5 secrets to creating great startup pitches & credible financial forecasts.
How can you make sure that your startup pitch and investment case are credible and attractive to investors, even if you’re raising a pre-revenue seed round?
This year, we’ve worked with almost 30 startup founders at pre or post seed stage to finesse their strategy, business models and pitches. At the heart of every one of them are three vital things: a product that people need (and want); a solid go-to-market plan; and a great commercial model that shows how you’ll grow your customer base and revenue.
At this stage of funding, investors can’t really assess your new business with any meaningful accuracy. Dig into forecasts and you’ll see ‘discounted cash flows’ (aka DCFs) and ‘weighted average cost of capital’ (aka WACC) as key methods to evaluate an investment. But at seed stage, these just don't work. You don’t have cash flows to discount. You don’t have capital to weight. It's more art than it is science (or maths). Instead, you must show investors potential. You’re forecast is an incredibly important part of that.
Here are our top tips.
1. It’s not just the numbers that matter - it’s the strategy behind it.
Behind a good forecast are big decisions about your business. What you sell. How you’ll sell it. To whom and at what price. Because you’re ‘forecasting’ it means you not only have to think about that in the present, but in the future stages of your business too. Before you start with a forecast, work through your business strategy. Your commercials, marketing and structure to make sure that your business can drive growth and support it. Build a model on this, instead of (’10% month on month sales growth) and you’ll instantly inspire much more trust in a potential investor.
2. Produce more than one scenario.
Scenario planning is a great tool for anticipating good (and bad) events that affect your business. Create an optimistic scenario - the one where you get every deal you want - and you build your startup into a rocket ship. This will give you a good idea of the strains that growth can put on a company - the people you’ll need to hire to support your product; the marketers you’ll need to drive that growth and the cash you’ll need to build your product. On the flip-side, build a ‘base case’ (it’s a finance term, roughly abbreviated, it means ‘the smallest possible…’). It will allow you to understand what you need to do if those key deals fall through. Use this approach and you’ll be prepared to answer a good deal of the tough questions investors often ask.
THE SECRET TO SECURING INVESTMENT AND A GREAT VALUATION.
If you're working on a round of investment, it's often difficult to know what to focus on.
Here's the secret. There's little more important to an investor than a great business model, and a strong financials behind it. It's the key to raising capital. And getting the valuation that you and your business deserve.
We're offering a free course to get you started. Developed in conjunction with the Design Council - we'll outline our approach to building a great investment case, and exercises to building your own. What are you waiting for?
3. Forecast from the bottom up, not just the top down.
Sizing a market from the 'top down' can unveil some really useful information to talk through with investors. But don’t rely on it. And don’t base your forecasts on capturing a share those markets either (it's lazy :)). Do your homework. Work from the bottom, up. This means really understanding the market. The key segments you’re targeting and your route to reaching that market. Done right, it’s powerful stuff: it not only produces a credible forecast for your pitch deck, but a great strategic foundation for your business, even if you’re not a numbers person. Here’s an article from us that walks you through the basics of building a forecast for your startup.
4. Research your market - and it’s gross margins.
Research is key to building a great financial model for investment. Understanding your market - the dynamics - from size to competition, allow you to build a more realistic picture of what you can achieve. Gross margin - essentially your profitability - is a big part of that. What are the profit margins of your competitors? How will you achieve a similar level, even as a small company? What will you do to innovate and drive costs down and margins up to increase your competitive advantage?
5. Base your funding request on a cash shortfall.
Ask yourself why you’re going for investment? One way or another, it should come down to a cash shortfall. And that should be driven by your growth: marketing, development and delivery costs. If you focus on traction, you can realistically expect to make ‘negative cashflow’ (that’s a ‘loss’ to us humans) for a while before breaking even. There may be other events that need a healthier bank balance too - for instance a large manufacturing run or investment in technology. If you can prove that these activities are powering your next stage of growth, it’s not a bad story for an investor - it’s in fact what they want to see.
A few last thoughts.
I hope this little article has given you some great take-outs to build into your next model. We really believe that financial model needn’t be boring, difficult or a necessary evil for investment. Done right - built from the ground up and around your business (ahem, no templates please) - they can not only help you get investment at a better valuation - they can provide you with great insight into the crucial decisions for growth. If you have any questions, comments or queries, why not drop me a line. I'd be really interested to hear what you're up to.
Jared is a partner at Think Plan Thrive, a London based Strategy company. We help organisations seize opportunity. Execute and grow, fast. We’re specialists in commercial and marketing strategy, pitch and investment cases.