How To Establish A Compelling Venture Capital Pitch Deck
by Dr. Patrick Flesner
As a venture capital investor, I am often asked by founders how a compelling venture capital pitch deck should look like. Surprisingly, I am not only asked this question by first-time founders but also by well-experienced management teams looking for growth capital. The answer to this question certainly differs from investor to investor and also depends on the financing round a startup is going through. A pitch deck of an early stage startup with only a product idea or a minimum viable product and little traction will certainly look different than a pitch deck of a later stage company that has already achieved product-market-fit, product-channel-fit and seeks funding in order to internationalize the business.
There are however overarching aspects that a founder should consider when establishing a venture capital pitch deck. In this article, I want to share — as stage-agnostic as possible — my personal view on what may be reflected in a compelling venture capital pitch deck so that the content is relevant for all founders.
At the same time, I believe this article can also help prospective entrepreneurs better assess venture opportunities.
I am often confronted with pitch decks that are very product or customer-focused. While customer centricity is of paramount importance for establishing a successful and sustainable business and although the products and services the company offers are important means to fulfil a customer need, founders should bear in mind that the pitch deck is not meant to convince customers to buy the company’s products or services, but rather meant to convince venture capital investors to invest a significant amount of money into the company.
Against this background, founders are well-advised if they put themselves into the shoes of a venture capital investor and ask themselves what such venture capital investors would probably like to know about the business and the corresponding investment opportunity. The short generic answer to this question is that venture capital investors want to know how much return they can make on their investment (more detailed answers to this question in the main part of this article).
As regards the return expectations, founders should know that venture capital investors live by the “power law”. This means that venture capital fund returns are not governed by normal distribution. Rather, most investments return only little or no money invested, some investments return the money invested or a bit more but only a few investments have outcomes well outside what any normal distribution curve would encompass (so-called home runs) and can generate more than 50% of the total fund returns.
Hence, if founders establish their pitch deck, they should always ask themselves what kind of return the relevant venture capital investors need to make, whether the pitch deck reasonably reflects how such returns can be achieved and why an investment into this company can be a home run investment.
Credibility and Trust
While the pitch deck should describe in a compelling way how the venture capital investors can generate the expected returns, founders should likewise keep in mind that venture capital investors look for founders they can trust and build a long and fruitful relationship with. Founders should thus refrain from overstating important business aspects and focus on establishing credibility by providing a visionary, but authentic, transparent, true and fair view of their business. Be ambitious but realistic!
Whether or not a pitch deck should have an executive summary slide is a matter of opinion. I personally like such introductory slides that work as a teaser and summarize company and business in a very short, simple and precise manner. Content-wise, the slide should really concentrate on what the founders believe the venture capital investor should be made aware of before reading the complete pitch deck.
Founders may then explain the customers’ problem the company’s product and services solve. The venture capital investor wants to see that the company is working on solving a significant problem, preferably one that is hard to solve, and that the customers are in extreme pain. Venture capitalists often talk about whether a product is a vitamin (nice to have), or a pain killer (must have).Just like in a drug store, vitamins are usually optional and priced lower than pain killers people buy in order to make immediate health problems disappear. As a venture capital investor, you look for companies that sell pain killers.
Product and Service
Next, the pitch deck should explain how the company’s product and services solve the customers’ problem. It is great if the company’s offering is the first and only offering in this regard and, if so, venture capitalists will certainly be intrigued. However, unfortunately, we rarely see that there is only one product or service solving a significant problem. Usually competitive products and services already exist. In such case, the venture capitalist needs to understand how the company’s product and services are different from existing offerings. And it will not be a compelling proposition to only state that the product or service is cheaper. Competing on price is rarely sustainable. Instead, founders should preferably be able to explain why the company’s products and offerings comply with Grant Cardone’s 10x rule and are 10 times better than existing offerings.
In addition, the founders should explain their vision as regards how the product is supposed to look like in 9–24 months and I appreciate all means that help me better understand how the product works in the real world (e.g. links to YouTube videos in which the company showcases its products).
Technology and IP
Since Eric Ries published his book “The Lean Startup”, founders are obsessed with going through the build-measure-learn feedback loop and bringing minimum viable products in front of their customers as early as possible. The Lean Startup movement has indeed helped transforming the way how new products are built and launched. However, the pitch deck should nevertheless demonstrate that the technology underlying the company’s products and services has been built for scale from the very beginning.
Likewise, the pitch deck may also stress that the company has been focusing on ensuring productivity, agility and eventually customer satisfaction by e.g. avoiding monolithic web applications and embracing microservices, whose loosely-coupled architectures speed-up development, testing and deployment.
If the technology is patentable, the pitch deck should also mention whether patent applications have been filed or patents already been granted, including the respective geographies covered by the patents or the applications, respectively.
In contrast, if the company is not there yet, the pitch deck should state this fact and the work that needs to be done as well as the costs associated with bringing the IT to a state-of-the-art level or filing patent applications. In such case, there is a direct link to the later pitch deck section about the investment amount required and the use of the respective funds (i.e. covering the required development costs).
The slides dealing with market size, structure and dynamics are usually the ones where investors check how big the market opportunity really is. Despite this incredible importance for an investor’s decision to invest in a company, I unfortunately very often see slides with only a huge circle with a huge number and a statement according to which the market is incredibly big. Such slides make me skeptical, since they either show that the founders have not analyzed the market properly (and are not as diligent as I want founders to be) or the market is actually not that big at all. Hence, founders are well-advised to be as precise as possible here. They should clearly define their target customers, calculate the total addressable market (TAM), explain relevant market dynamics and state their respective sources.
