The Art and Science of Early Stage Fundraising: A Fundraising Deck by Design
The role of narrative, valuation multiple and personal struggle
In my previous post I talked about the blurb as the essence of your narrative and the fundraising deck as the representation of your business story. I also discussed some strategies to get warm intros to VCs and prepare for meetings. Now I want to focus on several important concepts around the pitch deck design. Obviously, there are stage-related specifics, but some overarching ideas that are generally true:
1. Narrative, information flow and balance. You want readers to enjoy the presentation and feel as though they have gained a basic understanding of what you are building and why. What you don’t want is for your audience to be overwhelmed by five-year revenue projections and perplexed regarding how you might achieve these goals. You should provide approximately equal amounts of information in each section of the deck, mindful that your goal is not to land a term sheet right away but rather to generate excitement about your team and product, and the growth and market opportunities. The objective is to secure the second meeting. You are showcasing yourself, not overselling. Think about the deck as a door opener.
2. Valuation multiples expectations. Assume you are raising at $10M post-money valuation for 18 months. Depending on what we think about the risks associated with your business, we expect you to raise the next round at a minimum valuation multiple of 2x and ideally at 5x due to the nature of VC math. The Power Law in venture capital is important not just in the exit scenario but across the fundraising lifecycle of portfolio companies too. Are the goals you plan to achieve in 18 months in accordance with your business development plan aligned with multiple expectations? Will your MRR, ARR and unit economics at the end of 18-month period, and your future revenue expectations, support such a sharp increase in valuation?
3. The “Flywheel Effect”. This concept was popularized by Jim Collins in his book Good to Great. The flywheel components include positions or features that encourage reinforcement through causal effects, thereby increasing exponential and nonlinear adoption.
Amazon has created a virtuous cycle of broader product selection, better customer experience, more sellers, more traffic, lower cost structure, and lower prices: the way these factors reinforce each other is a great example of the flywheel effect In venture capital, we think that when the flywheel effect is set in motion, it can create sustainable growth and are very bullish on companies that understand these mechanics. Think carefully about the most important features that will drive demand, and the causal linkages between them.
3. Market timing. This is critical but somehow often underrated by entrepreneurs. It’s virtually impossible to build a monopoly with a $1B+ valuation if you are two years too late or five years too early, even if your team and product are great. Throughout your narrative be sure to address the ‘Why now?’ question. Are there underlying market dynamics (i.e. e-commerce adoption on steroids due to the Covid-19 pandemic) or technological forces (i.e. eventual advances in artificial intelligence and communication technologies) that will impact your business? Are there any other trends that could create a sense of urgency around the adoption of your product and could lead to hockey stick revenue and user growth?
4. Why you and your team? Why are you the best people in the world to build what you are building? Got a degree from a good college? That’s awesome, but don’t rely on degrees and certificates too much. Think about your story. Many great entrepreneurs have had to overcome some serious personal struggle. We grow when it rains. Did you battle a potentially terminal disease and decided to start a biotech company as a result? Are you coming from a rural village in Africa where kids typically don’t touch a book after the age of 7 and thus want to address K-12 education in emerging markets through technology? Did you get frustrated with real estate transaction experience in Brazil and decide to transform the industry by building a transparent digital real estate platform? Incorporate your story in the verbal presentation and highlight aspects of it in the pitch. The resilience, adaptability, conviction, and persistence that typically come as a result of some traumatic experience are equally, if not more, important than educational and professional background.
Hope this helps. Next time I will talk about the deck structure and emphasize the sections that I think are critical for early stage businesses.