What Founders Get Wrong About Series B (Part 2)

(A version of this post first appeared in Techcrunch)

In Part 1 of this series, I reviewed why your Series B materials should capture attention, transfer information with high fidelity, and minimize work. In Part 2, I want to dive into how your three most important materials accomplish those goals.

The Holy Trinity

A Series B data room can be overwhelming. You want to proactively manage what information people access in what order and focus their attention on a few key documents that they can return to when they fall into a rabbit hole. There are three primary documents that should do most of the heavy lifting in relation to capturing people’s attention and ensuring that information is transferred within the partnership with high fidelity: the deck, the strategy memo, and the forecast model.

You WANT people to focus the vast majority of their attention on these three pieces of information. This is a great way to control the narrative and ensure that what you want to be transmitted is received by the other parties.

An Elegant Strategy Memo is your most important document

Over the past few years, the strategy memo has emerged as a key part of initial diligence packages and I am a big fan. Some people refer to it as a company-written investment memo, but I prefer the ‘strategy memo’ title because it’s not really an investment memo, which comes with scenario analyses, exit plans, and other sections that would be awkward and a bit presumptuous for a company to externalize. I have also heard it referred to as a “narrative deck;” basically a detailed, written version of your pitch. I also do not think this fully captures a great strategy memo; it is MORE than the deck. I view the deck almost as a derivative of the strategy memo.

What is it then? A strategy memo is a cohesive written argument for your company's strategy, traction, and prospects, including sections for competition, financials, why now, etc. The best memos I have seen are very elegant ‘proofs’ of the company’s viability. They include graphs, illustrations, pictures, and visual tools to illustrate points and are clearly divided into different sections and subsections so that readers can easily find what they are looking for.

Y-Combinator evangelized the format and I have seen it pop up more and more over time (here is their overview and here is a great example). The reason I am a big fan is that when a company of interest provides us with a strategy memo, we almost forget the deck and focus exclusively on the memo. It is a much more elegant piece of content to analyze and discuss among a team of decision-makers.

Going back to our main objectives, the strategy memo is tailor-made for post-pitch success. It is designed to maximize fidelity as information is transferred around the partnership AND it also reduces the work of the investment team when they have to write their own memo — you can’t unsee the logic tree of an elegant memo. A good strategy memo becomes the guideline for how the entire diligence process unfolds. Your Due Diligence Questionnaire (DDQ), how you organize your data room and the breakout decks you choose to create derive from the memo. Ultimately, it is the central document to which members of the investing team return to over and over again.

You should send the memo after your first meeting. If the partner is truly interested, they will read the memo and emerge a true evangelist with the necessary knowledge to proselytize.

A Pitch Deck Should be Pithy, not All-Encompassing

I am not going to spend a lot of time on the pitch deck because there are so many great pieces on pitch decks out there. But I want to highlight a few key points in regard to a pitch deck. The first is that the key objective of your pitch deck is to capture attention and visually transfer information. Out of all the materials you create, the pitch deck is the one that can best help you create that initial, emotional connection. If the strategy memo goes for the brain, the pitch deck goes for the heart. As such, it should be formatted as a story with a beginning, middle, and end. The beats should be clearly articulated so that after 30 minutes (that is the time you should give yourself to capture someone), a potential partner walks away understanding what you do well enough to remember why they are excited.

It is impossible to transfer all the information needed for an investment in a Series B company in 30 minutes. The best you can do is move a partner from curiosity (they took the meeting after all) to enthusiasm. If you believe this is the true objective, then it becomes obvious that the deck should be visual and short. You want the partner to walk away with the 3–4 points you WANT them to remember. If you fill it with a bunch of great ideas, they won’t remember anything. You are the master and expert of your own narrative — you have to be the editor to ensure you increase your signal-to-noise ratio. Twenty slides is ideal and you can throw other, more detailed slides in an appendix — this will be useful if you go through a formal management meeting process and can jump to specific slides to answer questions. I have seen 20-page decks with 120-page appendices; don’t be shy of creating a pithy main deck.

