Bringing it together in a P&L

Nobody can accurately predict a P&L five years from. But, most entrepreneur have a pretty good idea about the cost of running the business over the next 12 months. Product development, giving a free 1 year subscription to new customers, designing the marketing materials, hiring an investor presentation designer, etc.

Still there is value to putting all these floating numbers in a coherent P&L. In the short term, you can fix the exact timing of your expenses. "Free subscription to new customers" is a zero entry in the budget, but in a P&L becomes a real cost. Thinking about year 5 forces you to do the check whether your business is actually vaguely plausible. Can you recruit the required 10,000 enterprise customers with a 5 person sales force? Is it viable to have $500 server cost per customers if they are only paying $400 at best, before even getting to R&D and marketing costs?

The P&L is a thought exercise, not a tool to calculate your $20m profits in year 5.

"They want such details in the financials"

This is a complaint I often get from startups that deal with private equity investors. The analyst is asking for the number of customers, the number of sales people, the number of engineers in 2021. Who knows, right? Does this make sense?

Well, partially. Building a financial model for 2021 can be a valuable exercise in checking wither your business model makes sense. If you need to recruit 30 Fortune 500 customers in 4 years with 8 months sales cycles and head quarters which are based on a different continent, you cannot get away with 2 sales people and some search engine optimization in your marketing and sales budget. On the other hand, a consumer-focused company that needs to sign up 500,000 user does not need a huge enterprise sales operation.

It is this sanity check that investors want to do. Your "sales and marketing cost is 30% of our $100m 2021 sales" does not show - in most cases - that you have thought about what it would take to build such a company.

Tech research for the outsider

"Oh, [tech research company] must have a chart on that!". Many startup pitch decks features charts, forecasts, and quotes by Gartner, IDC, Forrester, and others to back up their market claims. Here is how a potential investor looks at these charts:

• Every deck they have seen over the past 10 years probably includes a $1b market forecast by one of these. Most of these companies are not $1b businesses.
• These research agencies do a reasonable job at mapping out what people are spending today on technology, forecasts are based on this picture of today, where an analyst applies different growth rates in an Excel sheet to get to a number that is 3 years out. It is an extrapolation of market trends, not a thorough research about how IT could change fundamentally
• Research relies on a categorization of the IT market with ambiguous names, it is never clear what is included, excluded, where a new technology fits, whether markets are double counted
• Overall IT spend grows at a steady pace, that's how corporate IT budgets work. So a revolutionary new technology cannibalizes investments in other technologies. Research reports hardly ever show sharp drops in the size of market segments. Rather, when a new technology emerges, people relabel, redefine the market segments to reflect the new reality. So again, not a helpful basis to forecast the future.
• The quotes in the research report are loaded with jargon, but most importantly, all sound the same. A product manager might be really excited that a Gartner quote includes "it will definitely think about considering making my IT infrastructure more scalable next year by investigating [technology X]", but for an investor this sounds all familiarly vague. 

So how to use this type of information? Treat it as just another data point, but don't make your entire pitch dependent on it.

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Image via WikiPedia

Wobbly propositions

Internet / mobile consumer propositions can be constantly changing, and ambiguity can be a great driver of the creative product development process. In investor pitches though, you need to freeze the brain storming and present one consistent, stable product.

Investors need to make 2 leaps: understand what your product is about, and get a sense for the product you want to offer. In 20 minutes, you can't introduce 3 variants, discuss 10 other cool ideas, leave that for the follow on meetings.

These type of app ideas are very hard to describe in bullets or even pictures. The best way to get things across is to create a very specific user case example and describe a sequence of events, interactions between users. You can alternate between images, mock ups, etc.

The priority of all of this is to explain and show things, "pretty" comes in second. Sometimes investing a lot of energy in making screen mockups with buttons and sliders actually makes the app idea harder to understand. To show that you have design skills in house, you could take one app screen and turn it into a pretty mock up.

A side effect of this effort in an investor presentation might be that you get more clarity inside your senior team what your product should look like.  

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Image by Nicolas Henderson on Flickr

Investors pitching themselves

Investors need to pitch themselves as well to raise money for their own fund. I get to see many of these decks from clients. And in them, investors make the same mistakes that they advice potential and actual portfolio companies not to make.

To be honest, they might even be worse. Unlike a normal company, there are very few things that differentiate the operations of one PE, VC, hedge fund, from another. And secondly, the presentation culture in finance is very conservative, most institutional investors (the ones investing in PE funds), want a sit down meeting with a paper document in front of them.

