The sad reality is that over half of small businesses fail within the first four years. Even worse, 90% of all startups launched worldwide go out of business because of bankruptcy within the first three years.
Funding: The biggest challenge faced by startups
There are several reasons why startups fail: lack of product-market fit, not having the right team, and poor management. However, if you ask any startup founder what the most significant challenge they face when it comes to launching their startups is, they’ll often say that it’s the lack of funding.
Indeed, despite the significant contribution and impact small businesses and startups have to the growth of our nation’s economy, the 2017 Year-End Report done by the National Small Business Association (NSBA) shows that 27% of entrepreneurs can’t get sufficient financing from large banks and other financial institutions to start their business.
Even more disheartening is that this number hasn’t changed within the past two years.
The financial plight of startup founders
Because of this, many startup founders would often dig into their savings and financial resources to get their startups up and running. Unfortunately, they also tend to underestimate how much money they’ll need to keep their startup running while they’re waiting for their products and services to generate revenue.
As the funds quickly deplete, startup founders find themselves trapped between a rock and a hard place: they need to start generating revenue to keep their businesses afloat, but find that their funds are no longer going to be enough for them to do so.
Raising sufficient capital to launch your startup and keep it afloat may be challenging and frustrating, but it’s not impossible as proven by many of the successful startups we’ve heard and grown to admire.
In addition to tapping into their personal financial resources, these startups turned to angel investors and venture capitalist (VC) firms to secure the capital they need to get off the ground and start running.
This guide will help you create a compelling and effective pitch to present to VCs and angel investors and examples used by some of the startups to get the funding they needed. Since this guide is quite in-depth, I’ve included a table to contents below so that you can go to the section that interests you the most.
Venture capitalists and angel investors: alternative sources of funding
Angel investors are people use their personal funds towards a promising startup. Many of these angel investors are part of venture capitalist firms (VCs), where they pool their funds together and use these to award to deserving startups.
The most notable difference between angel investors and VCs is that several of these VCs have incubator and accelerator programs. In these programs, they closely work with founders from different startups so that they can quickly launch. They also host pitching competitions to give startups the opportunity to present their startup to other investors so that they can secure even more funding to keep their startups going.
Why get funding from VCs and angel investors?
Perhaps the biggest reason why many founders choose this route to finance their startups is the fact that they don’t have to pay these VCs and angel investors if things don’t work out. That’s because, in exchange for their investment, VCs and angel investors require a percentage of your startup’s equity. In other words, they become part-owners of your startup.
Challenge of pitching to VCs and angel investors
The biggest challenge when going through this route is convincing these VCs and angel investors to fund your startups, especially if you’re approaching them for seed funding.
For one thing, your startup’s new so chances are they haven’t heard about you. Second, there are lots of other startups knocking on their door and asking them for the same thing you’re asking. To have a fighting chance of convincing investors to write that check and hand over the funds you need for your startup, you’ll need to come up with a compelling pitch to present to them.
Elements of an effective startup pitch
There are two essential components to crafting an effective pitch for your startup: a pitch deck and a well-practiced pitch.
Let’s start with the pitch deck.
What is a pitch deck?
A pitch deck is a slide presentation used to serve as your guide when pitching your startups to VCs and angel investors. It helps you highlight the most critical pieces of information you want these VCs and angel investors to take away from your presentation, and convince them to award you with the funding you need.
While pitch decks vary in length, all pitch decks are made of 9 distinct elements.
1. Company purpose
This is the first slide that VCs and angel investors see the moment you start your presentation.
Even though this slide appears straightforward, this is perhaps one of the most challenging slides in your pitch deck to craft. That’s because this slide is what will set the stage for your presentation. You also need to efficiently convey the reason why your startup exists and why it matters in just one sentence.
More important, this slide must be able to capture and hook the attention of VCs and angel investors. If you’re not able to do this, convincing these VCs and angel investors will become an uphill battle.
One way to make this striking and compelling is by answering the question, “why did you decide to launch your startup?” The reason, according to Simon Sinek, is because people don’t buy into what you do. Instead, they buy into why you do what you do.
Airbnb’s pitch deck is the best example for this.
As you can see, not only did they manage to get their purpose across with as few words as possible, but also it’s written in such a way that straightforward and easy to understand that even a 5-year-old can get it.
As you may have probably guessed, this is where you present the problem or challenge that your startup’s product or service aims to solve.
