In the past, it was necessary for entrepreneurs looking to raise finance to submit 100-page business plans. But modern-day investors demand, at a minimum, a well-crafted financial model and a pitch deck.
Increasing volumes of applications for funding and more sophisticated investors have driven this trend towards more succinct funding requests.
What does this mean for you? A new form of lure and bait is being used by hopeful entrepreneurs to reel in funders. Enter the deck.
At its simplest, a deck is a screening tool that serves as the key to your first meeting with a potential investor. It is not a comprehensive analysis that is bound to put off busy investors with limited time on their hands.
The purpose of the deck is to make the job of investors easier — and to make it impossible for them to say no.
Done properly, a great deck should explain why the problem you are looking to solve creates a meaningful market opportunity, why your solution will be able to solve this problem in a way that competitors and substitute solutions can’t, and why your team has created, or is able to create, a business model with matching unit economics capable of turning any future market share into tangible economic value.
Your deck should solicit sufficient interest from investors to yield follow-on meetings, conversations and discussions — opportunities for you to present your vision, and explain why investors are likely to profit from it.
Related: DTI Funding
DocSend, the sales enablement and analytics software provider, recently teamed up with Professor Tom Eisenmann from Harvard Business School to conduct research into the use of pitches and the factors that contributed to their success.
Core takeaways were:
- Keep your deck to 20 pages or less
- Contact 20 to 30 investors
- Highlight your team slide — it is one of the three most viewed and important slides
in your deck
- Financial performance or forecasts will be the most used slide in your deck
- Don’t insert deal terms into your deck. Investors want to structure deals according to their preferences.
Your deck should include information that addresses the topics below, and in the order set out to ensure optimal and logical informational flows:
- Why Now?
- Market Size
- Business Model
The following example is based on a fictitious company and is not unlike Silicon Valley, the acclaimed comedy series on HBO. Assume Peter Hendricks, founder and CEO of Pied Piper is on the road to raise finance.
Using the construct and framework we’ve already set out, his story might look something like this:
“Pied Piper’s mission is to connect to the world through low cost, compression enabled data-driven interactions. We believe compression-driven, neural enabled networks offer opportunities for users and companies to interact more frequently, more cost effectively, and in a richer way than previously possible.”
Key Takeaway: Allow the reader to understand that the commercial vision drives your mission.
“99% of the world’s data has been created in the last two years. Along with the growth and explosion of data creation, capital expenditure on infrastructure has had to increase to keep abreast. Given the frequency and volume of digitally-driven data enabled interactions daily, weekly, monthly and yearly, consumers and companies are spending unheard of amounts on data and Internet costs to enable product usage and enablement.
This results in:
- Annual expenditure of R20 billion by data-heavy companies, and an estimated R82 billion by consumers using Internet-based applications and tools.
- Companies and consumers spending about R60 billion more than they should on data and hosting costs, due to cumbersome infrastructure and ineffectual architecture.
- Average users waste about three days annually waiting for files to load and data to buffer.”
Key Takeaway: Use data and numerical analysis to support your narrative. This will make your story more believable and justifiable. Remember, it’s all about justification.
“Our ever-growing data and Internet bills, capital investments and consumer facing latency could be solved by flexible, well-crafted compression software that reduces file sizes through the entire data lifecycle. Reducing file sizes will reduce data needed to remit, thereby reducing data costs, while lessening the need for capital investments to support data storage and transmission. As such, we believe compression holds the key to unlock R45 billion in excessive consumer and corporate data spend, in addition to providing opportunities for these expenditures to be diverted from commoditised necessities to higher-yielding alternative investments.”
Key Takeaway: Without divulging product or situational information, craft a story about how the problem might be solved. Demonstrating the effect of such a solution numerically will emphasise your point about the seriousness of the problem to any prospective investor.
“We believe data and Internet services are becoming increasingly commoditised, thereby reducing corporate and consumer willingness to pay outrageous amounts for data consumption. Furthermore, we believe the current problems with data consumption will be compounded by the growth in mobile adoption and additional subscription for communication and social media applications. The congruence of these events and occurrences will create a large and rich opportunity for compression based applications that will reduce file sizes, slash data costs, and improve security.”
