Not all companies need capital when they start, but when they require it at this phase (Seed-Series A) several elements are involved in the capital raising process namely: a given product or startup phase, the selection of investors, pitching investors (pitch deck + executive summary + business plan/P&L), meetings (negotiations), term sheet and finally, obtaining financing.
This process, depending on the round and phase in which a given company is, can last from 3 to 16 months - there is no clear time rule here.
Today we are focusing on creating an efficient ideal Pitch Deck – which in other words is the presentation showing the company’s profile to potential investors.
The process of capital raising in early rounds is about telling a story. The challenge here is that when we fight for financing from Seed/VC investor we need to face a huge number of companies that tell their own stories.
This results in the information noise. How an investor is supposed to know that your story is the one worth listening?Why Your company/Your product is the one that will persuade investor that in high risk conditions he or she will get return on investment for his fund? You can do it by means of 4-5 main documents. One of them is Pitch Deck. Creating it is not an easy task. In order to do so, you need to think through the vision, development and actions of your company.
What is a “good pitch deck”?
As always, good research and good examples from the market are illuminating and helpful. DocSend company and American professor Tom Eisenmann from Harvard Business School researched over 200 startups that went through Series Seed and Series A. Two hundred companies that they researched got more than 360 million USD.
On average, in Series Seed financing process a startup:
· contacted 58 investors
· participated in 40 meetings with investors
· obtained 1.4 million USD (please bear in mind that this is American market)
· spent 12,5 weeks in order to close the investment
On average, in Series Seed financing process a startup:
· spent 9,6 weeks raising investments
· contacted 26 investors
· participated in 30 meetings
· obtained 8 million USD (please bear in mind that this is American market)
The research showed that on average a pitch deck included 19 slides with a pretty similar structure:
- Why Now
- Market Size
- Business Model
Sequoia Capital has even a preferred order:
The process of raising investor capital should be treated in the same way as the process of selling services to customers. This means that so-called sales funnel and measuring conversion is a very good way of estimating our effectiveness and measuring the time of obtaining investor capital. A good method is to measure the number of e-mails, pitch decks and documentations opened by the investors as well as to measure how much time they spent on reading it. You will find a variety of tools for this type of analytics on the market.
This is important for a couple of reasons. Statistics say that pitch deck of a company that obtained investor capital has been read for 3 minutes 44 seconds. 12 percent of investors read it on mobile device and I bet that this rate is about to grow – this is why creating a presentation that is readable on smaller screens is so vital.
If we know how much time it takes for investors to read a presentation, we also know how much time they spend on given categories:
If we combine these important indicators (time in categories and the importance of categories) we end up with the following question: why only 57 percent of startups have „financials” slide in their pitch decks if the investors spend the longest period of time on reading exactly this category? This is a simple, but very painful mistake for a startup.
The second most important element of the presentation is the category “Team” – it shows that investors treat very seriously the question of investing in a right group of people. For me this is the most important indicator for the investment decision. Remember:
“Great business with poor management will create a poor company, great management with a poor company will find its way to a great company”
Examples of Pitch Decks in various rounds: Square
Investment process – how long does it take?
You need to be aware that on average the round on the American investment market, which is more developed than Polish market, takes 12,5 weeks. Brace yourself for this – during this time your company must work and develop quickly. Waiting for money in order to start working is never a comfortable situation and often disqualifies a company in the process.
Investors. Quality not quantity
I recently published a small review of Polish Seed and Series A investors. You may think that the more investors you meet and the more startup events you go to, the better chances for the investment you have.
For investors, the fact that they meet the same people from one startup on many events suggests a couple of negative things: the company doesn’t have traction (because the team is out at events and not working on its product), the company is in the very early phase of development (often, a so-called hole in the ground), founder has too much time. Such events could be very helpful in obtaining capital investment or exposing the company to business contacts but they are not the standard, at most they are the bad trend.
The most important thing is quality. You should choose investors carefully. This applies for companies and partners alike. Try to find out what they invest in and how they do it, how their processes looks like, what is their investment portfolio, what kind of extra-financial value they can bring to your company and, in particular, talk with them (try to avoid investors’ opinions about other investors, as well as the opinions of founders who couldn’t raise capital).
The number of contacts does not translate into the effectiveness of investment:
What I would do if I were in your place?
I would choose around 10 partners (not funds!) that are interesting for me in some respects – their mindset (you expect different things when Your company works in Poland, different things when you are about to work in the United States.
You want diverse and unique skill sets on your team when you face developing markets. At the top of your focus should be their social media presence (what they write about, what are their opinions, what they are interested in); which market segments they are interested in; where they have already invested, and on what terms.
Only after this initial research, would I start searching out information about their funds, but at the end I would come back topartners because they would be literally ‘my partners’ in case of a successful investment.
Because every market is different and in the investment process not everyone is equal, here are 5 most important facts to remember:
1. Your pitch deck shouldn’t be longer than 20 slides. The investor will spend 3 minutes 44 seconds reading it.
2. Gathering Seed or Series A funding will take more than you think and you need to be prepared for this. Your company should never be “either financing or bankruptcy”
3. More meetings does not mean more money. Choose carefully who you are going to talk to.
4. You will need to talk with about 10-20 investors.
5. Spend a lot of time preparing your pitch deck (don’t overdo graphics) especially as your team and financials are the most important elements of it anyway.