One of the best examples for this is the way how the late Steve Jobs did this during the launch of the very first iPhone back in 2007.
Although they are no longer a startup, Jobs’ manner of presenting the iPhone is still worth noting here because of the way how Jobs highlighted the common problems faced by the average person using a smartphone.
What made this keynote so compelling was the way how Jobs presented this. He didn’t just come out and listed all the problems that they saw with other smartphones. Instead, what he did was to make these problems relatable to those who may have tried to use a smartphone in the past by echoing their frustrations.
In this next section of your pitch deck, you’re now going to show to VCs and angel investors how your startup’s product or service.
A common mistake startup founders commit when it comes to this part of the pitch deck is focusing on the technical aspects. Remember that many VCs and angel investors have a degree in computer science and engineering. Even if you manage you capture their attention at the beginning of the pitch, you can quickly lose them here when you start going technical on them.
The key to presenting this is to make sure that you do this in a way that’s simple and very easy to understand. Again, let’s go back to the way how Jobs introduced the iPhone.
Notice in the video that even though Jobs highlights some technical aspects of the iPhone as part of the solution, he explains it in a way that an average person can quickly and easily understand.
4. Trends and opportunities
The goal for this next section of your pitch deck is to answer the question: why do we need your services or products now?
You need to show that your products and services are timely to meet either a growing or future need among your target market. Some of the things that you can include here are:
- Research studies from leading research firms or industry leaders
- Data you’ve collected from studies you’ve conducted
- Key metrics you’ve observed
- Laws and regulations directly affecting your industry and target market
One startup that did a great job at this is Facebook.
On their pitch deck, they presented their growth metrics, traffic, and user engagement to convince investors that their social media platform as a worthwhile investment opportunity.
Another startup that did an excellent job of this is Buzzfeed.
Here, Buzzfeed presented trends happening within the world of digital advertising and showcased the numbers they’ve generated on their website as proof of how their platform can meet these trends.
VCs and angel investors are aware that 42% of startups fail because there’s no market for the product or service they intend to produce. So it goes without saying that you need to prove to them in your pitch that there’s a hungry market out there that needs your product or service.
Again, this is where focusing on facts and metrics come in handy like in the case with LinkedIn’s pitch deck.
Despite the presence of other social media networks, LinkedIn was able to successfully prove to their investors that there’s a demand for having a business and professional social networking platform. They achieved this by presenting graphs and charts highlighting the significant and positive difference between their projected numbers and actual numbers their platform was receiving.
6. Product or service demo
Now comes the fun part: demonstrating to your potential investors how your product or service works.
This is another potential pitfall to avoid when you’re doing your pitch. Since you and your team have invested a lot of blood, sweat, tears, and sleepless nights to develop your product or service, it’s only natural that you want to wow your potential investors every single feature you’ve built into it.
The downside to this is you can quickly overwhelm investors with too much information.
When performing your product or service demonstration, put it in the perspective of a first-time user. Highlight on four or five of the most notable features of your product or service a first-time user will most likely use. Only go more in-depth into the features if and when the investor you’re presenting to asks.
7. Your team
Naturally, your investors would want to get to know not just you but every member of your team.
This is the time to do a little bit of bragging. Take the time to mention any awards or recognitions you or any of your team members possess. Specify where you studied, what positions did you handle while you were working, and the cumulative years of experience you and your team has within your industry or niche.
Also, be sure to include names of investors and organizations that have financed your startup so far. The VC and angel investor sphere is a very close-knit realm. Angel investors and VCs are more willing to invest in a startup that already previously received funding compared to those that haven’t.
8. Business model
In their book Getting to Plan B, authors John Mullins and Randy Komisar lists five business models you need to highlight to prove your startup’s viability: revenue, gross margin, working capital, operating, and financial.
While all these business models are worth explaining during your pitch, there are two that you need to give extra focus and attention. These are your revenue and financial business models.
The reason is simple: investors and VCs want to make sure that they will not only get a return to their initial investment but also create a substantial profit from financing your startup.
This is where you need to be very detailed in your presentation because this is where you’ll have to validate the amount you want them to invest in your startup. You need to clearly show them how and where you intend to use the investment you’ll receive from them. You also need to take them through the steps you’ll decide to generate revenue, and they start earning a return on their investment.
Buffer did an excellent job in their pitch deck in this area.