Key Takeaway: The purpose of this section is to explain why market and technological conditions are, or will become, conducive to companies and consumers using your product, or products/services of a similar nature.
“By looking at our core target markets, we currently preside over a R3 billion market opportunity.”
This estimate is based on the following supportive factors:
- Our target corporate clients are media, financial services, medical and telecommunications companies, and we have segmented our consumer target market according to age and smartphone adoption.
- In South Africa, we are currently targeting users aged 18 to 40, LSM 6 to 8. Given the application of our technology, we expect these users to be moderately tech savvy. Based on this segmentation, we estimate
a primary population of 4,5 million potential users.
- From a corporate perspective, three media companies, two medical companies, four financial services companies and two telecommunication companies have a need for our product, and are willing to subscribe to our offering.
- Based on our business and pricing model, we estimate our corporate cluster to be valued at R2,5 billion, and our consumer cluster R0,5 billion, based primarily on advertising opportunities.
Key Takeaway: You will often hear entrepreneurs say: “If I can just get 1% of this market, we will generate billions in revenues.” That is top-down analysis and investors will tear that line of logic apart. Always use bottom-up analysis. No matter how hard it is to find data or information that relates to your external market, reverse engineering defensible numbers is more often the wiser and more defensible route. Bottom-up analysis allows for an articulation of the number of customers in the market for your product or solution (defined according to the problem identified and the number of people or businesses experiencing the problem and in need of a solution), multiplied by the potential revenue in serving each customer individually.
“We believe Pied Piper is deeply differentiated from competing offerings, thus enabling us to capture market share more easily and directly than some of our competitors. We believe our freemium model will allow for wide adoption, with additional attractiveness driven by our wide product and service capability. While our competitors are only able to compress specific segments of data, the Pied Piper platform allows for data and informational optimisation across all categories.”
Key Takeaway: Use a series of tables or matrices to measure relative offerings from competitors or substitute products in highlighting the unique characteristics offered by your product or service. Your competition slide should state simply and convincingly why your product solves the problem in a way that competitors can’t. You should cover the following areas in your matrix analysis: (1) Price (2) Distribution (3) Funding raised (4) Business model (5) Key product features.
Related: New Ways SMEs Can Find Funding
Outline what your product does.
Key Takeaway: Closely tie your product story into the PSM (problem, solution and market size). Explain why your product is able to solve the problem outlined without repeating your solution narrative. Your product story should be a molecular analysis of your technology, explaining why it constitutes a viable and defensible solution. Moreover, your product narrative should be packaged and told in a manner that resonates with your market and opportunity analysis inasmuch as it must fit the customer base outlined, and the budgets from which potential customers will subscribe to your offering.
“Our business model is two-fold and relates to our key target breakdown according to consumers and companies.
- We plan to deploy a SaaS based model for companies, where they pay a tiered amount of R1 million monthly, which will increase in line with utilisation. This allows us to align our interest with that of our clients, allowing us to benefit alongside them from the success of our product.
- For consumers, we will deploy a freemium model to provide users with free access to our platform, allowing for low costs of acquisition and registration of a large base of potential users. We plan to use this base for cross-selling and up-selling of additional product and platform features, thereby monetising our consumer-based users.
Key Takeaway: The business model slide is a bridge to the information set out in your financial analysis. State and explain how your business proposes to monetise its offering, carefully setting out the underlying unit economics and key value drivers. Astute investors are always on the lookout for untenable business models, so be sure to know your key value drivers.
Richard Hendricks — CEO
- Experience: Software developer for Hooli
- Education: Computer Science degree from Stanford University.
Jarred Dunn — Business Development
- Experience: Senior Vice President at Hooli focusing on strategic markets
- Education: MBA from Stanford University.
Erlich Bachman — CMO
- Experience: Founder of Aviato
- Education: Computer Science degree.
Betram Gilfoyle — CTO
- Experience: Full stack software developer for a number of successful start-ups and corporates
- Education: Bachelor’s degree from University of Montreal.”
Key Takeaway: The purpose of your team slide is to demonstrate why you and your core team comprise the necessary skills and experience to make your venture a success. Provide a short description of the backgrounds of your key team members and their skill sets, linking these to their current roles and responsibilities within your business. Such competencies should relate to critical and important areas of your business or your key success factors. Think carefully about critical areas in your business, key human resources needed, and why your current team fills such gaps and requirements.
