September 15 2009
by Todd Hixon

Tips For A Good First Pitch

You are setting out to raise the first financing round for your start-up business.  You sit down to draft a pitch.  What should it say?  [We’re early stage investors, so these ideas are geared to the companies we see, which are typically raising their first round of investment from professional (“institutional”) investors.]

Let’s start with first principles.  What is the goal?  To get money, of course.  But, as the old salesman says, the goal of any meeting is to get the next meeting.  First meetings with venture capital investors don’t go straight to the wire transfer (except perhaps in Silicon Valley in the bubble).  Communication with an investor is a layered, back-and-forth process.  Your goal should be to answer the first level questions and create enough interest and excitement to get the investor to start digging into your business and ask you back for further discussions.

What do you have to work with?  Investors see a lot of business plans and have a lot to do. They will look at a written plan for up to 20 minutes, and then decide if it’s worth a meeting.  They will schedule a first meeting for an hour with a back end commitment.  In that short compass you need to sell them on investing more time.

You need a pitch that is specifically designed to get investors interested and answer the initial questions.

Initial questions:

  1. What is the theory of the business? You should be able to say this very succinctly, without a lot of wind-up.  You are usually talking to experienced, knowledgeable people.  They will get a good idea quickly.  If you can’t explain it efficiently, it’s a bad sign.
  2. How big does this business get? VCs are looking for companies that can grow to be worth $100s of millions, and $ billions in the best case, what one of my partners calls an “unbounded market”.  Make a reasoned, factual case for how your market gets to be big.   What are the critical assumptions and inflection points?
  3. How does this business scale? The number one risk factor in early-stage venture is revenue growth.  VCs want to invest in businesses that are poised to take off, and which quickly become able to fund their own growth. Getting this right produces outstanding ROI, and vice-versa.  Who is the “poster child” customer?  Paint a picture of whom you sell to and what they care about.  Are customers “in pain” and strongly motivated to buy?  How much time until you are ready to ramp revenue?  How long are your sales cycles?  How fast does this spread once it takes root?
  4. What evidence is there that the business works? Early traction is very helpful. Examples here include trial purchases from well-regarded customers, web site activity, revenue from a predecessor business model, or endorsements from industry thought leaders.
  5. How do you create lasting value? In other words, if we make the market work, can we get paid well for the business?  You need to identify sources of competition, and make the case that you have decisive advantage, your success will be hard to imitate, and potential acquirers will chose to buy, not make.
  6. How do you develop cash flow (i.e., what is the “business model”)? How, when, and why do you get paid?  How much investment precedes cash flow?  Once the business starts to scale, how much investment is needed to produce a dollar of sales growth (the “ROI at the margin”).  Businesses are much more valuable, and exitable, when they are big enough to move the needle for an acquirer, profitable, growing, and/or self-funding.  Investors want to know how, and how soon, this will happen.  This is the place where entrepreneurs tend to be seriously over-optimistic, so expect to see the salt shaker come out.
  7. Who are the key people, what have they done, and who needs to be added? Investors are looking to understand what kind of people you have, their expertise, and their track record.
  8. What is the exit opportunity? Who are the potential acquirers, have they been active, what kind of revenue multiples are paid, why will they chose your business and not some other?  Why does your company have potential characteristics of an IPO company (if it does; this is not a must)?
  9. How much investment does it take to get to cash flow breakeven? In today’s world this is a key question, as venture capital has become scarce, and follow-on financing rounds are often painful.   We look carefully at how big the burn rate gets before revenue starts to ramp.  If the revenue ramp is delayed, this is the rate at which cash disappears, and too-often forcing the company to raise money before there is proof that revenue is ramping.
  10. What is the financing that you are proposing to do: how much money do you want to raise, and what value-creation milestones can you reach with the money?  Some information on the current capitalization is also useful: i.e., amount of money that has been raised in the past, and the post-money value of the last round.  

What gets investors interested, even better excited?  Basically, strong answers to the initial questions.  Some color on that:

  • An original idea that makes profound economic sense, or unique technology that opens up a big market.  EnerNOC, one of our portfolio companies, came to use with a plan to aggregate existing generation assets to shave peaks in electricity demand.  This was in 2003, when oil was still cheap and Al Gore had yet to become an icon for global warming.   But the idea made sense.  And it worked.
  • Compelling evidence of early traction:  one of our companies, Koofers, is creating a destination site for college students nationally.  In less than 2 years they became the #3 destination site at their first school, a major public university.
  • A savvy, passionate team with enough experience to be credible
  • A change-the-world idea that could just happen, eg, Qliance, one of our companies, has a savvy, compelling team and game-changing business model that could take a piece of the $300B market for primary health care.

How to put it across?   Use slides; they are the modern language of business communication.  They allow you to use graphics effectively and to parse and pace the delivery of your message. Remember the rule that each slide should have one main idea, usually stated plainly in the title.

Keep your first pitch to 15-20 slides.  Many of the ten points above can be made on one slide.  With an extra slide or two for a few of them, you get to the 15-20 number.  Your goal is to get the investor interested: you are selling your idea and yourself, not defending a Ph. D. thesis.  There will be lots of opportunities for more detailed discussion later.  If there are a few follow up questions you expect frequently, put additional detail in an appendix, to be used if requested.

Entrepreneurs often ask for examples of good pitches.  This is a challenge:  real pitches are confidential.  Every entrepreneur’s story is different, and every entrepreneurial team needs to speak with its own voice, so a generic pitch is about as interesting as a generic novel.  The link below is takes you to an outline which you may find helpful for a first pitch:

Comments are closed.

Top of the page