Although I believe the pitch deck is a derivative of the memo, the pitch deck is the document that sees the most action during a fundraise and therefore gets the most feedback and goes through the most iteration. Some decks end a process looking nothing like how they started. Allow your deck to find its footing like a good comedy set that gets workshopped at comedy clubs. Remember that those changes should likely also influence your memo. When you start the fund-raising process, the iteration cycle becomes circular between these three documents.

A Forecast Model can be robust AND simple

Welcome to Series B, when a robust financial forecast model is table stakes. This round is about understanding unit economics and timelines and multiples to exit. You likely have clear product market fit and the cash you are asking for is to scale your supply to meet the demand you have uncovered.

Do not confuse detail with complexity. Your forecast model can be robust and even long but also be simple to understand. The key is to start with an Overview Sheet that explains the business in financial numbers EXACTLY how you explained the business in your deck and memo. From that overview sheet, you can link out to more detailed assumption tabs, but you have a firm summary that is easy to understand. The forecast model is not JUST your financial statements. The financial statements should be an output of how you run your business, not the other way around.

Whenever I hear someone tell me that their forecast model is “complex” and they want to take 45 minutes to walk me through it, I see red flags. If the forecast model is not self-explanatory, it will not transfer across the partnership. You will not have every single partner do a 45-minute call to decipher your model. Build a model that is understandable even if it has a lot of detail. “War and Peace” is long but simple. Do not write “Finnegans Wake.”

At the end of the day, investors look at a lot of forecast models — orders of magnitude more than you do. If they require you to explain your forecast, you will fail all three of your objectives: (a) you will not capture their attention, (b) you will not easily transmit information, and (c) you are not minimizing their work.

Here is a general set of guidelines for how to make your forecast model transmissible and minimize work on the other side:

• TABLE OF CONTENTS: Your first sheet would be a table of contents with definitions of key terms and the location of key assumptions. Give the reader a key for how to navigate the forecast.
• OVERVIEW SHEET: Your second sheet should be an overview of the business based on how you have explained the fundamentals of the business in your strategy memo and deck. If your scaling plan is to build more factories, then you should have a forecast that begins with factories at the top and then builds down to EBITDA or free cash flow. If your go-to-market strategy revolves around market expansion and penetration, start with how many markets you plan on opening and trickle that down to EBITDA or FCF. This sheet should explain what drives your business’s success and expansion. This sheet should match the story you have woven through the deck and memo.
• ASSUMPTIONS TABS: There should be a clearly-defined area for key assumption tabs. This might be “COGS” or “Plant Financing” or “Demand Forecast.” It depends on your business BUT these breakout tabs should be self-evident from your deck and strategy memo. However you explain your traction, key metrics, go-to-market strategy, unit and scale economics, etc. in those two documents, it should match your forecast. It should be obvious.
• FINANCIAL STATEMENTS: There should also be a clearly-defined section with your three connected financial statements (BS, CFS, P&L). It is helpful to have your P&L go to EBITDA or FCF.
• OUTPUT SHEETS: You will likely have financial tables and graphs in your deck and memo. It helps to have an output sheet directly from the model with those charts and graphs so investors can see where the numbers come from.

• VISUALLY CLEAN: Who says forecast models can’t be designed. Use visual design to ease your reader into your model. A wall of numbers is hard to navigate and intimidating to understand. Use the same color scheme from your other materials to highlight certain rows. Color code your sheet tabs. Remove the default gridlines and intentionally border cells based on what is important. A clean-looking model goes a long way in transmitting information across the partnership because people who open the model can get into it quickly.
• SCENARIOS: Giving investors different scenario toggles (base, conservative, growth OR equity-financed, debt, 50/50, etc.) gives you control of the narrative. Investors are going to do their own scenario planning anyway, giving them options to play with that are based on your own assumptions helps you inform those exercises.
• TIMELINE: You should have five years of forecast with the first 24–36 months broken out monthly that can easily collapse to an annual view. You should include your last three years of actuals, hopefully, monthly as well in collapsable form.

Prime Movers Lab invests in breakthrough scientific startups founded by Prime Movers, the inventors who transform billions of lives. We invest in companies reinventing energy, transportation, infrastructure, manufacturing, human augmentation, and agriculture.

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