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Diary of a venture scout: getting ready for fundraising – the docs!

In my previous posts in this series I outlined a few personal insights on searching for startups; now I feel ready to jump to the other side of the table, and discuss about prepping up for pitching to an investor.

Feeling ready?

Before starting your hunt for capital, you should answer a fundamental question: “Does my business really require VC investment?”. This seems trivial, and if you are reading this the answer is probably yes, but do not take it for granted. If you do not feel ready to:

  • Build something that will grow beyond yourself
  • Ride the emotional rollercoaster of having to interact with external people and investors

then I strongly advise against looking for VC.

In all other cases, before trying to reach an investor, you should get ready.

Ready for what?

You must be ready to shoot your best shot. And the best shot includes you and your team (aim for the best), your project and the material you prepare to present it to investors. I am not going to discuss the “you” and “your project” part of this (I might write a separate post for this), but be aware that the typical investor wants to invest in a great team and in a great product/opportunity.

Let me jump for now to the materials part. I personally have three items I love to see and discuss. If you don’t have them, I’ll ask for them, so have them always at hand.

  • Pitch
    • There are countless resources about preparing a pitch. Use them. You should take a look at Guy Kawasaki, Dave McClure and the other excellent investors out there who have produced tons of great advice.
    • Prepare the speech. Try it a few times until you are not embarrassed of yourself. Try it with your team members, your parents, your friends. Always be pitching, remember?
    • Do not discount the pitch as a pointless exercise. On the contrary, it is the most important piece of documentation and the starting point of all your reasoning. (I stand by Kawasaki’s approach of preparing the pitch first and, if needed, the business plan starting from it).
    • Let me stress a point: you will never think enough about your customer, your market and about your marketing strategy. Do not focus all your attention on the product.
    • Show & be ready to discuss your relevant metrics.
  • Roadmap
    • Show that you know what you’ll be doing in the short term, in particular regarding customer & product development efforts.
    • Set deadlines for yourself and for your team.
    • If you can, put together roadmap & funding needed for the major milestones, in order to pave your way to a tranche-based investment. This can be a good or a bad idea, it depends: YMMV.
    • Agile / Lean methods can help setting the right priorities here.
  • P&L
    • Inevitably, the investor will ask you for a P&L and/or a cash-flow statement. Do not tell the investor it is completely bogus (he’ll know it is) and do not, EVER, say anything about it being “conservative”.
    • Make it monthly with a 12 to 18 months forecast. Anything beyond that can be grouped by quarters or years. Get to the classic 3 to 5 years forecast in this way.
    • It is needed for showing your expectations of the future of the company and the market.
    • Metrics, metrics, metrics!! Clearly show & know your key drivers! (e.g. CaC, conversions, LTV, retention, etc..).
    • As a matter of fact, this is mostly about educated hypotheses, not just about raw numbers. I sometimes see plans where the HPs for conversion rates or CaCs are completely out of this world. The Internet is full of references: even if you have never spent a cent on advertising, take the time to check keyword prices on AdWords and scout for articles about key metrics for established companies and markets.
    • Take a look at the financials of listed companies (mostly in the USA, but there are exceptions). Understand that an 85% EBITDA in year three of a “conservative” plan just means you probably have no idea what you are talking about.
    • Do not pay a consultant for writing your financial forecast. If you have to, pay one to check that your plan contains no serious mistakes. If you feel you have no competence for doing this exercise, you probably lack a skill in your team.

Take your time and learn your numbers.

Good luck with that investor meeting!