What VCs want: 10 hacks to land investment in your “next tech” startup
The last decade has seen a plethora of tech startups – exceedingly successful as well as miserably failing. Some have raised insane money chasing unreasonable valuations and assumed it to be the barometer of success. Such startups are unable to create sustainable, profitable businesses leading to definite failure. Those who rightly caught the pulse of the market, served and built meaningful ideas into businesses have evolved, flourished and become true Unicorns.
With game changing technologies rolling out by the hour, Techprenuers today are constantly faced with the dilemma of balancing innovation, speed to market and sustained growth on the 3-legged stool of creating a valuable business. Well timed funding goes a long way.
All startups begin with a great idea but turning it into a viable, scalable business amongst others also requires timely funding and thus successfully pitching it to a VC / Investor. This is a Techpreneur’s true litmus test, as often great ideas without adequate funding have perished prematurely.
With soaring competition both for market share and fund raising, it is vital for a Technpreneur to be cognizant of the dos and don’ts while pitching to a potential investor. We will deliberate on the how and when to raise funding at another time.
Let me share an interesting startup story before we get to the crux of the article.
About 6-7 years ago, if my memory serves correctly, a Fintech Startup in the lending space secured seed money to the tune of USD 70mn from a single late-stage Fund on just a paper plan developed in 3.5 months. So, what aspects made their approach different that a late-stage investor, against their investment thesis, decided to back an idea-stage startup with the founding team having no background of lending?
The founders realised early on that there was no substitute for strong research and getting the product-market fit right.
They kept their business objectives clear – can you lend fast i.e. reduce the TAT, scale rapidly, strengthen the credit process to reduce delinquencies, how technology can disrupt the entire process. The founding team rolled up their sleeves and conducted deep dive research into what was happening in the lending space, started with secondary research, built up a hypothesis, then travelled lengths and breadths of 5 key states in India to test their hypothesis. They saw how & to whom traditional banks and NBFCs were lending or not., their sales and disbursement process and timelines, credit evaluation processes, their infrastructure setup to tap the potential borrowers, identified which areas had low and high delinquencies and why, setup meetings with customers, reasons for borrowing, use of technology by Banks and NBFCs in the entire sourcing to disbursement and the CRM process etc.
The pitch clearly highlighted the strong conviction around their hypothesis, practicality and robustness of the business plan and GTM strategy, capability and commitment of the team, future capital raise pattern, expected modes of exit and IRR to the fund. Key pointers what the Fund needed.
Sum of it, a well-researched idea lays the path to a robust business plan and increases the probability of attracting right and timely investment.
Now back to the hacks:
- Avoid being pigeonholed
Many investors, based on their experience usually categorise startups into pre-existing tech space that they have invested in before and might not be patient enough to listen to your “big idea”. Therefore, it’s always better to state your core tech right at the start to avoid any ambiguity in what you pitched and what they heard.
- Define your value proposition
All investors in any part of the world want to know – Will this sell or not? You may have worked months on building your prototype but it ain’t great if nobody will buy it.
Your elevator pitch should not only talk about why your tech offering is unique but also how it solves a particular problem and what is the addressable market for it. Back it up with thorough research and customer insights. Knowing your target market and size as grounded as possible is a huge plus. Make sure the product market fit is spot on.
Clarity of your value proposition is key to building a great pitch.
- A clear and precise pitch is the perfect pitch
Nowadays, with the massive rise in Start-ups, VCs are flooded with proposals. Most VCs will give you 30min to an hour maximum for a pitch which would include time for introductions, Q&A and understanding the VC’s investment thesis. In this time an Investor decides to proceed or not. Thus, don’t run around in circles before you get to the main idea. Follow the 30-20-10 rule. 30 seconds to summarise your idea and core value proposition, presentation lasting not more than 20 minutes and 10 minutes for Q&A. This is generally applicable for your first presentation. You need to give the VC enough information to keep him enticed for further deep dive. This is where you get your time to demonstrate your business and product in detail.
It is very helpful to do a dry run of your pitch prior to a VC meet. A well-structured deck can make a huge difference. Get professional guidance if required.
