Tip #89: Follow-up quickly

Tip 89: Follow-up. That’s probably enough “content” tips for now. Don’t want to write all your pitch for you. Let’s tackle a couple of other “process” tips next.

First, follow-up immediately. Hand-written thank you notes are nice, but what really wins goodwill is delivering on what you say. If you promise to send someone follow-up data, do it promptly. Answer follow-up questions quickly, supply documents, proactively address concerns raised during the pitch – all helps separate you from the mediocre.

Tip #88: Exit strategy data

Tip 88: Exit strategy data. Following from tip #87, provide some data on (a) precedent transactions and (b) comparable companies trading multiples.

(A): What have other companies in your space been acquired for? What did they look like at the time of acquisition (pre-revenue, profitable, growing at 50% or 10%)? When – recently or has the M&A wave in your industry passed already? On all these questions, data is key.

Data could simply be a brief list of acquisitions in your industry (and a long list in your diligence dropbox). You can find these for free through Crunchbase or the SEC Edgar portal for public companies (look at the big players in your space and see what they tell you about their acquisitions). You might also get some from industry-specific newsletters (sign up for newsletters from the mid-market investment banks that specialize in your space – they often send out great data as part of their marketing efforts). Even google could help.

Ideally there are some operational figures and in a perfect world financial data (acquisition price, revenue and EBITDA of the acquired company). The data is out there; you need to have looked at it - not least because we will.

(B) Much easier to find is comparable company trading data – the share price multiples of publicly-traded companies in your space. Say you’re an online marketplace company. You need to know how marketplaces are valued (multiple of GMV, for example), and how players large and small, generalist and specialized, US and international, are valued – Ebay vs Amazon vs Etsy vs …

If you can tell us that your “peers” get traded based on an EBITDA multiple, and over the cycle between 4x and 8x LTM EBITDA, you will be very persuasive that you know what you’re doing and we can have some faith in your exit strategy if you say they could buy you at a multiple that would be attractive to you in a deal that would accretive to them.

Almost no companies do this. It isn’t as sexy as another set of product UX designs, and it isn’t easy; but it’s a very effective way of crushing it in your pitch. “We will be acquired by Amazon because they buy a lot of companies” is not.

Tip #87: Be acquired

Tip 87: Exit strategy – be acquired

So, we’ve agreed you aren’t going to IPO. But saying “we will be acquired” isn’t a good answer either – for many reasons.

First, duh, it’s obvious. Second, the passive formation (see back at tip #29) shows that the proactive approach of driving towards an early exit is not on your radar – and it’s going to be a battle for us to push you towards setting up the business processes crucial to getting to executing an exit.

Even more than that, though, we need your idea on the plan.

Who: who buys companies in your space? Do you know them yet? Why not?

When: what does your company need to achieve to be an attractive acquisition target from acquirers in your space?

How: are strategic buyers gobbling up pre-revenue technologies, or are financial buyers like private equity funds rolling up companies with EBITDA of $5 million? Are they doing full acquisitions or long earn outs?

If you can answer some of these questions, your exit slide can hugely enhance your credibility; but usually this slide loses the last sliver of credibility a presenter has.

Tip #86: Exit strategy - IPO

Tip 86: Exit strategy – IPO

Following from the last tip, if you answer with those two options (IPO or an acquisition), you are clueless.

Early stage companies in the Carolinas do not have a high probability of reaching an IPO. On average around six companies IPO in North Carolina each year; none IPO in South Carolina; 20,000 companies are started in those states; I’m willing to bet none went from angel investment to IPO in five years.

The only realistic exit strategy is to be acquired. If you say you will IPO, your credibility is gone.

Tip #85: Exit strategy

Tip 85: Exit strategy – to include or not? On Guy Kawasaki’s 10/20/30 pitch infographic, he memorably concludes that “no entrepreneur knows when, how, or if she will achieve liquidity, and yet many include a slide that says “There are two liquidity options: an IPO or an acquisition.” Duh. If an investor asks about your exit strategy, it means he’s clueless. If you answer with these two options, you have a lot in common.

I guess we’re clueless: we are going to ask about your exit strategy. Yes, no-one knows when they will exit – but no-one knows what the financial projections will be either and you will definitely have to cover them.