Here are some of the bullet points that will show up in any investor presentation:

• We are a highly experienced team
• We delivered great returns
• We do really thorough due diligence
• We do extraordinary risk management
• We have a very sophisticated modeling capability
• We are hands on with our portfolio companies
• We have proprietary deal flow
• We are being loved by our portfolio companies
• We have a unique network of partners

Think about an institutional investor who receives hundreds of these decks, all making the same points, written in the same style, using the same (blue and grey) colors.

As a fund wanting to raise money, you need to decide which of the above are hygiene factors for which you can tick the box, and which are truly special in your case and build a story around that is consistent. 

And I see most funds do a pretty good job when they pitch the story verbally to me, the challenge is to get that verbal story translated into visuals. This is especially important because these decks are emailed around to decision makers who might not have been at the physical meeting. 

"This chart says it all"

One chart with a few circles explains the product roadmap, pricing strategy, customer segmentation, and competitive differentiation. Perfect!

When I push back, clients are often surprised. The problem: the chart works perfect for people who have been sweating over it for 6 months. They remember how they inverted the direction of the arrows back in December, how they added the color layer, how they got rid of these long sentences that used to sit at the bottom left.

The person who sees the chart for the first time misses that context. It is the visual equivalent of the poetically beautiful but utterly vague mission statement.

Two solutions:

1. Go for a completely different visual approach
2. Use the existing concept that the presenter got used to, but carefully layer all the concepts one by one

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Art: Malevich, "White on white"

Writing good emails

"Cover letters" that introduce a pitch are often poorly written. Think about the latest spam email that you received from a head hunter offering to help you with recruiting staff for your startup. You open it (maybe the subject line was decent), and as soon as you started reading 3 words you knew what was going to come and deleted the message.

A cold email is a shot at someone who is looking for the earliest opportunity to shorten the email inbox with that satisfying "delete", "archive", "done". The skill is to postpone that moment.

• If your email is a huuuuge amount of text, people don't read but eyeball and hit "delete" after spotting the usual "that's why you should invest" at the bottom after pagedowning the text. A lot of text in one block is scary.
• How did you get to the person? "[x] gave me your name", is OK, but "[x] told me that you should be really interested in this" is better if that is what she did.
• Line break, then a super short and to the point sentence what you are: "Startup raising series A, with x in sales, in the drone market, with [famous investor] as a Seed investor"
• Line break, this is a critical moment where you can feel the finger going to the delete button. You need to present the hook. "Yes, everyone know that drones will be big, but there is something that is blocking progress and we fix that [name of thing you fix]" Or "our team consists of [famous person, famous person, famous person]
• Then point to a short slide deck that you attached that explains your company. The objective of that slide deck is not to land the investment, but to create enough intrigue to initiate a phone call. (Confidential) product details and financials, long market backgrounds, detailed implementation plans, are all for a later stage of the dialogue.

In short, avoid delete button triggers: long paragraphs of text, buzzwords, lack of clarity of what it is you do, what you want, lack of clarity of how you got to the person, generic pitch deck that is not tailored to the email stage of the due diligence process.

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Image by freezelight on Flickr

The pitch to the entire VC partner group

These observations by Jason Lemkin are spot on. By the time you have made it to final presentation to the full partnership of the VC, it is likely that the partner you were in touch with until then wants to do the deal. The main challenge in this presentation is not to make mistakes in front of an audience who has done far less homework than that partner. Do your thing that worked before, and treat ignorant questions with respect.

"Years ago, I invested in..."

An investor is heavily influenced by the successes and failures of past deals. There might be no scientific evidence that "you can't make money in healthcare diagnostics", "ad tech is dead", "companies founded in Italy are hard to scale", "that sounds like IT management, and that is a feature rather than a market" but the investor, with sample size n=1, is a true believer.

In the first few seconds of an interaction with an investor, they will try to put you in a box of something they understand and/or have invested in in the past. Help them do it, and say that you will clarify later why "mobile social network" is not exactly what you are doing.

If the dialogue with the investor continues, pay careful attention to of the cough comments about past experiences where she burnt her fingers on something that sounds similar. These reservations go really deep, an investor won't trip over the same stone twice. Understand the concern, and really explain why your situation is different. If you don't know the answer right away, get back to her later after you have collected the facts.

Read human signals

The investor asks you a question, and the instinctive reaction of an entrepreneur is to fire back with data, slides, and arguments to prove that the investor is wrong. "No, that concern does not apply to me because, because. because". Part of the rhetoric includes a repeat of what just has been presented, to eliminate the possibility that the investor did not understand it the first time around. Boom, boom boom.

Pick your battles. Especially if the investor bases the question on 5 other startups she has seen in the same field, it is 5 people she knows and trusts against you she just met 20 minutes ago. Maybe she has a point, maybe you need to find out a bit more about the background of her concern, after which you can give a more balanced answer, which could well be, let me check and I will get back to you.

