Early Stage Adventures

(note – this is an update from a post I did back in August 2007)

I see hundreds of early stage pitches every year. While some are very good, many could be improved with better structure and content.  Series A or seed stage pitches have a different emphasis than pitches for later rounds. In early rounds, you need to convince investors that there is an attractive market opportunity when there is often very little real world validation around your business. You also need to convince investors that the team can execute in what is often the most difficult (or rephrased risky) time of trying to build a company.

If you search the web, you will find lots of resources on what to include in a pitch – however, here are some of the basics that I like to see (these need to be adjusted as appropriate for your type of business and industry):

1. Team: The #1 focus for early stage investors.  Do they have right skills, experience and credibility?

2. The market opportunity: the market should be described in such a way that it makes it interesting for the group of investors you are targeting.  Sometimes it’s about bringing a disruptive innovation to a large established market (think Dell in PCs) or an emergent market that’s showing explosive growth (think YouTube in online video). All investors focus on the size of the market – basically the bigger the potential market, the more attractive it will be, but that does not mean you should throw out wild estimates (that has the affect of questioning your credibility which will hurt you more with investors than any small market size estimates).

Markets are more complex than just size (think segmentation, growth rates, etc) and are ultimately made up of individual customers (see 4 (a) below).

3. Your solution: the product/solution should flow naturally from your analysis on the market i.e. it meets a critical need in the market; customers will want to buy (as opposed to you needing to convince them that they need this); and for business customers, the economic value is real and quantifiable.

You may want to include the competitive overview here or later in the slides.

4. The business model:  this section comprises various subsections around how you will architect your business.  It won’t be set in stone – early stage company building is about proving your initial assumptions and you will make many adjustments to your business model.

a. Customers and market entry: as a seed/Series A round its unlikely that you have many customers (if any). This is a very tough place for new startups and one of the major areas of risk for investors. You need to show investors you understand who your initial target customers are, their buying process, and how they will likely use the product (note: consumer web applications are different — its about the user experience rather than ROI, although this does lead to a deeper discussion on “who pays”). If you don’t know these or at least have some well grounded, working assumptions around them, then its like sailing in a fog. Based on these assumptions flow your target customers, channels, sales models, and product roadmap. The product direction and market focus is likely to change (almost always does) as the company grows and the market shakes out, but you need a starting point in which to rally the team and allocate your scarce resources.

b. Revenue and economics: There are many different revenue models – enterprise license, maintenance, subscription, service, freemium, sponsorship, advertising, etc.  You will also want to work out, particularly for consumer oriented businesses, lifetime customer value and cost of acquisition.

c. Sales model:  ok you’ve identified an attractive set of customers, you’ve outlined a compelling value proposition to them, you’ve sketched out assumptions on how the revenue and economics work for the business – now how the heck do you sell to this group, particularly when you’re an unknown (and risky) startup?  This is where the rubber meets the road, so to speak.

There is a whole host of choices around the sales/channel strategy: direct, OEM, telesales, web, to name just a few.  Sometimes the models are clear and over time, the challenge will be to build a sales and marketing machine.  At other times, the sales/channels will be unclear and you will need to experiment with several approaches to figure out where the low hanging fruit is before even contemplating building the machine.

5. Funding plan and milestones: how much, how big, and how quickly are all questions that investors will ask around your financials. This is actually more complicated in practice than one might think.  There are many ways to finance a business in the early days (I’m not talking about the practical issue of raising the money, just different theoretical approaches that balance risk/reward/dilution).  For example, a business might have 3 approaches – raise $500k to build a demo but not a complete product, raise $2m to take the product to market, raise $6M to build product, take it to market, and figure out the distribution model.  For CommonAngels, we specialize in capital efficient businesses, so the first two fit our strategy; the later really doesn’t (I’m talking about the initial round; many businesses need capital to scale quickly, but we are not focusing on that phase in the seed/SeriesA round).

In addition, what milestones will you achieve with the money you want to raise? Also some investors like to see an exit discussion; I find this is very individual taste.  For me, I’m more interested in understanding where are the points of strategic value that are being built into a business and whether it can be done in a capital efficient manner.

Now that you have the key points, organize them in a way that logically tells the story. Your audience’s attention is at its highest level at the start, so look for an opening that hooks them in to the story you are about to tell! If a summary slide makes sense use one.  Avoid clichés and buzzwords.

To help get you started, click here for a tongue in cheek sample template.

Good luck!