would be broadly aware of the scale potential. At a startup stage, investors will most likely invite a startup for a meeting only AFTER they have assessed that the concept does have a potential to address a large market. Hence, stating the obvious, especially in segments that are very obviously large does not add any value. E.g. For a education domain startup, highlighting in minute details the number of number of schools, number of students and growth rate in India is wasting precious time in the first meeting with investors. Assume that investors who are meeting a startup in the education space know the potential of the opportunities in the domain.

How then do you estimate the market potential? Simply, by being specific about your segment and making some assumptions on the specific segments and the revenues per customer/consumer. E.g. Instead of saying education in India is a USD 18 billion market, for a premium ‘home tuitions startups’ it will be prudent to state “With over 250,000 students in the top 10 cities in schools with fees above Rs.10,000 a month, at Rs.2500 per student, the market potential is roughly over Rs.500 – Rs.600 cr. P.a. At an all India level, the same translates to a market potential of well over Rs.1000 cr.

 

Some points to consider when estimating market potential

  • Clearly define what problem you are solving… and for whom – this will give you a good idea of the number of customers with that problem in the geographies that you plan to be available in.
  • Estimate the practical reach e.g. while there may be a 100,000 people in your target audience spread across 50 cities, you may want to take the top 5 or top 10 cities and see how many people you have within your target audience. This of course gives you the total market potential IF 100% of potential customers were to buy.
  • Now, apply some filters i.e. ability to pay, ability to reach via media, etc. E.g. while there may be 60,000 potential customers in the top 10 cities you identified, and you may be panning to use a combination of media, if the total reach of these media vehicles is 50%, the total potential of the market is really 30,000 customers.

You could also apply some price filters to test the elasticity of the demand in comparison to price. I.e. work up alternate scenarios to reflect the increase / decrease in demand in case the price were to be moved up or down… and then evaluate which scenario makes a better business case. [Note: For different situations you may have very different parameters for a good business case. In some cases, rapidly acquiring customers, even if margins are lower, would be a key criteria… often relevant in new concept that make sense for the first mover to ‘land grab’ and lock in potential customers on whom profitability can be increased later.

  • Now, if the product is of a repeat purchase nature, you would need to make some assumptions on the number of times the customers would buy the product / service in a year. In doing this, it is critical to map the reality or in case of new product categories, to do some qualitative and/or qualitative research to validate your assumptions on the number of repeat purchases within a year.
  • All the above, and perhaps some more as relevant to your category/product/service, will need to be worked and reworked often to arrive at what seems like a practical market estimation.

 

How do you estimate your revenue and growth? This is a rather tough part, and the accuracy of these guestimates is largely dependent on how accurate your assumptions are.

Many entrepreneurs make the mistake of projecting revenues as a % of the market potential. Often we hear entrepreneurs state “Even if we were to capture just 2.5% of a Rs.1000 cr market, we are targeting a revenue of Rs.25cr in year 2”. This is obviously an oversimplification and without any basis for how the sales plan will be implemented.

To prudent way of arriving at a estimation of revenue is to build a business case ground up. I.e. how much revenue are you expecting per customer, how many customers can you get, how much does it cost to get each customer, etc. At the startup stage, it is important to do a month-by-month detailing of how you see the customer base increase based on what specifically you plan to do in your marketing & sales plan. Needless to say that this is not a one-time exercise, and you will keep reworking on this till the business case starts making sense.

While doing month-by-month revenue estimation, if you have multiple revenue streams, then make the revenue estimates for all the revenue streams, which then total up to make the overall revenue for the company. E.g. if you are starting a chain of restaurants, you may want to break up the revenue by breakfast, lunch, snacks and dinner as these would cover different dynamics of your restaurant business. Similarly, if you were doing an ad-supported Freemium product online, you would like to estimate separately your revenues from ads on the free downloads and the subscription from the paid downloads.

Do remember that this is just a guestimate… i.e. a well-thought-out estimate. This is just a reflection of how YOU expect the market and the world around it to behave. And because there are no guarantees that the world will behave as you predict it to, it is prudent to be very, very conservative with the revenue estimates. If you are too optimistic, you are likely to allocate a proportionate marketing investments behind the revenue growth… and if for whatever reason the revenues do not happen as you have predicted, you will have a sufficiently fierce problem on hand.

Note:In many a startup scenarios, revenues may NOT be the key parameter of progress. E.g. in a startup which is establishing a new technology, proving the concept and the business model may be the main objectives in the startup stage.

Do remember that your growth and revenue numbers should be mapped to the marketing plans and marketing investments, and should be rooted in reality. “We are smarter and we know social media marketing really well and hence our customer acquisition cost is much lower than others” is not a statement that investors would be keen to bet on [though if you state that they would be keen that you demonstrate your skills in lower cost customer acquisition 🙂 ].

As one of my mentors had said “See the film in your mind… for a startup, it is critical to be very clear on what specifically is going to happen on the marketing front, product front and sales front in which month and therefore what revenue and customer numbers that will likely translate into”.

 

Some advice:

  • Try to achieve higher conversions than comparable others in the market, but estimate much lower conversion. This way, even if you do not do better than market average, your plans don’t go awry.
  • Validate your assumptions – validate your assumptions – validate your assumptions…. Again and again and with multiple sources. Going wrong in assumptions can be disastrous, even if the rest of the components of your business do well. E.g. if you assume a 0.5% conversion, but it actually turns out to get 0.3% conversions, you may be off by a considerable margin in your profitability and may also run out of cash sooner.
  • Identify the key ratios that you need to measure. E.g. Gross margins, cost of customer acquisition, headcount per ‘unit’ [i.e. could be a set of customers], etc.

Key points to remember

  1. Be conservative in revenue estimates
  2. Validate your assumptions
  3. Detail out the revenue plan on a month-by-month basis, and separately for each revenue stream