“Pursuant to our go-to-market strategy, we aim to achieve the financial performance set out below:
- Break-even is at R12 million in revenue, equating to one corporate customer or about 0,48% of the total market.
- With an investment of R10 million, we believe we will reach a valuation of R400 million in five years, thereby offering a 10X return on our valuation of R40 million today.”
Key Takeaway: Slides on your financial performance or outlook should not go into detail that you can’t justify and defend. Ideally, your financial slide should set out any historical financial performance (for those of you in the seed or pre-seed stage, you probably don’t have any past financial information – don’t worry), with a reasonable outlook for future prospects.
Thus: Last year’s financial performance, if relevant, with a two-to-three year P&L and cash flow outlook. Your finance slides should also include a robust break-even analysis across a series of different scenarios. If you are not familiar with break-even tables, get someone knowledgeable to assist you. (Break-even analysis is crucial to understand, as most investors would want to unpack this early on. Investors use break-even as a simple metric to unwind applicable risks, determine the number of customers you would need to acquire or products you would need to sell, and test the reasonability of your required customer base relative to the size and dynamics of the relevant market.)
In closing, your deck should be short, to the point, and relevant for investors looking for 10X growth in their investment.
You will therefore need to explain why the market is large enough, why your product actually solves a problem, and why you will be able to turn any investment into a real financial return.
Lastly, make sure you understand your business and materials thoroughly, as investors are sure to probe deeply. Nothing will end your meeting faster than a wrong number, a misunderstanding of your business, or if investors sense that you are waffling.
3 Components Of The Perfect Elevator Pitch
Can you clearly demonstrate value when faced with a time crunch?
After filming two seasons of Entrepreneur Elevator Pitch, I’ve come to realise that there are three key elements to delivering the perfect pitch.
Our show is unique when it comes to pitching: Potential entrepreneurs have just one minute to pitch their idea, service or product. Those 60 seconds have added pressure because the contestants are being filmed, and they are talking to a camera (instead of people) while riding up to the penthouse suite in an elevator.
In real life, with a different set of distractions, it’s essential to know how to deliver a convincing elevator pitch. Whether you are pitching a product, a service or yourself, here are the three essential components in a pitch:
- Stimulate interest
- Transition that interest
- Share a vision.
Can you stimulate interest?
The first step, stimulating interest, is the most important. In fact, an “elevator pitch” is usually determined by the limited amount of time you have, and circumstances may only give you the opportunity to stimulate interest. If you do a good job of stimulating interest, this can yield a second opportunity, where you transition that interest and share a vision with those you are pitching to.
Keep in mind that people generally buy based on emotion, using logical reasons as their impetus for action. So, make a point to connect with them emotionally in order to stimulate their interest. Don’t be afraid to show your feelings; demonstrate high energy and excitement for your idea, business or service. Your passion and belief need to come through in your pitch!
Use the 100/20 Rule to your advantage: Have the energy that you are providing R100 worth of value and only asking for R20 in return. This attitude will generate enough attention, giving you the opportunity to transition the interest that you’ve garnered.
Make the transition
But people don’t buy exclusively on emotion. There needs to be some logic in the decision to make a purchase. Therefore, you must address some sort of pain, fear or guilt in your pitch, that those without your product or service may experience. And if you can illustrate how you (efficiently) solve a big problem, you’ll have more statistical success in your elevator pitch.
Making a genuine connection can help you transition interest. Learn to make yourself equal, then make yourself different.
Simply having connections to the same people or a point of similarity in your backgrounds will help bridge the gap with those you are pitching. Then you can emotionally connect, following that up with the logic portion of your pitch.
Transition the interest you’ve generated with a clear explanation of what differentiates you. Build credibility by discussing your sales, distribution, revenue, awards and/or successes. All of these different ways to “attract” allow you to segue from emotion to the logical reasons to buy.
Of course, it is of the utmost importance to be honest when you are pitching. The truth always comes out, so ensure that you aren’t over-promising with your pitch. Don’t create a void that you are unable to fill.
What’s your vision?
