The previous two blogs described a startup that has done its customer discovery, developed its MVP (“minimum viable product,” not “most valuable player”), assembled an awesome management team, and is now ready to pursue outside funding. As those earlier blogs detailed, many companies hurt their chances of funding by not having a properly prepared cap table or fully documented details of the company’s ownership of its IP.
Another frequent mistake is approaching investors without having the proper pitch materials. Whether you are raising money from corporate venture capital funds, free-standing VC firms, angel groups, or individual investors, you should have a detailed business plan, a one or two page executive summary, and a PowerPoint pitch deck. Depending on the situation, you may also need a draft term sheet and a document containing legal disclosures as required by securities law. Each of these items is crucial, so it is worth covering a few basic points for these documents.
A business plan is an essential element for starting a business and pursing investment. The exact contents vary depending on the situation, but at a minimum the typical contents include:
- an introduction no longer than three or four sentences;
- a brief description of the business opportunity or underserved market;
- a brief description of the company and its founding;
- a listing of the management team and their qualifications and experience;
- a description of the business strategy, including specific target markets or industries, infrastructure needs, overall marketing strategy, and growth opportunities from a non-quantitative point of view;
- a description of the market opportunity, company pricing strategy, and revenue opportunity;
- an explanation of the timeline to profitability, with supporting detailed pro forma financial statements that should be included as an exhibit;
- information regarding the company’s competition;
- description of the company’s investment funding needs and how it intends to use the proceeds of the funding (for example, product development and enhancement, building a sales team, etc.); and
- description of the company’s likely exit strategy.
The document should also have a brief confidentiality statement, and each page should have a confidentiality marking.
This one or two page free-standing document, which follows a fairly standard format and can be expanded or modified as appropriate, summarizes the information in the business plan. This means that the executive summary needs to address each of the business plan points mentioned above, which is not easy to do in one or two pages. The Executive Summary is often the first document an investor requests, and first impressions are incredibly important. It can be difficult and time-consuming to summarize and condense the many essential topics into a one-page format, so the company should devote significant time and energy to prepare a first-class summary. I like the saying, “pardon me for writing a long letter, I didn’t have time to write a short letter.” This saying points out that it takes more time to prepare a highly focused, condensed and quality executive summary than to prepare a longer (rambling?!) executive summary, but that will be time well spent.
This is typically a PowerPoint presentation that covers the same subjects as the business plan and executive summary, but is a supplement to a live presentation. Once the potential investor has viewed the executive summary and expressed interest in learning more, the next step is a face-to-face meeting where the company presents their business case using the pitch deck. The potential investor may ask for a copy of the pitch deck in advance of or after a face-to-face meeting. To ensure a successful pitch deck avoid:
- too many slides (fifteen is usually about right);
- text-heavy slides and too-small font that renders the slides unreadable; and
- an “in-the-weeds” presentation that is not fully understandable to someone unfamiliar with your company.
It is helpful to ask potential investors the approximate amount of time they would like you to devote to your presentation, and then condense or expand the pitch deck depending on the amount of time available.
In addition to pitching your company to various investors, you will likely be pitching your company to potential customers, distribution partners, and other third parties. A pitch deck for presentations to potential customers or distributors has a completely different focus and flavor than an investor pitch deck. If you already have a pitch deck for meetings with customers, don’t assume that you can slap a different label on the existing deck, change a few words, and call it an investor pitch deck. Despite some superficial similarities, the investor pitch deck is an entirely separate and different animal!
Legal Disclosure, Draft Term Sheet, and Definitive Agreements
One key procedural question is whether the investor or the company will take the lead in preparing legal documents. The general rule is that VC firms take the lead in preparing all documents. This has some disadvantages, as the documents will invariably be heavily weighted in the investor’s favor. However, it has the advantage of relieving the company of the burden of preparing extensive legal documents.
Pursuing angel investment is usually an entirely different process from the documentation point of view – most angel investors will look to the company to take the lead in preparing documentation. As a result, if the company is pursuing angel investment they should have their legal counsel prepare an appropriate term sheet and disclosure documents as required by securities law. The company should also be ready to have their counsel draft the required detailed documents (stock purchase agreement, investor rights agreement, co-sale agreement etc.) upon agreement of a term sheet.
When I see poorly prepared pitch materials, it is usually the result of a company trying to “go it alone.” In other words, they try to prepare these documents without the assistance of outside professionals. I understand the cash-poor nature of most start-ups and the desire to operate “lean and mean.” However, not using outside professionals in this process invariably does not end well. In the case of the business plan, executive summary, and pitch deck, one of the challenges is that it is very difficult for founders to take fifty steps back from the company that has been their sole focus for many months or years and to present it to someone who knows nothing about the company. An outside voice is crucial to ensure that the documents speak to the newcomer. In addition, you are marketing the company, so involving marketing professionals is advisable. A business plan that is technically sound but has no “pop” will not excite a potential investor. In addition, the business plan needs detailed pro forma financial statements, and the involvement of an experienced financial professional is vital. Finally, there are multiple legal considerations such as compliance with securities law, structure of the potential investment, etc., for which the early assistance of experienced legal counsel is vital.
In summary, any company seeking to raise investment funds should take the time to prepare solid pitch materials, and should use outside professionals in the process – it will be time and money well spent.