Focus on These 7 Things to Get That VC Funding

Welcome to Spencer Trask Perspectives, a monthly interview series with our CEO Bill Clifford and writer John Essick. Mr. Clifford has generously agreed to share his unique insights and expert opinions on topics such as business development, deal flow, C-suite management, startup culture, entrepreneurialism, and more.

We welcome your feedback, and encourage you to submit questions to askST@spencertraskco.com for Mr. Clifford to potentially answer in future articles.

A study performed by the U.S. Bank found that as high as 82% of failed US businesses flop due to cash flow issues. Venture capital is one option available for many innovative startup companies seeking to scale their businesses before they run out of cash. For these small businesses, venture capital funding serves as a bridge until access to other capital markets is merited. It’s a time for innovators to slip out of the cocoon of development and make the case for an influx of cash — and in some cases, experienced leadership — based on projections and probabilities. It’s a potentially make or break moment for many startups. We asked Bill Clifford how startups can best prepare to make themselves stand out from the crowd, and what key information VCs are looking for in a memorable pitch.

John Essick: How important is the Pitch Deck at the initial meeting with a VC firm?

Bill Clifford: The pitch deck plays a vital role during the presentation given to the VC firm by the startup to make the case for investment funding. Many founders toil and sweat over the pitch deck believing that this presentation is their one and only shot at getting venture financing. It is critical in that, aside from introductory small talk, the pitch deck may be the first impression a startup makes during the meeting. To be very honest, yes, some venture firms will vote yea or nay on the basis of this one presentation. However, most serious VC firms will carefully listen and digest the important facts presented during the ‘Pitch.’ After all, they’ve taken the meeting.

JE: What are some subjects the Pitch Deck should address?

BC: The Pitch Deck itself varies depending on the state of the company at the time of the presentation. Naturally, pre-revenue companies would have different content than later stage companies that already have some marketplace traction and operational results. Regardless, several components will remain constant:

· VC firms would expect to see a strong statement of the company’s Mission and Purpose. The statement should address why the company exists and what problems, issues, or challenges the company faces.

· Next, the VC firm would expect to see and understand clearly the Solution that the startup provides, whether it be a product or a service. If there are pictures, videos, screenshots, audio files, or any other dynamic means to bring the solution to life beyond just words, this is the time to make the ‘magic’ happen.

· Naturally, the pitch deck must also impress upon the audience the size and scope of the market for the product or service. It should persuasively convey not just the market, as it is known to exist today, but the market that will exist if the product/service were to be introduced.

· If there are competitors, point out all of the competitive advantages that the startup has over the others. If there are major price advantages that would be deemed disruptive to the current market, point out such facts clearly.

· Build a reasonable and defensible revenue and expense model and document all of the assumptions that are built into your financial forecasts for at least three years out, including a cash flow forecast. Have a forecast with an Investment Plan A, for instance an investment ‘ask’ for an initial round of financing of $5M. Then also have an Investment Plan B, which might be a forecasted financial plan if the startup receives initial financing of $8M instead of $5M. This would allow the venture capital firm to understand the impact of the additional $3M on the rate of growth of the company and its impact on revenue, expense and earnings.

· Next in the Pitch Deck would be the ‘go to market’ strategy or plan to distribute your product/service throughout the marketplace, including building and staffing a sales force, if required, and establishing a web presence.

· Finally, every Pitch Deck must include a description of the team and each of the key management members. VC firms are greatly comforted to see executives with backgrounds and experience in related industries, and members who may have worked together as colleagues in the past.

JE: What is one subject that startups should really become polished at addressing in the Pitch Deck?

BC: Every new startup that has gotten the attention of the Venture Capital community has already, by definition, developed a reputation and identity for being the ‘hot new company’. It doesn’t matter if it’s in the web development space, MedTech space, Biotech space, 3D printing space, or hoping to disrupt some other industry. The company wouldn’t have attracted VC firms without some credibility in its home turf.

That said, during the pitch, the VC attendees are going to expect to be blown away by the depth and breadth of the scope of knowledge and capability of the startup team and the product(s). This is the time to show off an understanding of the pertinent industry market forces at work, as well as the capabilities of key team members to achieve milestones. The financials may not be glowing, the marketing plan may have some holes, and the revenue ramp may not be as fast as desired, so be sure to shine in this core area of expertise.