The founders of Buffer were very transparent in their pitch deck when it came to their financials and revenue generation. By leaving no stone unturned in this part of their pitch deck, Buffer was able to gain the confidence of their investors. As a result, this pitch deck helped them raise $500,000 in funding from investors.
Another startup that did an excellent job at this is Moz.
By going into detail on their business model concerning its revenue run rate, estimated generated revenue, and customer lifetime value, this pitch deck helped them raise a whopping $18 million in funding from investors.
9. Your competition
Including your competitors in your pitch deck may make you feel uncomfortable, but this actually works in your favor.
For starters, being able to specify competitors that are making money solidifies to your potential investors that there’s indeed a market and demand for the product or service you’ve developed.
Second, this gives you the opportunity to help you establishes your startup’s Unique Selling Point (USP) by highlighting what is it that truly sets your startup and your product or service from your competitors.
More important, it gives you the chance to showcase to your potential investors what kind of person they will be working alongside the moment they decide to invest in your startup. Comparing your startup to your competitors without sounding arrogant takes a lot of self-control and maturity. Both are qualities that investors look for in a potential partner.
Best practices when preparing your startup’s pitch
1. Limit the number of your slides.
Marketing guru and venture capitalist Guy Kawasaki recommends not to go beyond 10 slides for your pitch deck. Doing this will help you shorten your pitch. This is especially crucial if you’re planning to join any one of the pitching competitions where you’re only given 10 minutes or less to complete your pitch.
2. Don’t overload your slides with texts.
Although your slides are meant to serve as your guide when presenting your pitch to potential investors, that doesn’t mean that you should use these as huge cue cards to know what you’re going to say.
Overloading your slides with text can also cause your investors to become overwhelmed and distracted with all the information. At the same time, if they find certain points you’ve listed in your slide that you didn’t mention in your pitch, they could use this as a reason to question you and your entire presentation.
One way to help you keep the text you include on your slides at minimum is to use at least a 30 point font size. This makes your text striking enough for your investors to see. At the same time, it’s big enough to make sure that you use as few words for each slide as possible.
3. Observe the KISS principle.
K.I.S.S. stands for “keep it short and simple.”
Going straight-to-the-point with your presentation not only keeps your presentation short but also limits the number of questions you can get from VCs and angel investors listening to your pitch.
The more information that you provide VCs and angel investors, the more ammunition you’re giving them for questions. Investors will base their decision not just on how well you presented your pitch, but also how convincing you are when answering their questions. If you or your team is not able to answer any of the issues that your potential investor poses, you risk the possibility of not getting the funding your startup needs.
A great way to do this is by doing a mock presentation about your startup to your friends or family members. Go through the presentation and then allow them to ask you questions. Pay attention to the sections of your pitch that are getting the most questions. While they may not necessarily decide to invest in your startup, they can show you areas in your pitch that you may need to revise to make it more understandable.
If you’re up to a challenge, try to get a couple of kids to listen to your pitch. Kids have a shorter attention span and a more limited vocabulary than adults. Then again, if you can keep their attention and they can understand what you just told them, presenting to highly educated investors would be much easier.
4. Study how other startups do it.
Studying in-depth guides like this and reviewing slide decks of successful startups is excellent, but there’s nothing that compares to watching a live pitch competition. That’s because here you can see how different startup founders present their pitches as well as the questions that VCs and angel investors will most likely ask. Look at also areas of their presentation where they fell short and come up with ways on how you can improve this in your presentation.
5. Keep pressing on.
Many of the stories we hear about unicorn startups focus on that strong pitch they made that brought in millions of dollars in funding. So, it’s understandable for startup founders like you to get disheartened and frustrated when investors turn you down after several pitches.
The truth is that many of these popular startups known for their success stories were in the same position as you’re in now. Google, for instance, had to pitch to 350 investors before they managed to get someone to fund them. Skype pitched to 40 investors before they received a yes, and Cisco had to pitch their presentation to 76 investors.
As I mentioned earlier, raising capital for your startup requires much time, effort, and patience. No matter how well you prepare your pitch, there’s always the possibility that you won’t get the investment you hope.
When that happens, don’t lose heart.
Ask for feedback from the investors that you’ve presented. Take note of these and then apply these to your pitch and your startup, and try again. Every “no” you hear will only take you one step closer to that “yes” from an investor or two.