The VCs & the art of the Pitch

The VCs &the art of the Pitch

UCSF Idea-2-IPO

Naeem Zafar (Berkeley-Haas)Twitter: @naeem

www.Startup-Advisor.com

Topics of Discussion

• What exactly is the VC model

• The art of the elevator pitch

• Pitching to VCs

• Process of raising money through VC

2naeem@Startup-advisor.com

Capital Needs

• You must be able to draw this picture

naeem@Startup-advisor.com 3

$0time

De-Risk The Deal!

Raising Capital is Hard!

• Sources:– Friends, family and fools– Angels– Venture capitalists– Strategic investors

Domain, You

Traction, Exit!

Channels, products,

technology

VCs vs. Angels

VC Industry

Angel Investors & Groups

• VCs invest $20B a year in ~3,000 deals per year• Angels are investing between $20B and $30B in ~30K

deals per year

• http://www.angelcapitalassociation.org/

• Angel groups– The Angel’s Forum http://www.angelsforum.com/– The Band www.bandangels.com– Sand Hill Angels http://www.sandhillangels.com– Keiretsu Forum http://www.keiretsuforum.com

Demystifying Venture Capitalism

• Firms with partners who have financial & operating experience

• Invest other people’s money in high risk, high reward ideas

• Nurture & guide them to an exit

Why Raise Money in Chunks

• Preserve equity by de-risking the deal

ValuationRisk: tech, team, market

Risk: team, market

Risk: team, execution

Risk: mkt size

Series A

Series B

Series C

Funding Needs

homework

BootstrapOr Angel

Prod Dev Deployment proliferationPrototype

Series A Series B Series CF&F

naeem@Startup-advisor.com

~6 mo.

~6 to 12 mo.

~6 to 18 mo.

~12 to 18 mo.

7-Step Method of Getting Funding

1. Research them (the investors)2. Get introduced3. Send exec summary to gauge interest4. Request F2F meeting5. Pitch & intrigue them6. Build comfort & momentum7. Compelling event to bring to a close

What Investors Looks For

• Traction is most important– Sales, customers, revenues

• Hierarchy of traction1. Sales 2. Field testing or pilot sites3. Agreements for beta testing,

pilots, field trials4. Contract for pilot, field testing5. Potential customer testimonials6. Names of customers

VC Business Model

• Money comes from “Limited Partners”– Committed money, collected upon a “cap call”

• Managed over a ~10 years period by “General Partners” by investing in companies

• Profits returned to LP as companies exit (merger, IPO) & never pooled

• Keep 2% per year of fund size as management fees + 20% of gains (carry)

The VC Model

General Partners,

associates, venture

partners, EIR

semicon

New materials

Web 2.0 sw•Government pension fundsLP

•Corporate investment funds

•Private family moneyLP

VC firmSource of $ Startups

Limited Partners Diversify Risk

Early stage

Software

Medical

VC firms• Limited Partners (LP)

invests in a variety of funds to diversify their risks

• VC is just one asset class

• Various funds can be by type of investments or stage of investments

VC Place Multiple Bets

semicon

New materials

Web 2.0 sw

VC firmLP

Invest $50M(Money sent as investments made)

$3M series A

$8M series B

$10M series A

Ball Drops! Outcome is Known

semicon

New materials

Web 2.0 sw

VC firmLP

$3M series A

$8M series B

$10M series A

Shut down!

Series C, then IPO at $500M

Acquired for $200M

Fund Winds Down

semicon

New materials

Web 2.0 sw

VC firmLP

$3M series A

$8M series B

$10M series A

Shut down!

Series C, then IPO at $500M

Acquired for $200M

$45M (18% became 9% due to series C)

Exit Math• LP committed $50M but cap calls for $21M• Over 10 year period paid $10M in management fees• LP math:

– Capital recovered $95M– LP got $8M (semi) + $10M (materials) = $18M– Portion of carry

• 80% of ($50M-$10M)= 0.8 x $40M = $32M• 80% of ($45M - $8M) = 0.8 x $37M = $29.6M

• LP: $31M out, $79.6M returned (net = $48.6M)• VC: $10M in fees + $15.4M in carry

The VC Business Model

semicon

New materials

Web 2.0 sw

VC firmLP

LP expecting 5X to 10X return over 7 years

Management fee~2% per year+Carry(portion of profit retained ~20% to 30%)

• VC will invest in 20 to 40 companies in one fund

• Each partner may do 4 to 8 investments over life of each fund

Raising Money

• Odds are tough, even after proper introductions it may take 20 to 50 presentation to get traction over ~6 months

2 get funded

20 due diligence

100 preso

~1000 biz

plans What One partner at a typical VC firm does in a typical year!

Term sheet

Due Diligence

Entrepreneur’s Funding Process

Homework LegalPitch

Closing!

3-6 months2 to 4 months 1 to 2 months)

Section II

The Art of Presentation

Business Communications

• Essential to your professional success–& personal relationship success as well

You Are The Message!

• It is not about PowerPoint• You are the message • Use aids as needed• Have your message ready & crisp

Elevator Pitches

• If you have clarity you will not need too many words to describe it

• Best way to tell others about your idea?– What problem do you solve?– Who has this problem?

