5 secrets to great startup pitches & Investment cases.
How attractive is your pitch and investment case to investors?
This year, we’ve helped almost 30 startup founders from pre-seed to A-round to finesse their strategy, business models and pitches. Here's what we've learnt: every great startup (and raise), has three vital components: 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.
But how do you show investors what a great deal you're offering them?
The classic business forecasting and valuation methods are ‘discounted cash flows’ (aka DCFs) and ‘weighted average cost of capital’ (aka WACC). But here's the thing: at seed stage, they 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. And your forecast is an incredibly important part of that.
Here are our top tips on creating a great investment case and sales forecast.
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.
Start with a basic model, based on the future (or near future). Before you forecast, work through your business strategy. Your commercials, marketing and structure to make sure that your business can drive growth and support it. Only then build a model for the future. Think about milestones you'll hit. And how you'll hit them. Forecast those sales from the bottom up (start with your consumers, rather than the market size and a '10% month on month sales growth' approach 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. Here's what we recommend to new companies.
i. Create an optimistic scenario - the one where you get every deal you want. It's a sure-fire way to plan your growth. Do it in detail - analyse how more customers mean more people to support your product; more marketers to drive things forward and more cash to continue building your product.
ii. 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. How you'll survive.
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 micro-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 for investor discussion.
But don’t rely on it.
Basing your forecasts on capturing a market share is lazy, and rarely goes down well with serious investors. Instead, 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?
Dig into these questions early on in your exploration, and you'll have the basis for a good discussion with an investor.
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.
What investors want to see, more than anything is that cash shortfall being caused by growth. If you focus on traction, you may make ‘negative cashflow’ (that’s a ‘loss’ to us humans) for a while before breaking even. That's okay - as long as you have the funds to support it. To get those funds, you need to show an investor the big-picture. Your forecast should show how a temporary loss makes for a large gain in the future. And how the money you're asking for is essential to powering the growth it will take to get there.
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 around your business - 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.
We love a chat. Ask us questions. Let us buy you coffee. We want to hear what keeps you up at night, we might just be able to help.
Call us on +44 (0)207 193 7924
Ask us anything. Book a free consult.