Venture capital · Fundraising

For seed funding, are VCs investing in a startup's longterm strategy or its immediate use case?

Lucas Hanson Looking for a partner to build awesome products

September 4th, 2015

I'm reviewing a pitch deck that a friend will use to help raise his startup's seed round. Currently, his product is a social platform that has modest growth and good user retention. He is in the middle of a pivot that will position the current product to disrupt a $200 mil market within a $50 Bil industry, with a long term strategy of expanding his platform to gain marketshare in other parts of the industry.

We've been in constructive arguments over the pitch deck's narrative. Given that the pitch will touch on both points, should it emphasize the current value the product is delivering (e.g user growth/retention, immediate use case of the app)or the future value the product will deliver (pain points it solves in $50 Bil industry/plans to generate revenue)?
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Michael Brill Technology startup exec focused on AI-driven products

September 4th, 2015

There's an important nuance... pitch the new idea and then use whatever bits of success you've had with the old idea as proof points.

Do not start off with the old idea, tell the investor what you learned and now you're going to go do this new thing. While all of us here appreciate the need and willingness to pivot, *most* seed stage investors simply don't have the bandwidth to deal with plot twists in your story.

Florian Pestoni

September 4th, 2015

The answer is "Yes". Investors want to see both an ambitious vision for the company and a pragmatic short term execution plan that is actionable. The best narrative is one where you can position the current product value on a path that leads to the future value it will create. 

This can take many forms: you may start with a narrow segment of the market, prove that you are useful and then expand horizontally (facebook); or you may follow geo expansion, starting in one metro area before going national and then global (lyft); or perhaps you start with casual users and then work your way up to more demanding users (dropbox). 

Regarding product functionality, if the pitch is for seed funding everyone will understand that the product in its current form is very limited. Investors get excited when people use the product in spite of its limitations, so don't be shy about explaining what's missing from your product. 

One quick comment: personally, I try my best to stay away from using terms like "disrupt" or "revolutionize". I'm not saying you shouldn't aim high, but it works so much better if you show how you create value and let the audience make the connection in their head for how this can "change the world".

Peter Johnston Businesses are composed of pixels, bytes & atoms. All 3 change constantly. I make that change +ve.

September 5th, 2015

Think about their motivation...

Venture Capital is a financial calculated risk exercise, rooted in maximising return and minimising risk. They invest because they believe they can make a better return, hopefully quicker too, than by investing in traditional ways. At heart, they don't really care whether a use case or a projection is valid, or even if the product/service/idea has a life beyond the point where they offload it. What they are hoping to do is buy in for $100k and sell on to a second stage investor for ten times that or more.

In judging what is a good vehicle to achieve that they look at the idea, the IP, the team and the ability to execute. Many incubators are really vehicles run by VCs to take raw unpolished ideas and turn them into investor diamonds - often by changing the team, filling the skills gaps, plugging them into existing growth hacking and management systems and introducing them to people who can open doors. So they take in the rough diamond, polish it and sell it on.

They need the ten or even hundred times model, because it is pretty much impossible to tell at the early stage what will scale, what will be profitable etc. By investing small amounts in many companies, they spread risk, hoping that one unicorn covers the few failures and there will be many minor successes (the ones where they cover their costs but not much more).

In making a judgement they tend to focus on the tangibles - these are imagination limited bankers after all, trained on balance sheets. They can often understand the current use case, but often discount the future possibilities as wishful thinking (they've heard all that before).

Here, I would discount the current situation. Look at it as having spent the time and effort to create a platform which has future use. Focus on the future opportunity. Cover yourself by showing that you have profitability and stability, but along the way have uncovered a powerful opportunity you are seeking to fund. Asking more investment into what you've already done reeks of failure.

Don Sedei Owner/CEO at TheAmusementPark

September 4th, 2015

Lucas, It has been my experience that vision and growth strategy of a product, brand, or service is key to any investor. But you must be able to show a calendar of a current launching strategy to give your investors the assurance you can gain traction within a designatied time period so your progress can be evaluated. I would focus on the current value and just touch on the future value. If there is interest then you can satisfy any doubts that they may have by presenting a strong long term business strategy as well as a launch strategy.

Richard Acton-Maher Co-founder at Wundereel

September 4th, 2015

Short answer: If current value is easy to prove, check that box quickly and focus on future potential value and his plan to get there.

Current value is more important in a seed round than future value potential. Proving that you can execute on a product, achieve market fit, and position it to grow are all more important than proving the business could be huge. After all, if you can't do the first three, how huge the business could be is irrelevant because you'd never get there.

That said, if your friend's resume and the metrics of the business are such that it's relatively easy to prove this, I would give it little emphasis. Dwelling too much on how well things have already gone can only do bad things like:
a) invite scrutiny of existing operations to the detriment of discussing future plans, which are more relevant to your planned fundraising.
b) send the message that you think you've already achieved success and are looking to be rewarded for a job well done.

If, on the other hand, it's not easy to prove this, it needs the emphasis because, as I said, proving that is far more important than demonstrating a huge hypothetical opportunity exists.

As for what constitutes "proof," growing users and improving retention is great. If acquisition and other variable costs are flat or falling, I'd say that's good enough. Absent any of one those things, solid proof you can get there could suffice. E.g. a detailed plan, a successful track record executing in similar situations, etc. But those have to be stellar.

Just one man's opinion.

Rob G

September 4th, 2015

...sell the vision and use his most relevant successes as proof points that he can execute on that vision. This of course assumes that the current business can in fact be seen as a success - "a social platform that has modest growth and good user retention"  could certainly draw some yawns... if you can get investors to listen past yet another pitch for a "social platform". If the current story is not strong then he won't get investment by pitching it anyway, so he really has no choice.  Again, If the current story is a strong story or can at least be positioned as evidence of his ability to execute (idea, test, product-market fit, MVP, more product-market fit testing, more building, user adoption, hire, fire, sell, market, etc.) then use it as proof of his ability to execute on the long-term vision. 

Rahul Architect Director of Architecture at Fidelity Investments

September 4th, 2015

I think business case should always be bottoms up - how much u spend for an unit and how much u sell it for and derive the scale in time or volume to reach break even.

Lucas Hanson Looking for a partner to build awesome products

September 4th, 2015

Thank you for the different insights! Some of the insights have already made their way back to the deck, so your comments and perspectives are extremely valuable--especially to the founder who is going to start pitching soon. 

David Still Founder of Start-ups, Entrepreneur, Financier and Advisor

September 4th, 2015

Both, plus the steps that you will take to make the transition.

Bill Warner Managing Partner of Paladin and Associates

September 5th, 2015

I understand the question, but not the premise.

Of course, early investors want to see how you are going to get meaningful traction as fast as possible, so get very real about how you are going to do that. They are also going to want to see the long term value and be convinced that you can grow to a market value that will give them their desired return. 

As for the premise, VC's don't invest in startups normally. They are later stage investors. There are exceptions, but this is the world of angel investors and private individual investors. The answer is the the same though. 

Bill