- Addressing Product Market Fitment is key
A key factor in any pitch that a VC wants to see is a strong Product Market fitment. Often than not, this is not captured or explained well by the Founder. Either they are not well researched or well-articulated, both are a problem.
What sets apart a viable business plan from a paper one is that there is no substitute to research and knowing your TAM and the factors influencing it. Articulate the key assumption that underlies why a customer is likely to use your product. It is highly important for the Techpreneur to know the what, the who, and the how. What are you going to build, who is going to buy it, and what is the business model you are going to use to deliver it?”
Rest all key points such as GTM strategy, burn Vs profit, competition, MOAT, team & infra required, scalability etc. fall easily into place in your pitch.
- Your idea may be great, but I couldn’t understand it?
Techprenuers usually assume the audience’s level of understanding and often make the mistake of not breaking down their pitch to their level. An Investor may or may not be an expert. Remember you are seeking an investment not a Tech Award.
Apply the KISS principle to a pitch: “the Investor knows limited and has limited time, it is my job to explain my business proposition in a precise and simple manner so that he understands and latches on to it quickly.” An Investor gets only 30min to understand your business proposition while you’ve had ample time to build your idea. Play the conversation as it goes.
- It’s not only your business idea, but you are being judged too
During any pitch, the VC is always judging the founders. Half the battle is the idea and the balance is always the Founder. Your understanding, maturity (not by age but attitude), vision, capability to execute the vision and business plan, commitment to the venture, personality, are you easy to communicate with, open to feedback and suggestions, team player etc.
How deep is your skin in the game or is it just a fleeting thought?
Additionally, with reports of Founder issues in various start-ups, VCs are far more cautious these days.
Always remember, your speech, investment deck and business plan (excel) are synonymous to each other. A well-articulated pitch helps the VC to understand you and your business proposition well. VCs seldom see through the Founder during the pitch. You may have a great idea but if they are not comfortable with the founder …. reduces the chances of investment.
If you are unable to develop an investment deck yourself, get a professional to help you.
- Talk about the team, fill in the gaps
I cannot underscore the importance of a great team. A techrepreneur can’t sail the ship towards investing alone. VCs want to know if key functions such as CTO are well occupied and well incentivised. They prefer not to invest and then wait for you to hire. If the position is not timely filled, VCs understand that it will impact the business plan. This reduces or differs their keenness to invest at that time in the Start-up.
- Know well on what the fund required to be raised and its utilization?
Most of the start-ups consider raising multiple rounds and higher amounts as the barometer or success. Herd Mentality. Understanding the cashflow requirement of your business plan at each stage of growth is key to know the funding amount to be raised. A Founders prized asset is his shareholding, once given, difficult or expensive to get back. Capital planning helps a lot.
Today there are numerous examples of Start-ups and erstwhile “Unicorns” who have traded viable business models and profitability in favour of GMVs, never ending burns, higher valuations, low governance and risk controls have succumbed to erosion of shareholder value. These factors amongst others have led the Investor Community to err on the side of caution before investing. Fund utilization just as in Banking, is taking greater importance.
Knowing your P&L well, how quickly you’ll be able to break even while preserving capital are the hallmarks of a great investor pitch.
- Founder Shareholding? Important to have clean cap table
VCs tend to reject proposals especially till Series A rounds if the Operating Founders shareholding in the business is less than 51%. This has a clear impact on subsequent rounds as with each round, Founder shareholding is naturally going to reduce. Perceived risk around Founder interest in the Start-up has a profound impact on whether to invest or not.
- What’s in for me?
Any fund has a limited amount to invest and defined exit period. Show the investor why they should invest in your venture versus the innumerable other opportunities they receive on a daily basis. Clear articulation of business evolution, next rounds of funding and exit strategy for the Investor with expected exit IRR helps a lot in moving the ball towards a successful fund raise.
Always remember, Be Clear on your business objective, builds stronger conviction. Your goal while pitching is to convince them that your business is one worth investing in and will make your investor(s) money. While pitching be clear weather it is better to pitch the hype or your strong metrics.
(The author is Mr. Karan Gupta, Managing Partner, Weave Capital and the views expressed in this article are his own)