Read the human signals, if the investor does not engage anymore and says "OK, I understand", but her eyes say something different, it might well be that she simply does not want to hear a repetition of your arguments she does not believe.  

Pitching to investors

I have written a guest post on Presentation Guru, the digital magazine for presentation professionals. Here you can find my post about designing presentations that will convince investors.

"Why should people invest in my company?"

Google is full of free investor presentation advice and presentation layouts. The problem with all of these is that they are generic and not specific to your situation. So blindly filling out a presentation template is unlikely going to give you the best pitch.

Here is another way to craft your pitch. Think of an investor you respect, and even better, an investor whose reasoning you sort of understand resulting from conversations and or blog posts. Now, jot down an imaginary conversation that could have taken place if you find yourself next to her in the check in line for a flight. The most important part of the exercise is to anticipate the likely questions are face expressions you are going to encounter: "Really, what is it about?" "Hmm, that is a sort of [x] for [y] right?" "But are any of your users actually sticking around?" "What do people pay today for this?" "But you have no machine learning expert on your team" "Yes, I know that online video consumes a lot of bandwidth, but what does it have to do with you"

 Now take you notes from this conversation and use it to craft the flow of your investor pitch. Then, go back to the standard investor presentation templates and use them as a check list to see whether you haven't forgotten anything important.

Why is the business school, standard, investor presentation structure not always the right one?

• Investors might already know a lot about a market, a technical vertical segment, so there is no need to do the 101
• Investors might actually know nothing about a particular market, and you will have educate them before getting to the actual pitch
• There are "elephant in the room" questions screaming to be answered first, even if they allow show up on page 25 of your template
• Visual or verbal analogies might require a story sequencing that clashes completely with a standard investor pitch template
• If you have 500 pages and/or 3 hours of material there is no alternative but to structure things orderly. ("Hey, where were we again?")  In 10 to 20 minutes, you have a bit more creative freedom to shuffle things around
• Standard presentation structures might not work in a conversational pitch style, if you start rattling down your Harvard-approved pitch the investor already gets worried: "Huh oh, we are going to get this one for the next 10 minutes" and you are likely to be interrupted with a question that invites a dialogue.

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Art: Leonid Pasternak, The Passion of creation

"Do you do web sites as well"?

New startups are in need of all kinds of marketing collateral: pitch decks for investors and/or potential customers, product brochures, and a web site. I think that in the beginning, people are aiming too high with the web site: super effects, video backgrounds, sparkle, and glitter.

But the experienced investor or corporate purchaser sees through the facade immediately, this is a brand new startup with hardly any customers and 6 months of VC funding left. Instead, you can build a web presence that show yes, that you are young, but that you are serious and know what you are doing.

• There is actually some sort of web page on your URL, not an "under construction"
• Use squarespace, Wix, or another template engine for a modern look and feel, with at least a premium enough version that it does not say "proudly built with Wix" at the bottom.
• Make sure your branding is consistent: accent color (you don't need a lot of it), and a simple logo (does not have to be a master piece) 
• No gmail or hotmail email addresses
• Your LinkedIn profile actually says that you are the CEO of this company, and not a marketing consultant from 2004 to present
• The company has an address that when entered in Google street view does not point to a residential street
• When the site has a "news" section, or a blog, it should contain fresh articles, if not, just don't put it on.
• The web site should actually describe what the company is doing, without buzzword overload

In the early phases, especially for enterprise sales, Google will land you a lot of customer inquiries, but rather people will visit your web site after a meeting as a form of due diligence.

Pitch one liners

TechCrunch posted a list of contestants at the latest  Y Combinator demo day, and you can learn from the one-liners that describe the company. A few words capture the essence of a pitch and instantly makes it clear what the company does, and even more importantly, teases you to find out more about a potentially interesting idea. 

No buzzwords, filler words, no hype. See how the headlines use concepts that we already know, often brands of established companies. This is a quick memory short cut for a story that would have taken 30 minutes to explain to someone in 1995 who never heard of Palantir.

