What I would want to know if I were you

How to pitch VCs, why investors look for what they look for and what to do

about it.

Ben Wirz, Director Business Consulting, Knight FoundationTwitter: @bthewirz

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About Ben• Russia/Journalism/Investment Banking• VC/Private Equity (11 Years)

– Mgmt @ 2 start-up companies exited at 15x and 2x (Energy, Manufacturing)

– Invested in 15+ companies

• At Knight Foundation since 2010— Evaluate/consult startups & other grantees— Identify opportunities for Knight Enterprise Fund— Work with 10-20 startups at any given time.

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About Knight Foundation

The John S. and James L. Knight Foundation is the legacy of a family who created the largest newspaper chain in the US.

– Journalism & Media Innovation: Since 2007, Knight has invested $100M+ in new technologies & techniques, including 200+ community news & information experiments

– Engaged Communities: Knight looks to develop in people a strong sense of belonging, timely access to information, the ability to understand information and skills to take action. Strong ties in 26 US cities.

– Fostering The Arts: Knight seeks to weave the arts into the fabric of the eight Knight resident communities (Akron, Charlotte, Detroit, Macon, Miami, Philadelphia, St. Paul and San Jose/Silicon Valley)

"Thus we seek to bestir the people into an awareness of their own condition, provide inspiration for their thoughts and rouse them to pursue their true interests.“ -John Knight, 1969

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About Knight Enterprise Fund

Social Media:Providing technology that lets content creators harness social media.

Sustainability:Developing improved/scalable media revenue models.

Media Operations:Creating tools that significantly simplify or lower costs for operations.

Design:Developing smart UX/UI that augments engagement.

Distribution:Offering cross-platform content delivery systems.

Marketing:Providing innovative ways to build audience and brand.

Information & Engagement Platforms:Dramatically improving users’ engagement with information and their communities.

• Early stage investments in mission-aligned media innovation companies

• Not lead, co-invest & help fill out rounds

• $100-300k typical investment

• Value added investor-26 communities-23 universities-Hundreds of media relationships-Large network & strong brand

WHAT AN EARLY STAGE INVESTOR WANTS TO KNOW

Investors Focus On 3 Things:

1. Problem/

Opportunity2. Team

3. Product/ Solution

What Is The Problem You Are Solving?

Be sure to include:• How big is it?

• How painful is it?

• How much is solving it worth?

• How do you know it’s a real problem? (Hint: This information should be coming from potential or actual customers)

How Will You Solve The Problem?

Explain Your Value Hypothesis:How the product or service will deliver value to customers once they are using it.

Sample Hypotheses:+ Lower consumer cost/time+ Better experience (increase willingness to pay)+ Improve supply chain for customers (B2B)+ Increase volume for customers (B2B, B2C)

Explain Your Growth Hypothesis:How new customers will discover your product or service

Sample Hypotheses:+ People will tell their friends (viral)+ We will advertise (paid)+ We will market directly to enterprise customers+ We will employ partners to distribute product.

Solve This First!

Source: Value, Growth Hypothesis concepts come from Eric Ries, The Lean Startup

Why Do You Think You Can Solve It?Pre-Minimum Viable Product:• Do customers recognize that

they have the problem you are trying to solve? (market)

• If there was a solution would they buy it? (market)

• Would they buy it from you? (Team)

• Can you build the solution you are proposing? (Team)

• Are you capable of iterating? (Team)

• Will you be able to market the solution? (Team)

After Minimum Viable Product:Traction vs. $/Spent in terms of:• Engagement (Value)• Conversion/Activation (Value)• Retention (Value)• Churn (Value)• User Growth (Growth)• Marketing Effectiveness

(Growth)• Payment (Value)• Customer Lifetime Value (Value)• Cost of User Acquisition

(Growth)

What do you do if VC says no?

Ask them whether its because:– Wrong Problem?

• One they are not interested in solving• One they do not believe exists

– Wrong Approach?• Do not believe in value/growth hypothesis

– Don’t believe you can solve it?• Wrong team• Not enough traction

WHY VC’S ASK THESE QUESTIONS AND WHY THESE ARE THE SAME ONES YOU SHOULD BE ASKING YOURSELVES

Imagine you are a VCFrom Experience You Know:• Business plans are wrong, all startups are built on

untested flawed assumptions (risks).• 70-90% of startups fail• Key risk is scaling too quickly

• i.e. spending money based on assumptions instead of knowledge

Conclusion (as a VC): Best way to analyze a startup (as a VC) is to: (1) Determine what has been proven, and what is still being assumed (2) Determine if team is capable of learning from and improving on inevitable mistakes.(3) Invest when reward for testing remaining assumptions outweighs risks.

Conclusion (as a Startup):• Think about productivity not in terms of how much stuff you are building, but how

much stuff you are learning, make sure you are learning as quickly as possible.

In other words, what do you do when:

1. Discovery(avg 5-7 months)

2. Validation(avg 3-5 months)

3. Efficiency(avg 5-6 months)

4. Scale(avg 7-9 months)

Most startups say they are here…

…but are actually here

Best time to investRiskiest time to invest

Answer: Move up the curve with minimal amount of $

Discovery Phase (T+ 5-7 months)Purpose: Validate whether startup is solving a meaningful problem and whether anybody would hypothetically be interested in their solution

Key VC Considerations:1. Team 2. Problem

Events: • Founding team formed• Many customer interviews conducted• Minimum viable product• Team joins accelerator• Friends and family round• Mentors & advisors

Key Graduation Milestone:-Customer Validation of Problem-Complete Minimum Viable Product

Key Stats (Avg):# of employees: 1# of $ raised: $200kMonthly User Growth: 6%

Source: Startup Genome Project

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Think of yourself as Plato

1. Accept that you don’t know what customer wants.2. Set out explicitly to figure it out.3. When you get significant agreement on problem, build

MVP.4. Stay lean.A startup is an organization formed to search for a repeatable and scalable business model.

