Venture capitalists (VCs) get pitched hundreds of times a year. And, even though countless articles have been written on the topic of how to present a startup to professional capital allocators, many encounters leave the VC disappointed. The following is a common sense outline on how to approach this process. While most of the points raised apply to any VC pitch, some of the topics are specific to technology investors and blockchain allocators in particular.
How Do You Turn $500,000 Into $50 Million?
It might seem like stating the obvious, but nevertheless is seldom enough put into practice: Venture investors are allocating capital with the expectation to receive a return on their money. Depending on the stage of the investment and the profile of the venture fund, the multiple expected of said investment might be as high as one hundred or more for a seed round and as low as two to three times for late-stage investment such as a Series D in a company slated for an initial public offering in the near future. Your job as a fund raiser is to provide the venture capitalist with believable values going into this expected return. Below you will find descriptions of some of the most common variables, the specific ones are usually derived from the vertical the solution is addressing.
Total Addressable Market (TAM)
The starting point for any business plan — regardless of seeking outside investment — should be to define the TAM for a given product or service. It is important to be rigorous before arriving at a dollar amount that might sound impressive but does not describe the actual market opportunity for the product. For example, an entrepreneur might be tempted to list the value of all properties in the United States, when pitching his real estate software. However, the correct value is derived from a multiple of clients your solution might be able to service and the price these clients are willing to pay. Get as much data as possible to back up your assumptions. And, if your solution is offered cheaper than the competition, use the new lower value to define the total addressable market.
Customer Acquisition Cost (CAC)
As with the previous variable, investors will frown upon the generic assumption that state the costs for acquiring a paying customer. While research into industry-standard metrics is a first step towards finding a realistic value for customer acquisition cost, successful marketing strategies often have to be adjusted for the specifics of the product and fine-tuned for a specific target of clients. Complex products might require longer sales cycles with additional customer-care and onboarding requirements. You might even find the need to offer your solution for free or at cost for some time to entice users to switch to your company from a competitor. Experienced investors will demand that you establish sound CAC values, especially if you are planning on using a portion of the funds you are raising to fund marketing measures.
Business Model
Prominent startups have in the past seemingly raised money from investors without a clear path to revenue and profitability. Some of these unicorns (companies with pre-IPO valuation of at least one billion dollars), only offered metrics showing user growth but did not provide investors much guidance on how the company would return the investment. However, unless your project shows exponential user and/or customer adoption that outpaces similar projects by a significant margin, your business model should show regular streams of income that will sustain the company before the funds that are being raised are depleted — ideally with several months to spare.
Product/Market Fit
Experienced investors, such as Marc Andressen, have pointed out that the only thing that matters is getting to product/market fit. The single best data point for a product achieving this status are customers that are paying for the solution. And, while consumers might be willing to spend money for lifestyle products such as music streaming services and designer sunglasses, the customer acquisition costs for these offers will regularly include significant marketing expenses. Investors focused on technology companies are more likely to be drawn to solutions that address problems heretofore unsolved or poorly addressed by incumbents. However, entrepreneurs might frequently conflate the former with latter, not realizing that the existing service providers achieved their current position by solving an underlying need for their clients. As a result, the projects might offer a solution that solves a technological challenge while still being inaccessible to most consumers.
Focus On Your Customers' Problems
Startups that fail to deliver a (completed) product frequently move their focus to marketing their solution to an audience that seemingly did not recognize its obvious advantages. This theme can readily be observed in a myriad of companies in the blockchain space, busy advertising their solutions while proclaiming to investors that adoption of the technology is near. Especially headlines spouting “cryptocurrency adoption” leave experienced investors shaking their heads in despair.
Entrepreneurs wanting to avoid this semantic trap, should complete the headline (“Adoption by who?”) and their products before approaching the market or investors. Breakthrough technologies are adapted by technologists who create products by tailoring it to users and their behavior. After all, consumers did not learn to use voice-over-IP but adopted the use of Skype, WhatsApp and other products that made use of the protocol, providing the same — or better — communication services than legacy phone service mostly without charging a fee.
Conclusions
When approaching a technology investor, make sure that the technology solves a problem that users have and want to pay you for; know how many there are and how much these customers are willing to pay you. Develop a sound theory of your total addressable market in much details as possible. The most successful pitches allow venture capitalists to calculate returns without needing a calculator or pen and paper.
