June 22, 2019

No, I Do Not Want to See Your Pitch Deck

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As an investor, I often meet with startup founders seeking seed or early-stage funding. While the first meeting with most investors typically involves showing a pitch deck that covers a number of points including defining the problem the company is seeking to solve and explaining its solution (i.e., product or service), traction, market size, customers, sales strategy and revenue model, management, financials and the investment offer, my preference is to spend the first meeting lasting 60-75 minutes in an engaging conversation.

The founders often optimistically express how their venture will generate millions of dollars in revenue in a few short years or be the next unicorn (valuation of more than $1 billion). They fail to recognize, however, that a large majority of startups fail within the first few years of existence. These startups fail not because of a lack of market opportunity, but as result of their inability to implement their business plan or foresee and mitigate any number of risk factors.

The initial meeting with a startup founder provides them with the ability to communicate their "path to success." In other words, what is their plan to overcome the long odds of turning their startup into a successful (profitable) venture?

Below is an agenda that I often provide the startup founder in advance of our first meeting in order to efficiently use our time together:
  • Where do you see your business in five years? What type of company are you trying to build? What will your company be the leader of and to whom are you serving?
  • What is the problem you are trying to solve?
  • In simple terms (i.e., in words my mom will understand), what is your company's solution to the problem? How is your product or service creating value for your customers? What is the "WOW FACTOR" that will motivate your customers to pay for your product or service?
  • What is your company's competitive advantage?

As noted above, WOW FACTOR #1 pertains to how you drive value for your customers. WOW FACTOR #2 is your plan to increase value for your company, which in turn will generate a return on investment for you (as investor #1), your co-founders and outside investors. Since I subscribe to the principle that if you don't know your numbers you don't know your business. I wish to know:
  1. What are your annual or projected sales based on a trailing 12 months, not the calendar?
  2. What are your gross profit margins?
  3. What are your expenses as a percentage of your gross profit? (Not a percentage of sales. You pay your bills with gross profit – not with revenue.)
  4. What are your operating expenses segmented by (1) sales and marketing, (2) general and administrative (G&A), and (3) research and development (R&D)?
  5. What is the percentage of each segment as a percentage of gross profit? In other words, what percentage of gross profit will be spent on sales and marketing, G&A, and R&D?
  6. What is your cost of revenue (sales)?
  7. What is the company's timeline for achieving key operational and financial milestones including break-even point?

I also support the notion that if you can't measure it, you can't manage it. Therefore, what are your top 3-5 key performance indicators and why?

A startup's "Path to Success" in achieving sustainable profitability is not a lack of opportunity, but identifying, mitigating and overcoming risks. Whether it is for a business where I hold an equity stake or companies I advise, I evaluate the strength of any business plan or long-term strategy on the ability to identify and mitigate the following risk factors:
  1. Product Risk (according to this article, product risk is defined as "the potential for losses related to the marketing of a product or service. It is managed using a standard risk management process of identifying, treating, controlling and monitoring risk as part of product development or product management.");
  2. Technology Risk (the potential for implementing new, unproven technology looms large in most content strategy projects. This article provides 36 types of technology risk. Furthermore, a business must consider the risk of a cyber attack or data breach. How is your company planning for the potential of technology failures to disrupt your business such as information security incidents or service outages?)
  3. Market Risk (bifurcated by geographic risk (different risks exist when doing business in China compared to the United States, for example) and sector risk);
  4. Management Risk (there is an assumption that the founder(s) possess some great skills and professional experiences, but the most seasoned professionals have some weaknesses or gaps in their management acumen. A discussion on management risk provides for the opportunity to hear more about these weaknesses and plans to build a solid management team. I take a philosophical approach to business where self-awareness is a quality that I find imperative because I am investing in the team to successfully execute a business plan);
  5. Scale Risk (a startup can maximize its speed of progress by keeping the five core dimensions of a startup: customer, product, team, business model and financials in balance. The art of high-growth entrepreneurship is to master the chaos of getting each of these five dimensions to move in time and concert with one another. Most startup failures can be explained by one or more of these dimensions falling out of tune with the others);
  6. Climate Risk (many businesses are facing the twin pressures of extreme weather events and failure of climate-change adaptation. A report by McKinsey & Company, a consultancy, classifies climate risk into two categories: Value-chain risks and external-stockholder risks. The former include physical risks ("those related to damage inflicted on infrastructure and other assets, such as factories and supply-chain operations, by the increased frequency and intensity of extreme weather events, such as wildfires, floods, or hurricanes"), price risks ("increased price volatility of raw materials and other commodities"), and product risks ("the core products becoming unpopular or even unsellable"). External-stockholder risks include ratings risk ("the possibility of higher costs of capital because of climate-related exposure such as carbon pricing, supply-chain disruption, or product obsolescence, regulation risk ("government action prompted by climate change"), and reputation risk ("either direct, stemming from a company-specific action or policy, or indirect, in the form of public perception of the overall industry"). The common starting point for creating a mitigation strategy is to undertake a full assessment of where climate-related risk lies within a firm.)
  7. Capital Risk (ability to raise additional capital including but not limited to a small business loan or line of credit, purchase order financing, vendor financing, product pre-sales, and crowdfunding); and
  8. Exit Risk (it is true that if you are focused on your exit strategy, then you are not focused on growing your business. However, are you thinking about the different options of how your investors are going to see a return on their investment?).

Lastly, the following three questions helps me understand your strength in self-awareness, which follows from management risk discussed previously:
  • What keeps you up at night about your business?
  • What keeps you going?
  • Why do you think you have the ability to successfully implement a business plan to lead a company to sustainable profitability?

I was asked to create a presentation to a group of startup founders whom were starting the process of soliciting capital from investors. "Fundraising for Your Business: Dos and Don'ts of Pitching to Your Investor" provides some tips that I hope founders find useful. I purposely italicized 'your' in the title because, similar to sending a resume tailored for a specific position or company, the investment pitch (including a pitch deck, if you are requested to provide one) should be tailored to the investor whom the founder is seeking an investment from.

If I find the initial meeting/conversation compelling, then I will schedule a second meeting for the purpose of experiencing a demonstration of the product or service. Like purchasing a vehicle, I want to know the specs before I look under the hood and take a test drive.

If you invest in startups, what are your expectations during the initial meeting with the startup founder?

Aaron Rose is a board member, corporate advisor, and co-founder of great companies. He also serves as the editor of GT Perspectives, an online forum focused on turning perspective into opportunity.

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