Craft a sticky story of your company’s journey.
Photo courtesy of Christopher Michel.
Last week I had a Monday morning meeting with the founder of a pre-seed, self-funded company. We had been collaborating for almost a year and he told me that they had their first pitch competition in three days. He wanted to do a review of their pitch with me.
After a quick run through his pitch, I gave him my brutally honest take on it: “None of it was usable”
The deck would have been OK for an investor sit down, but it was not appropriate for a three minute pitch in front of an audience where the goal is not to attract investors but rather to win a competition – or at least to peak interest and to be memorable. After all, win or not, you want them talking about you afterwards. A totally different frame of mind is necessary in the prep and the delivery for an event like this. You do not need to be a Ted Talk master, but you do need to tell an authentic story people will remember and connect with.
Unfortunately, they had already submitted the deck and could not make changes. I pondered for a moment. The deck had one good slide so I advised them to just focus on that one slide and ignore the rest. As scary as it sounded, a good story focusing on one good visual was much better than a bad story focused on many bad visuals.
Here’s how we re-worked their pitch.
Make you and your story the focus of your pitch. If your story is powerful when you sit down one-on-one, then it is simply a matter of figuring out how to translate it into one that captivates a large audience. So for my friend (founder), this meant it was time to break him down and build him back up.
We began by asking all sorts of questions….
Now, can you tell all this in no more than three powerful sentences?
Notice that not once did I ask about Sales Growth, Exit Strategy, MRR, LTV or financial models, setting up the story is all about you and your story. If your story is compelling, the details can follow. It doesn’t work the other way around.
Here are my top 9 pitch tips that can help you weave a sticky story that is authentic.
After considering these pitch tips, it was only a matter of weaving the the story in a sequence that made it progress. Here’s the outline we used:
Happy to report that being the amazing entrepreneur he is, he turned this advice into a pitch competition victory three days later.
Based on my experience as both an entrepreneur and investor, there are six primary components that impact the venture capital valuation of an early stage technology company: market dynamics, company metrics, future funding needs, team, comparable transactions, and VC ownership targets. I will provide some detail on each in this article, though the relative importance of each category will vary by deal.
Market dynamics: Factors that impact valuation include the size of the total addressable market (TAM) and a company’s potential to become the market leader. Industry focused solutions should be pursuing at least a $300 million market size, while horizontal solutions that solve pain points across industries, need a $1 billion market size. Investors also want to think that if the company executes well that the upside scenario in each company has the potential to return 50-100% of the entire fund. Companies get a valuation bump for market leadership: the #1 player tends to get at least a 1.5 multiple premium over the #2 player in the space.
Company Metrics: VCs like to invest in companies that have a chance to go public. Today the minimum bar for a business cloud company to go public is $50 million in revenue growing at 50% a year. In the early stages (Series A & Series B), a company should demonstrate an ability to achieve 2-3x annual growth consistently. Valuations are most generous when enterprise companies can keep churn under 10% a year, otherwise growth can be constrained by just trying to replace lost customers. In addition, VCs look for unique leverage in the sales model allowing for capital efficient customer acquisition. This will impact the need to raise more capital in the future, often leading to a higher valuation today.
Future Funding Needs: Virtually every company will need to raise another round. A key aspect of the valuation is whether it is reasonable to believe the valuation of the next round will be at least 1.5-2X the current value. Founders never want to tell their teams that all the hard work they’ve done between rounds isn’t worth a higher valuation. Thus, does the executive team have the money it needs to meet key milestones before the next round of funding? If the answer is no, then the VC will likely discount the current valuation. Although most investors allocate 50%+ of their funds for follow-on, investors need to believe the company will be relatively capital efficient so their ownership stakes aren’t diluted significantly by the time of an exit.
Team: Investors tend to pay a premium for repeat entrepreneurs or super-star entrepreneurs who are motivated for a big outcome. Most VCs expect to find holes on the executive team – the question is whether the initial team can recruit the best people in the world for this opportunity.
Comparable Transactions: In order to settle on a valuation, investors look at comparable public companies as well as the revenue multiples of recent acquisitions. Most venture investors focus on comparable transactions above $100 million as those transactions are more likely based on business fundamentals than those below $50 million. Other key data points include the revenue multiples the potential acquirers are trading at and the revenue multiples paid on prior acquisitions.
VC Ownership Targets: Series A and B investors often have a desired ownership target of 20-25% after the funding round, which can impact valuations. For example, if a Series A company wants to raise $7 million, and the VC wants to own 25%, it would be difficult to settle on a post-money valuation of more than $28 million without raising more money or reducing the percent ownership for the VC.
These six categories are meant to be a guide, but in reality there are often other factors that come into play. For example, in competitive situations, a venture firm might stretch on valuation to “win” a strategic deal. In addition, venture valuations are cyclical, and they often track behind public market valuations. Two companies with similar metrics might end up with very different valuations based on market timing.
Finally, valuation isn’t everything when selecting a venture firm. Entrepreneurs and investors are building a long term relationship, and entrepreneurs who are fortunate to have multiple term sheets may opt for a lower valuation if it means having a certain partner on board. The key is starting the relationship with a valuation that feels fair to both parties, and sets the company up for long term success.