Voodoo Manufacturing – A robotic 3D printing factory
Volt Health – An electrical stimulation medical device
Terark – Making databases faster
Wright Electric – Boeing for electric airplanes
Speak – AI english tutor
NanoNets – A machine learning API
Scribe – Automating sales development representatives
Breaker – Making podcasts a real business
Bitrise – Automated build/test/deploy for mobile apps
Fibo – Mobile work tracking for construction teams
Paragon One – Career coaching from real professionals
Tress – A social community for black women’s hairstyles
Bicycle AI – Automated AI customer support
Vize Software – Self-Serve Palantir
Simple Habit – Netflix for meditation
Snappr – On-demand pro photographers
IQBoxy – Software that replaces human bookkeepers
Beek – Book review site for Latin America
Bulk MRO – Industrial supplies for India
Soomgo – Thumbtack for South Korea
Cartcam – Shopping app for the Snapchat generation
Peer5 – P2P Serverless CDN
Pit.ai – Automatically mining trading strategies
SmartAlto – Software suite for commercial real estate
XIX.ai – Predictive assistant that anticipates your needs
Zestful – Employee activities as a subscription service
Arthena – Art investing for everyone
Mednet – Stack Overflow for oncologists
Penny – A mobile personal finance coach
Moneytis – The cheapest way to send money abroad
Hogaru – Cleaning for SMBs in Latin America
Bulletin – WeWork for retail space
Sycamore – Onboarding drivers for on-demand jobs
Aella Credit – Consumer and low-income lending platform
Tolemi – Software to help cities find distressed properties
Niles – Conversational wiki for business
Upcall – Outbound calls as a service
KidPass – One pass for “amazing activities for kids”
Lively – Modern healthcare savings account (HSA)
Indigo Fair – Amazon for local retailers
Collectly – Stripe for medical debt collection
Tetra – Automatic notes for business meetings
FloydHub – Heroku for deep learning
ACLU – A non-profit you might know

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Image via WikiPedia

Presentation half life

Presentations go stale over time. Watch your slides. You might not see it, the audience will. 

• PowerPoint 2010 fonts, colors
• Out of date logos (of your company, but also customers, competitors, partners)
• Inconsistent formatting between pages
• Analogies to over-used, old, example companies ($1 dollar shave club, MySpace, etc. etc.)
• Growing slides: company history, company events, customer logo overviews, every year another column gets added and the others get squeezed

But what I most often see is that the founder still pitches her deck the same way she got her seed funding (with success). A few years on, the company has moved on, and the investor concerns have moved on. Yes, the technology is still great, but you don't need to convince anyone that that is the case. But what about that traction with customers?

Too informal

From multiple VCs I have heard this scenario:

Highly confident entrepreneur walks in the conference room, sits casually next to the VC rather opposite the table, leans back relaxed in the chair, rocking back and forth, savoring his coffee, suggests to do a different style of pitch, life is too short for boring pitch decks, let's just have a more intimate and informal chat about the tech world at large and the entrepreneur's specific venture in particular, the entrepreneur-investor relationship is all about dialogue, conversation, and exchange of ideas...

"Multiple VCs", means 2 VCs, and both of them were women. (No, it was not the same entrepreneur).

This approach might be a bit too informal to work. Have your traditional pitch deck ready, and make things less formal if you sense the right dynamic in the meeting. 

Refreshing language?

It is tempting to describe your product in a completely new vocabulary to illustrate that you do things differently.

Still, the first thing that a potential customer or investor will do, is to translate that back to the old vocabulary in order to figure out what is different, and what is not.

Often it is better to do part of the work for them. This is especially true for impatient investors who are not always convinced that something that sounds completely different, is in fact, completely different.

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Image: The Treachery of Images

That annoying junior analyst

Overheard in a meeting. "Don't put in too much detail in the 5 year financial forecast. It can never be accurate anyway, and you run the risk to wake up that annoying junior analyst who has not said anything the entire meeting, and let her zap the entire momentum of the pitch"

Agree, super precise forecasts 5 years out can never be correct. But:

• A consistent 5 year P&L with realistic margins and marketing spend is a sign that the company knows what it is getting itself into. It is not a test of accuracy, it is a test of management competence.
• Analysts can look junior, but could actually be reasonably senior in an investment organization. Or, even if the analyst is junior, convincing rather than bypassing them is a required hurdle in the investment process. "Hey Sally, did their financial planning make sense? You looked at it right"
• Maybe it is actually good news that the analyst did not ask a lot of questions about the other content in the presentation.

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Image: Promotional photo of the cast of the CBS television series Whiz Kids

Pitchbot - chat bot to practice investor pitches

This is nicely done: pitchbot. It gives you a nice feel about what a discussion with different types of investors might look like.

Elephants in the room

Client "I don't want to talk about this, because it reminds people of [X] which failed. Let's call that differently because there was that research project 10 years ago that did not work. Hmmm, let's not put that on page 3".

Me "But your technology solves all these problems from the past right?"

Client "Yes"

Me "And in meetings, where do you end up talking about all the time"

Client "People confusing me with technologies from the past"

Sometimes it is just better to take things head on and stop avoiding the big elephant that is sitting in the room but nobody wants to bring up in a conversation.

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Image via WikiPedia