-Steve Blank.

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Today

Current Funding Horizon

Expect to Solve Challenges through Testing & Iteration (like Aristotle)

Launch

Current Funding Horizon

Alpha 1st Iteration 2nd Iteration etc

What is Minimum Viable Product (MVP)?MVP = F(Customer, Problem, Time or $$$)

• Primarily, MVP is a way to test your value hypothesis

• Focus on CUSTOMER– Qualitative Discovery, Quantitative Validation

• Get to know habits, problems, desires (FUN MATTERS)– what causes pain? what causes pleasure?

• Define 1-5 TESTABLE Conversion Metrics of Value– Attention/Usage (session time, clicks)– Customer Data (email, connect, profile)- Revenue (direct or indirect)- Retention (visits over time, cohort behavior)- Referral (users evangelize to other users)

• Note: Paid Solutions drive FOCUS (& pay rent)

SOURCE: DAVE MCCLURE, 500 Startups, Metrics4Pirates Presentation, June 2011

Lean Startup Canvas = System to Chronicle Learning

Also Check Out: Lean Launch Lab

Validation Phase (T+ 8-12 months)Key VC Considerations:1. Team 2. Solution3. Problem

Key Milestone:-Product market fit

Key Stats (Avg at end of Phase):# of employees: 4# of $ raised: $800kMonthly User Growth: 21%

Source: Startup Genome Project

Purpose: Get early validation that people are interested in product through exchange of $ or attention.

Events: • Core features refined• Initial user growth• Metrics & analytics

implementation• Seed funding• 1st key hires• 1st paying customers• Product/Market Fit

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To test MVP, First Make Assumptions Explicit

Revenue Sources %

Online Donations 10%

Wealthy Individuals 30

Advertisement 25

Foundations 30

Events 5%

TOTAL 100%

How many monthly uniques/page views will you haveWhat % of readers will donate?

What % of registered readers will donate?How many registered users will you need?

Is this realistic? What % of target audience does this imply?

What growth rate will that require in registered users

What % of non registered readers will donateHow many non registered readers will you needWhat growth rate will that require

What will average donation size be Registered vs. UnregisteredMonthly/Annual/One-time

Boil down assumptions to 5-7 key Metrics that you can measure

Seven metrics that matter: 1. Acquisition: (rate of gaining new users)

2. Engagement: (how deeply are you engaging users)

3. Virality: (new customers coming from existing customers)

4. Monetization: (% of total users participating in the business)

5. Churn: (loss of existing users)

6. Lifetime customer value (projected monetization returns by class of customers)

7. Program Productive (Yield on promotional activities, both paid and viral)

Source: Escape Velocity, Geoffrey Moore (2011)

Look for Product/Market FitPMF = F(Customer, Solution, Alternatives*)

• Product / Market Fit occurs when value hypothesis is validated:– Customers like your stuff better than other options– Not static, Not optimal – just Local Max 4 F(customers, solution, time)– make sure you’re moving in optimal direction 2 local max

• Q: what competitive solutions are available? – … that your customers know about?– how are you diff/same? – in ways that people care about? (will pay for)

• KILL a FEATURE regularly (or rotate 1% tests)– Q: what is MOST $ cust pay 4 LEAST func MVP relative 2 BEST alt?

• NICHE 2 WIN: RE-define cust + DIFFerentiated features

SOURCE: DAVE MCCLURE, 500 Startups, Metrics4Pirates Presentation, June 2011

Efficiency Phase (T+ 13-18 months)Key VC Considerations:1. Solution2. Team3. Problem (for Scale)

Key Milestone:-Conversion Funnel Optimization-Growth Theory Validated

Key Stats (Avg at end of Phase):# of employees: 4# of $ raised: $900kMonthly User Growth: 29%

Source: Startup Genome Project

Purpose: Refine business model and improve efficiency of customer acquisition process to avoid scaling with a leaky bucket.

Events: • Value proposition refined• UX Overhauled• Conversion Funnel Optimized• Viral growth achieved• Repeatable sales process &/or

customer acquisition channel

Develop a marketing strategy based on what customers are doing

Q: What channels? Which users? Why?A: High Volume (#), Low Cost ($), High Conv (%)

• Design & Test Multiple Marketing Channels + Campaigns• Select & Focus on Best-Performing Channels & Themes• Optimize for conversion to target CTAs, not just site/landing page• Match/Drive channel cost to/below revenue potential

• Low-Hanging Fruit: – Blogs– SEO/SEM– Landing Pages– Automated Emails

SOURCE: DAVE MCCLURE, 500 Startups, Metrics4Pirates Presentation, June 2011

Purpose: Step on the gas! Drive growth aggressively.

Events: • Core features refined• Initial user growth• Metrics & analytics

implementation• Seed funding• 1st key hires• 1st paying customers• Product/Market Fit

Conversion Funnel vs. Cohort Analysis

Scale Phase (T +20-27 months)Key VC Considerations:1. Team2. Solution

Key Milestone:-VC Financing-Real Revenue (Breakeven?)

Key Stats (Avg during Phase):# of employees: 17# of $ raised: $3MMonthly User Growth: 43%

Source: Startup Genome Project

Purpose: Step on the gas! Drive growth aggressively.

Events: • Large A Round• Massive Customer Acquisition• Back End Scalability

Improvements• 1st Executive Hires• Process Implementation• Establish Departments

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Outcomes (from Best to Worst)

1.Success2.Failure (allows for better

resource allocation)3.??? Not Sure

Be sure you know what success & failure look like!This is more difficult in a nonprofit context.