Finally, in order to excel when sharing a vision, you need to have a value proposition that backs the 100/20 Rule. Make the value that you bring to the table as clear as possible. The value you’re asking for in return also needs to be clear. If you don’t display confidence in what you’re asking for, you won’t instill confidence in those you ask.
Tell others exactly what you want, why you want it and what you’re willing to give in return. You should have already proved your valuation when transitioning interest, then reiterated that valuation as you progressed in the pitch.
Take the people you are pitching through the reasons why you can be of value to them, the impact that you can have on their life or organisation and the capabilities you (or your product/service) possess that makes working together beneficial for all involved.
Practice your pitch, then get rich
After following each of these three steps, close with one simple question to gauge whether you are aligned or not: “Can you see any reason you wouldn’t want to move forward?”
If you utilise your pitch to stimulate interest in your product/service/self, transition that interest, then share a vision with those you are pitching to, the answer is almost always a resounding “no.”
And if you get objections or rejections, so what? Address whatever objections there are and if you still can’t get aligned, that’s OK. Take the perspective that the universe has a set number of rejections you need to get to before you find the right partner.
Related: How To Pitch
Be grateful for an opportunity to prove others wrong, and believe that if you keep working on your pitch, product, service or self, everything will come to you in the right way at the perfect time.
This article was originally posted here on Entrepreneur.com.
Alan Knott-Craig Answers Your Questions On Finding a Funder To Managing Your Staff
What you really need to know to land an investor.
Focus on one customer at a time. Make that customer happy. Move to next customer. Aim for ‘1 000 true fans’, then keep them happy.
The rest will come.
1. How do I find an investor?
You have 4 options:
Applicable if you only have an idea, and you need cash to make your idea a reality. Usually between R500 000 and R1 million. You need to milk your network: Parents, friends of parents, colleagues, parents’ friends, friends. If you have no network, you need to build a network or use your savings. There is no math to these investments. You get money because they believe in you, not because they seriously expect a return.
2. Early-stage VC
Applicable if you already have a working product with traction, ie: users and/growth, and you need cash to build out. Usually between R1 million and R2,5 million. There are a number of early-stage VC’s in South Africa, just ask around. Knife Capital are amongst the best. Ideally you want an introduction from a trusted party. Failing that, just email them directly. Give a simple pitch. They’re looking for 15X return on investment.
3. Late-stage VC
Applicable if you have a critical mass of users and meaningful revenue, ie: R10 million a year, and you need cash to grow. The late-stage VC’s are the likes of 4Di, hard to get access without an introduction from a trusted third party, usually one of your existing investors. They are looking for a 5X return on investment.
4. Private equity
Applicable if you have a cash-generative business that requires capital to either exit a shareholder, or to grow profits exponentially. Looking for 25% IRR.
There are also state-sponsored sources of capital for entrepreneurs from previously disadvantaged backgrounds, for example the Technology Innovation Agency. This is ‘soft’ money, requiring no equity or personal surety. If you can get it, take it.
Investors are looking for return on capital. If I invest R100 in an early stage company, I want to get R1 500 (15x) back within a reasonable period of time, ie. no longer than five years.
The key metric is Total Addressable Market (TAM). The size of the market you’re targeting determines the potential size of your business.
Assume you target a market with a TAM of R100 million (profit), and you assume you can get 10% of that market by 2020. That means your business will have R10 million of profits in 2020.
A private company is valued at a maximum of 7x profit, so your company will be worth R70 million in 2020. If you ask me to invest R1 million today, I need 21% of your company in order to realise a 15x return (R15 million) by 2020.
Start with TAM, work from there. Remember, every assumption you make will be questioned. Minimise your assumptions. Maximise the evidence for your assumptions.
2. If you are a start-up, what’s the most important thing you can do to grow?
Focus on one customer at a time. Make that customer happy. Move to next customer. Aim for ‘1 000 true fans’, then keep them happy.
The rest will come.
For consumer products, always make it easy for your customers to share. Friction-free sharing is the easiest marketing tool you can have.
Feature-creep is a big risk and can be a big distraction. You need one single value proposition that is enough to get customers. Having fifteen cool features will never compensate for the lack of one killer use case.