• Tell about a use case, not “how it works”

Pitching

• Explain yourself in first minute (slide zero™)• Explain the relevance of what you do• Stay at a high level• Listen for audience reaction …• Pitch again and again & fine tune

Pitching

• People listen to 7% of words that you say• They listen to 52% of your body language• Connect with your audience

– Make it relevant to them– Be clear (first in your own head)– Pause & let the message sink in!

• Do not repeat words on slide while presenting

• What is the one point you want people to remember after this slide– Make this point in the title of the slide– Make this point verbally– Content of slide should support the headline

Art of Pitching• First establish context then describe• Tell what you do, then explain rest

– Compartmentalize information

• Keep asking “so what?”

So What?

We provide 128-bit encryption in a portable device

It is super hard to break into our system

You can now have a secure conversation with your HQ from hotel room

Typical pitch So What! Make it personal

Tips on Slides• Unclutter your slides• Minimize font, style, emphasis overload

– These detract from your message

• Write & insist what words can be deleted• All articles can & should be deleted• Use “builds” only with busy slides• No more than one (or 2) messages per slide

Most Important Slide • What is the most important slide in your

presentation?• Why?

Naeem’s Pet Peeves

• Unexpected capitalized words on slides – That are not proper nouns or acronyms

• Too many words – OK to delete articles & shorten

• Too much clutter, animation that does not add but distracts from message

You & Your Passion• Be attentive, energetic, in front!• Know your message!

– Do not read your own slides

• Engage with audience• Uses pauses effectively

Say It With Conviction!

10/20/30 Rule

• Ten slides• Twenty minutes• Thirty size font

• You want to communicate “enough”, not everything!

• Purpose of the pitch to stimulate interest, not to close the deal

Organization of Pitching• One hour meeting nets 50 minute• 5 minute greet, 5 minute wrap• 30 minutes for discussion• Leaves no more than 20 minutes for

presentation• Font size rule* (oldest person in the room divided by 2)

* Guy Kawasaki rule

What do VC hear?

• What you pitch– Unmet need– Market size– Solution– …….– Team– …….– Financial assumptions– Financial projections

• What they hear– Is there money to be

– Are these the people who will make me money?

– How much money can we make?

Company Name

Name Title & Contact infoTag Line

Ten Slide Pitch

Audience can read the info but this is where you explain what you guys do: This

is what I call Slide Zero

1: Team

• Who are you?– Make words relevant– Include advisors, consultants if they make you

look larger & impressive• OK to show up with a less than perfect team

– All teams have holes– Important issue is that you know that there are holes that

you are willing to fill

2: Unmet Need• What pain are you alleviating

– Get everyone nodding their head in agreement

• Minimize a lot of data from “analysts” and consulting companies

• Describe a problem people connect with • Customer examples

3: Target Market & Segmentation

• What is your target market• Which sliver will you own

first & why• Market size• Market dynamics

– Regulation, new technology, new players

4: Market Dynamics & Competition

• Complete view of competitive landscape– More is better

• Never dismiss your competition– Investors, customers, employees all want to know why

you are better, not why competition is bad

• Never say that you have no competition

Positioning

• How will others remember you• Using familiar players to help position yourself

5: Your Solution

• How you alleviate this pain• Make sure that audience clearly understand

– What you sell– What is the value proposition– Not a place for in-depth technical description – just a gist of

“how”

• Avoid text but use diagrams, schematics, mockup, demo here

6: Your Unfair Advantage

• Why now?• Technology, secret sauce or magic behind

product• Special alliances, relationship that makes it

possible to for you to do this, now

7: Business Model• How you make money

– who pays you– what channels– what gross margins

8: Go-to-Market & Sales Strategy• How will you reach your first 10

customers• Marketing leverage points• What alliances needed or in place• Convince audience that you have

an effective go-to-market strategy

9: Financial Projection & Key Metrics

• What are key metrics & assumptions– customers, installations, licenses etc

• 5-year financial projection Take into account extended sales cycle

• Make people understand the assumptions that you made

$0 time

10: Status & Timeline• Current status

– Accomplishments to date (last ~6 months)– Timeline (major milestones over next ~18

months)– how the money will be used

• Can be used to show key metrics– Employee growth– Customer or geographies growth– Profit point etc.

Q2-’11Q4-’10 Q1-’11 2H-’121H-’12 1H’13

Timeline

e.g. 10 referenceable

accountsOr

Reach profitability etc.

Alpha customer acquisition

Series B $7M

Start company e.g. 1st

Prototype

Milestone #5

2H’13

Series A $4M

Milestone #3

Milestone #2

Milestone #4

e.g. 1st

alliance signed

Seed $100K

Q3-’11 Q4-’11

Product development

Prod Launch

Employee count 4 6 11 18 22 29 39 54naeem@Startup-advisor.com 53

www.FiveMountainPress.com

Summary

• Pitching requires clarity– Get clarity on your own business– Who your audience is and why should they care

• Pitching is common sense!– Which apparently is not that common

• Luck happens when preparedness meets opportunity

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