The total addressable market should be analyzed top-down and bottom-up, in any event bottom-up. A top-down market analysis is actually not more than a reference to a certain statistic stating that a market has a certain size. With this approach, I am left with the option to either believe the statistic or not. In contrast, the bottom-up approach makes use of real tangible information and starts at the company’s target customer base telling the reader how many potential customers exist and could buy the company’s product or service at a certain price point (e.g. there are 1,000,000 target customers globally who could buy the company’s product for an annual fee of 1,000 Euros so that the total addressable market amounts to 1 billion Euros). From there, the founders can show the serviceable addressable market (SAM) and the serviceable obtainable market (SOM) explaining the market share the founders believe they can get in the serviceable addressable market.
Investors will not only double-check the founders’ calculations and do their own market analysis but also check whether the envisaged serviceable obtainable market (SOM) suits the revenues forecast reflected in the financial plan.
In the Go-To-Market section of a pitch deck, founders can show which channels they use to acquire new customers and at what cost. They should explain whether they work via marketing and/or sales channels and what channels they use to acquire what kind of customers. There is not only the term “product-market-fit” but also the term “product-channel-fit” meaning that specific products are best distributed via certain channels. For example, if a company targets SMEs with a relatively low willingness to pay and potentially an accordingly low customer lifetime value, it rarely makes sense to use direct sales and expensive feet on the street with correspondingly high customer acquisition costs to acquire new customers. Also, enterprise clients are often high-touch clients to be approached also through field sales, but rarely adopt expensive and education-intensive solutions viaself-signup and low-touch options.
This section should not only explain what has been done so far but — given that it might be easy to get first traction with e.g. early adopters but not so easy to acquire customers at scale — also what the respective plans and potential obstacles are going forward.
As stated above, I rarely see companies without competitors. And as an investor, I want to invest in the winner. I thus need to understand which companies the founders believe are competitors or could become competitors. But even more importantly, I want to understand why I should invest in this particular company. What is the company’s differentiator and competitive advantage? I very often here that being the first mover is the advantage and I likewise very often respond that I do not believe that being the first mover per se is an advantage. There are rather several examples where followers ended-up being the winner (e.g. there have been several social networks before Facebook).
Hence, what really counts is the ability to build a competitive moat (maybe on the basis of being the first mover). There are many ways to build a competitive moat and I need to know what makes this company stand out, e.g. resources or partnerships that others do not have, complex technology and respective patents or network effects that make it unattractive to switch to competitive solutions.
While the section on market size, structure and dynamics should demonstrate that the company is active in a big market with a correspondingly big market opportunity, this section should clearly state how and why the company will win this market.
Management Team, Board and Shareholders
Investors look for excellent founder teams that have the required complementary skills, are resilient and persistent, have relevant industry expertise and experience, can attract high caliber talents and eventually show the ability to build not only products, but a successful company. In this section, the founders can hence demonstrate their strengths and explain how they want to deal with weaknesses (e.g. missing team members and corresponding hiring plans).
In addition to the members of the management team, it is also helpful to get relevant information on the backgrounds of the members of the board of directors and the shareholders in the company. A fully-diluted cap table showing shareholders with their percentage shareholding and employee stock options that have already been allocated and those that are still available for allocation may complete this section.
The section showing the company’s financials should contain historic financial information (at least P&L and Cashflow since launch), current trading, the financial plan going forward (for at least the next 3 years) and the company’s key performance indicators (KPIs).
While the financial information in the pitch deck may be presented on a quarterly or annual basis, the financial model that investors will ask to be provided with and that they will carefully review before investing in a company should contain the information on a monthly basis.
A strong emphasis should be put on showing the key performance indicators (KPIs) and their development over time. The KPIs that should find their way into the pitch deck may differ from company to company and business model to business model. For a marketplace business model, founders may show e.g. the gross merchandise value (GMV), the take rate, the corresponding internal revenues, contribution margin calculations as well as metrics dealing with activity, liquidity and retention. For a SaaS business model, founders may show customer development, the average revenue per customer, the gross margin, the churn, the corresponding customer lifetime value, customer acquisition costs (fully-loaded) (i.e. including all sales and marketing costs), CLV/CAC-ratio, payback period, monthly and annual recurring revenue development as well as funnel metrics. For both SaaS and marketplace business models, a cohort analysis is very important and should either be reflected in the KPI section or provided to the investor together with the financial model.
The pitch deck should also tell the reader how the founders have calculated the KPIs. For example, some founders of SaaS companies try to show lower customer acquisition costs by not including all sales and marketing costs (which would be industry standard) or to show a higher customer lifetime value by not multiplying the average revenue per customer with the gross margin (or not including all SaaS business-relevant costs of revenues in the gross margin calculation, e.g. customer success and activation costs, hosting costs and transaction fees).
Financing Need and Use of Funds
Deriving from the financial plan going forward is usually a certain financing need and the pitch deck should clearly state the amount the founders want to raise in this round of financing. And it is always better to state a specific number (e.g. we are raising 5m Euros) rather than a range (e.g. 4–6 million Euros), since a specific number demonstrates that the founders have a clear view of what they need to achieve in order to bring the company to the next stage and the cash required to do so. In addition, the founders should articulate what the funds will be used for (e.g. R&D, sales and marketing, internationalization, hiring key personnel etc.).
Exit Scenarios and Potential Acquirers / IPO
Depending on the stage of the company, the founders may want to end the pitch deck by showing potential exit routes, e.g. an IPO or potential acquirers.
As stated at the very beginning of this article, venture capital funds need to make abnormal returns on an investment in order to generate acceptable returns for their investors (their limited partners) and this section helps investors understand who could buy the company after founders and investors have jointly created value in the years to come.
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