JE: Should the ‘pitch team’ include a ‘numbers person’ who may not be part of the management team but can address financial metrics with more authority and clarity if that is not the founder’s strength?

BC: Yes, the presenting team should always have a numbers person because the VC team will always have a numbers person. However, the main startup team presenter, usually the CEO or Founder, should have a very good command of the numbers, including all the assumptions underlying the revenue and expense forecasts. There is nothing more distracting during a presentation than for the presenter to have to stop every sentence and either refer to notes or have to ask the CFO for answers. It’s expected that the CEO/Founder have ready answers to questions about critical financial information.

JE: Is there one particular area that you’ve seen startup founders stumble or slip up on during a VC pitch session?

BC: There are two areas that most startup founders have difficulty with:

· Questions related to the valuation of their company at its current state; and

· What managerial and expense actions they would take if certain milestones are not achieved in their financial plan after accepting venture capital funding.

In regard to valuation, the founder comes into the session proudly believing the company is worth more than the VC firm is offering. The VC firm, while respecting the founder’s position, must realistically invest capital at a valuation that provides some upside opportunity for its investors and other stakeholders throughout the initial investment as well as for subsequent investment rounds, should they be necessary. The negotiations around valuation are a constant struggle the founder may not be prepared for.

The area concerning management’s proposed actions should certain milestones be missed is another instance where the founder is often stumbling for words. No founder wants to commit publicly to workforce reductions or other forms of expense reductions. Often, however, a plan may be necessary to secure VC funding and can become mandatory components in the final financing agreements.

JE: Should the startup founder and team be disappointed if initial meetings are not with decision makers? Is there a protocol most VC pitches follow?

BC: This is very important: any meeting with representatives of the Venture Capital organization is a meeting with decision makers. Just because the team that showed up to attend your pitch didn’t happen to include anyone with the title of General Partner doesn’t mean that it didn’t include a decision maker.

VC firms don’t send unprepared people to attend meetings with prospective startup companies. Everyone that a VC firm chooses to send to a presentation is someone thought of highly enough to be taken away from other duties to hear the pitch. That means that before the day of the pitch meeting, that person also committed their time to:

· Performing a thorough background research on the company,

· Doing market research on your industry,

· Calling customers for references,

· Calling customers of competitors to get competitive references,

· Attending internal meetings on your company

· Generally doing a lot of work to prepare for the meeting

If you treat the VC team like it’s the JV team, you may have just lost yourself a funding opportunity. Put on your best show, serve your best Danish pastries, bring out the best china and silverware, and make sure that the limos are on time. One blackball from this team and you’ll never get to meet the General Partner.

JE: Should the startup pitch team bring up potential bumps and bruises that may await, or focus on the benefits only throughout the Pitch Deck?

BC: It’s always good for a startup pitch team to show the VC firms that they are not so naïve as to think that the road to success is paved with lilies. They should demonstrate that they have anticipated some negative surprises. It could be a result of issues generating from the competition or from missed deadlines or failed product capabilities. Regardless of the disruptive force, the VC firm would expect that a plan of action is in place to meet and overcome identified obstacles while still attaining financial plan metrics.

There is no need to get too draconian with these negative surprises. After all, no one expects an action plan to overcome a nuclear fallout or a hundred-year flood. However, plans that address what would traditionally be a disruptive event in the pertinent marketplace would show the VC firm that leadership has vision and are thinking and monitoring events which shape their industry.

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About Bill Clifford
Bill Clifford is Chief Executive Officer of Spencer Trask & Co., a privately owned advanced technology incubation firm. Prior to joining Spencer Trask & Co., Mr. Clifford served as Chairman of the Board and Chief Executive Officer at Aperture Technologies Inc., General Partner of The Fields Group, and General Partner of New Vista Capital. He is also the former President and Chief Executive Officer of Gartner Group, the world’s leading authority on the information technology industry, user and vendor technology strategies and market research. During his tenure at Gartner, annual revenues increased from $175 million in fiscal 1993 to $780 million in fiscal 1999.

Mr. Clifford currently serves on the board of directors of Cybersettle Inc. and SWK Holdings (SWKH.OB). He has been featured in CEO Magazine, Leaders Magazine and Forbes, and is a keynote speaker and panelist at numerous Technology Industry conferences.