3. Our staff is growing, more than 20 now. Any tips on management?
Having four or five staff is not hard. You don’t need to be a good manager or leader. You can muddle along. It’s when your team starts growing past the twenty number that management becomes a skill rather than a word.
There are hundreds are articles written on the art of management, but Jack Welch (former GE CEO) broke it down to this:
- People want to know who they report to.
- People want to know how they’re being measured.
- People what want to know how they’re doing.
- That’s it.
- One boss. Clear KPIs. Regular feedback sessions.
Alan Knott-Craig’s latest book, 13 Rules for being an Entrepreneur is now available.
What it’s about
It’s easy to be an entrepreneur. It’s also easy to fail. What’s hard is being a successful entrepreneur.
For an entrepreneur, there is only one important metric of success: Money. But life is not only about making money. It’s about being happy.
This book is a collection of tips and wisdom that will help you make money without forgoing happiness.
Get it now
Do you have a burning start-up question?
XPRS Capital Africa Bridges Funding Gap Faced By South African SMEs
XPRS Capital Africa answers local SMEs call for funding.
Small and medium enterprises (SMEs) are a vital component of the South African economy. However, there is a substantial portion of the country’s estimated 650,000 SMEs that have no access to funding to assist in their continued growth
In response to an increase in demand for reliable and easily accessible capital for businesses like these, XPRS Capital Africa opened its doors in South Africa. The specialist business funding provider is geared towards rapidly vetting and approving short-term business funding ranging from R50,000 to R500,000. In addition, XPRS Capital Africa specialises in extending funding to SMEs that may not qualify for funding from traditional lenders.
Simon Leps, CEO of XPRS Capital Africa explains that XPRS Capital has its roots in the US, having been founded in 2013. “The company is a renowned and established alternative online business-to-business lender. Together with a team of data scientists and using thousands of data points, XPRS Capital has developed a proprietary credit vetting algorithm and packaged product set.”
“The technology and approval processes developed by XPRS Capital has a massively successful track record overseas and the experience that our company has gained over the years will help many more SMEs in South Africa to reach their potential,” says Leps.
“The XPRS Capital platform has processed over $1b worth of loans and has a proven track record of funding thousands of businesses across hundreds of industries,” he continues.
Leps adds that the company’s sophisticated algorithm allows XPRS Capital Africa to provide funding to many South African SMEs that are usually denied loans on the basis that their owners have less than ideal credit records. “Traditional lenders are often reluctant to lend capital to SME owners whose credit histories place them in higher risk categories. This has created a massive challenge for many promising SMEs. At XPRS Capital Africa, we focus on the health of the SME, and use state-of-the-art technology to provide businesses the cash flow they need to grow and flourish.”
Using the unique algorithm that we have optimised for the South African market, we are able to accurately assess any SME that has been in business for over a year, to rapidly provide a 3 to 12-month funding solution, notes Leps. “The online application takes less than 10 minutes, allowing SME owners to spend less time filling in forms for funding, and more time on their business.”
XPRS Capital Africa provides funding directly, working closely with SMEs to offer the fastest approvals, best possible repayment terms and most accurate risk profiles for any business.
“Cash flow is the lifeblood of every single business. Our mission is to provide this quickly, affordably and reliably,” Leps adds.
He notes that, given the high number of businesses that have trouble accessing financing, SME owners should also know how to maintain their own positive credit records. Thereby they can ensure that their businesses have access to as many options as possible.
“Ensure that all areas of your company are looked after to the same degree as most funding providers want to see that all aspects of a business are well managed. Up to date, audited financial statements and management accounts, well managed bank accounts, and good budgeting and forecasting show that the owners are attentive. Owners also need to know their businesses inside and out and be able to answer questions about their cash flow and deal pipeline.”
Related: The Investor Sourcing Guide
In addition to this, Leps says that the customer’s experience when dealing with the business could also have a measurable impact. “Any touchpoints that are available to your customers will be looked at by potential funders, so all customer facing assets should look professional and be kept up to date. This goes for websites, online portals and social media accounts.”
“The ability to access additional funds when your company needs it is the key to long-term survival. That’s why it is paramount to maintain the best possible credit record. However, it is also important to remember that, whatever the financial state of your business, business owners are never completely out of options,” Leps concludes.
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