Our goal as investors is to achieve a liquidation event – a sale of our shares to generate a return on our investment. It would be clueless for us not to at least think about this. In fact, it’s very often the first thing we think about, as it is for many VCs (including this guy).

So tip 85: include something on your exit strategy!

Tip #84: SC angel tax credit

Tip 84: SC angel tax credit. If you’re a South Carolina based company eligible for the SC angel investor tax credit (i) be applied and approved before you pitch and (ii) tell us you are eligible during the presentation.

You don’t need to explain what the credit is because our members are well aware (even those outside of South Carolina).

But if you could be qualified, make sure you are; and if you are qualified, don’t make us ask! Nothing says “could have been better prepared” more efficiently than wondering when asked “what’s the SC angel investor tax credit?”

Learn more about the credit here, because it’s important long before you pitch.

Tip #83: Use of funds

Tip 83: Use of funds. Investors want to know what you are planning to spend this capital on. Use of fund tables (another table? really?) often look something like this:

 
 

Moderate to high marks for brevity; low marks for being useful.

Product development – for what? Sales & marketing – for what? Marketing – what? “Scaling” – come on. "Expansion, Marketing, Software“ - that really doesn’t add anything more than saying “We’re raising money to build up our business.”

So Tip #83 – either delete your use of funds table entirely, or expand it to be something useful.

(One other approach would be to integrate it into your financial projections table (or datapoints in circles page). Of course, a separate problem is that very often "use of funds" tables don’t tie to the projections table! Having them on the same page makes it even more imperative that the data ties clearly.)

Tip #82: Minimum investment

Tip 82: Deal structure – the “minimum investment”.

Notice anything these two extracts from "deal terms" slides have in common that we haven’t discussed so far?

Tip 82: Remove the "minimum investment" when you’re pitching to us.

Why? Because our minimum investment (when aggregating our members' investments together) is around $150,000. It's not a good sign if we can get $100-150k of investment appetite from our members, so if we have $50k at the end of the process we are likely to pass. Either way, it’s up to us to choose our minimum investment amount. 

On top of that, the minimum investment individually for a member of our groups is $5,000. None of those figures are your minimum investment. Why make life complicated for people? We know our investment requirements; take this one of yours out.

(As an aside, these extracts were pretty good, but you can probably see by now some areas for improvement, in addition to losing the “minimum investment”. The left failed to say what kind of valuation (pre-$ or post-$) - which was a materially different result on these early kinds of investments. The right has needless words (“will be”), weak phrasing (“seeking to”), unnecessary characters (12 zeros), and a distracting typos (two spaces after Valuation). But overall pretty good efforts.)

Tip #81: Too much momentum

Tip 81: Deal structure – too much momentum. We recently heard one entrepreneur say during a pitch that she was in due diligence with 13 angel funds and groups. At first glance, this sounds impressive – lots of interest, lots of momentum, get on board before you miss out.

But the reaction from our members was something approaching incredulity (“You’re in diligence with 13 angel groups? Is that even possible?”), which didn’t really help with maintaining credibility.

Worse still is raising too much “FOMO.” Yes, we have a fear of missing out of good deals. But we have an offsetting fear of wasting a lot of time hearing pitches on roadshows and doing our due diligence only to find the round is full and we couldn’t participate after all. Failing to get into diligence with us because we thought it unlikely we’d ever get the chance to invest is perhaps not the result you are pitching for?

Tip #80: Fundraising momentum

Tip 80: Deal structure – fundraising momentum. If you already have good fundraising momentum, say so – don’t just hope we ask.

  • Raising $500k, preferred equity, $2.5M pre-$, closed on first $200k.

If you haven’t yet got good fundraising momentum yet, you should still be proactive about explaining your status.

  • Just launched a $500k, preferred equity, $2.5M pre-$ round

Another approach is to tell us how much the founders have already invested to get the business this far. This is essentially equivalent to showing your current fundraising momentum.

Tip #79: Deal structure in one bullet

Tip 79: Deal structure – one bullet. In the pitch we need to know three things relating to “the deal”: (1) how much you are raising ($500,000); (2) what is the pre-money valuation ($2M pre-$ valuation); and (3) what is the structure (preferred equity with a 1x participating liquidation preference).

Tip #79: that’s it.

We do not need to read or hear about minor structural details (we’re a NC LLC), unless there’s some complication that needs addressing early on.

We don’t need to have information that is generally known (we’re selling equity, which means shares in our company) or relates to general angel investments (a preferred equity round means you investors get paid first in a liquidation event) – because we know this already.

You also don’t need to detail specific structural terms (the deal includes pro rata rights, redemption rights, …). You can simply mention that you have a standard deal (standard set of angel deal terms) – or if there is something very strange that needs addressing mention it now. (Bonus tip: make sure there is nothing very strange that needs addressing.)

So three long tips to summarize in one “deal” slide that only needs one bullet:

  • Raising $500k, preferred equity, $2M pre-$

Tip #78: Pre-money valuation

Tip 78: Deal structure – pre-money valuation. When you describe the proportion of your company you are selling, provide the pre-money valuation. That is the valuation of the company before an investment is made.

You don’t need to show on the slide the post-money valuation (unless there is some huge complication we need to know that will mean pre-money + money ≠ post-money*). Nor do you need to show the percentage of the company that we are buying.

You should know both of these numbers. But you only need to show the pre-money valuation on your slide, because that is the metric on which we judge each company we look at. Anything else is just adding complication and/or making it hard for us to compare against other deals – which is bad for you.

(*See our workshops on deal valuation for more on this.)

Tip #77: Clear structure

Tip 77: Deal structure – “a clear structure”. After the amount, the second most important piece of information is the structure.

It is harder to offer tips on this, because it is a complicated subject. The easy recommendation is to do your homework.

Start with market practices for the kind of money you are trying to raise. Who are the right types of investors, and what drives their investment (or lending) decisions.

Delve deeper into the specific targets. If you’re approaching VentureSouth, know what we won’t fund (or probably won’t fund) and the deal structures we like ($500k angel rounds of preferred equity at a $2M pre-money valuation) and won’t invest in (like convertible debt, common stock, or deals priced based on Silicon Valley and Sand Hill Road valuation metrics).

This should happen before your pitch, but you should be crystal clear during the pitch what the deal terms are.

Tip #76: Ask early

Tip 76: Deal structure – “ask early”. Last time we agreed to give a single figure “ask” – say, $250,000. This related tip is to put this ask right in your first couple of sentences – don’t leave it to the “deal structure” slide near the end.

Why? Why spoil the surprise of where this pitch is heading? It is typically difficult during the pitch to put early slides in context, unless we know why you are telling us the information. We evaluate proposals asking for $150,000 very differently from one raising $1.5M. If you don’t tell us the ask until the last slide, we can’t judge as we go along if you have good traction or a good product if we don’t know how many resources have been deployed to reach where you are. Similarly, we can’t tell if your sales and marketing plan makes sense without knowing the future resources to be deployed to create it.

Obviously you can’t cover all this in the opening slide. But telling the audience in your second sentence that “I am raising my $250,000 angel round” gives us a quick indication of how to evaluate the meat of the presentation to come.

So after your intro sentence (“Good afternoon. My name is Paul Clark, CEO of Back Rubs Inc., a company based here in Greenville that provides on-demand back rub services.”) try “My team and I built our company to 20 locations across the Upstate, and I am here today to persuade you to invest in the $150,000 angel round I am raising to expand my business across South Carolina.”

That way I set the context for all the information to come (and hammer home my traction) right from the start.

Tip #75: Clear ask amount

Tip 75: Deal structure – “a clear ask amount”. To raise money from angel investors, you don’t need to have a PhD in deal structuring. But you do need to have a clear proposal. We have a few tips relating to that, beginning with tip #75: have a clear ask amount.

You should have worked out how much money you would like to raise long before the pitch. Even if you’re doing a one-on-one pitch to the first individual you’re discussing this with, you should have a proposal – and you should present it clearly.

Give the definite, single figure amount in the pitch. $1 million or $150,000; but not $250-500k. People raising “a range” of capital typically don’t do well. If you’re not sure if you need $250,000 or $500,000, you either (a) haven’t thought exactly how you’re going to spend the money, judge its success, understand the milestones ready for future fundraising or exit or (b) are presenting a plan with too many variations to be compelling in a quick pitch.

Tip #74: Emphasize traction early

Tip 74: Traction.  In the last tip, we noted that “nothing proves traction better than revenue.” That leads to more generalized tip: highlight your “traction” early in your pitch.

No-one really knows what anyone else means by “traction,” and it can become a moving target (especially if the investor isn’t really that excited, a “lack of traction” can be a convenient excuse). In general we are looking for proof that people will buy this product. Revenue from existing customers who will provide strong endorsement is the ultimate proof. But whatever your traction is, you need to introduce it early in the pitch: if it’s exciting, use it to get the audience excited from the beginning.

Burying traction and near-term potential late in the pitch means failing to exploit a great opportunity. For example, I recently saw a pitch from a company with ~20 small customers from a local network of friendly individuals and their word of mouth, and so had moderately interesting proof that people liked the product and were seeking capital to expand its production capacity. Q&A started like this:

Questioner: “Why do you think there is demand that will allow you to sell all the extra product you will be able to produce?”

Presenter: “We currently pre-sell all of our product, and we have 80 companies on the waiting list.”

Questioner: “Wait, what? You have 80 customers who you haven’t been able to service yet and are waiting to buy?”

Presenter: “Yes.”

Audience: Wakes up.

Had that information been delivered upfront, we would have been much more interested in the rest of the pitch! Coming at the end, it had much less impact.

However you think you can prove traction, spell it out early.

Tip #73: Historical financials

Tip 73: Historicals. Include your recent historical financials in your projections table.

Nothing proves traction better than revenue; nothing proves you’re a pragmatic and effective operator than a well-controlled and effective burn rate. Have these two numbers in your table (or better yet…)

(Also a small pet peeve: financial performance that occurred in the past is called “historical.” “Historic” means “momentous” or “historically significant” – which I suspect your recent financial performance was not…)

Tip #72: Spurious accuracy

Tip 72: Spurious accuracy. A typical projection table (like some of those back in tip 65) shows new customers each year projected precisely (31, 423, 1578, 31,245, 108,205), year 5 revenue projected to the dollar, and margins and growth rates shown to 1-2 decimal places.

We already agree we don’t believe these fantasy projections. We definitely don’t believe such a specific fantasy.

There are multiple reasons not to be so spuriously precise. Most obviously, $19,258,356.38 is hard to read and takes up space, while not adding anything valuable to the pitch than $19M would.

More subtly (as with the general complaint about mismatching tables in tip 21) they show you just don’t think about projections and financials. All you have done is proved that excel is a good tool for multiplication, and given strong signals that you haven’t actually thought about, calibrated, or digested the result.

So, tip #72, round customers to the nearest milestone (500), round big financials to the nearest million ($19M), keep margins at whole numbers (50%), and keep your credibility high.

Tip #71: Operational data

Tip 71: Operational data. Still sticking with a table? OK, one more thing you should add: operational data.

If you show just financial projections, you are likely to get a question like “how many customers does your projected revenue of $10 million in 2018 come from?”

Either you know it, which is ideal - but a high risk strategy. Or you can bluff it, which might just work, but what if we catch you? Or you can revert to the tried and tested (scoring a fail) "I can't remember off the top of my head, but I'll be happy to share my projection model."

Just have the key operational data as the top line of your financial projections table. No risk, lots of reward.

Tip #70: Projection table improvements

Tip 70: Projection table improvements. Still sticking with presenting a projection table despite these recent tips? OK, then here are some things to include.

First, limit yourself to start with to key line items – revenue, gross profit, EBITDA, net income.

Second, leave out any line item that can be derived easily from another. For example, if you show revenue and gross profit, you don’t need to show the COGS line separately.

Third, keep it brief. On revenue, you don't need to show us separate line items for very minor ancillary revenues or for business lines you don't have a plan for yet. On costs, when you created your projection model you thought about lots of cost buckets. But don’t show them in the slides, because individually they’re immaterial and impossible to read.

Fourth, include cost items that are meaningful for your business. If it’s a consumer brand driven by marketing, we need to know how much you’re spending on marketing.

Fifth, include those metrics and data-points we tipped you about earlier – your unit economics, your minimum cash balance in the relevant period, your year end cash balance, etc.

And lastly, do what you can to make the financials fit the rest of your “brand” – with an integrated formatting. (See tip 21 for how not to do this.)

Here is an excellent example where a company followed most of the tips above and put the table in “their format” (they were a knitwear company, so used their color scheme and a clever “weave” of the boxes). Had they lost a few “$”s and “M”s, this would have been near-perfect – for a table.

But what about that idea of not using a table at all?