How To Build a Winning Investment Case To Hook Investors
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In the past, it was necessary for entrepreneurs looking to raise finance to submit 100-page business plans. But modern-day investors demand, at a minimum, a well-crafted financial model and a pitch deck.
Increasing volumes of applications for funding and more sophisticated investors have driven this trend towards more succinct funding requests.
What does this mean for you? A new form of lure and bait is being used by hopeful entrepreneurs to reel in funders. Enter the deck.
At its simplest, a deck is a screening tool that serves as the key to your first meeting with a potential investor. It is not a comprehensive analysis that is bound to put off busy investors with limited time on their hands. The purpose of the deck is to make the job of investors easier — and to make it impossible for them to say no.
Done properly, a great deck should explain why the problem you are looking to solve creates a meaningful market opportunity, why your solution will be able to solve this problem in a way that competitors and substitute solutions can’t, and why your team has created, or is able to create, a business model with matching unit economics capable of turning any future market share into tangible economic value.
Your deck should solicit sufficient interest from investors to yield follow-on meetings, conversations and discussions — opportunities for you to present your vision, and explain why investors are likely to profit from it.
DocSend, the sales enablement and analytics software provider, recently teamed up with Professor Tom Eisenmann from Harvard Business School to conduct research into the use of pitches and the factors that contributed to their success.
Core takeaways were:
- Keep your deck to 20 pages or less
- Contact 20 to 30 investors
- Highlight your team slide — it is one of the three most viewed and important slides in your deck
- Financial performance or forecasts will be the most used slide in your deck
- Don’t insert deal terms into your deck. Investors want to structure deals according to their preferences.
Your deck should include information that addresses the topics below, and in the order set out to ensure optimal and logical informational flows:
- Why Now?
- Market Size
- Business Model
The following example is based on a fictitious company and is not unlike Silicon Valley, the acclaimed comedy series on HBO. Assume Peter Hendricks, founder and CEO of Pied Piper is on the road to raise finance. Using the construct and framework we’ve already set out, his story might look something like this:
“Pied Piper’s mission is to connect to the world through low cost, compression enabled data-driven interactions. We believe compression-driven, neural enabled networks offer opportunities for users and companies to interact more frequently, more cost effectively, and in a richer way than previously possible.”
Key Takeaway: Allow the reader to understand that the commercial vision drives your mission.
“99% of the world’s data has been created in the last two years. Along with the growth and explosion of data creation, capital expenditure on infrastructure has had to increase to keep abreast. Given the frequency and volume of digitally-driven data enabled interactions daily, weekly, monthly and yearly, consumers and companies are spending unheard of amounts on data and Internet costs to enable product usage and enablement.
This results in:
- Annual expenditure of R20 billion by data-heavy companies, and an estimated R82 billion by consumers using Internet-based applications and tools.
- Companies and consumers spending about R60 billion more than they should on data and hosting costs, due to cumbersome infrastructure and ineffectual architecture.
- Average users waste about three days annually waiting for files to load and data to buffer.”
Key Takeaway: Use data and numerical analysis to support your narrative. This will make your story more believable and justifiable. Remember, it’s all about justification.
“Our ever-growing data and Internet bills, capital investments and consumer facing latency could be solved by flexible, well-crafted compression software that reduces file sizes through the entire data lifecycle. Reducing file sizes will reduce data needed to remit, thereby reducing data costs, while lessening the need for capital investments to support data storage and transmission. As such, we believe compression holds the key to unlock R45 billion in excessive consumer and corporate data spend, in addition to providing opportunities for these expenditures to be diverted from commoditised necessities to higher-yielding alternative investments.”
Key Takeaway: Without divulging product or situational information, craft a story about how the problem might be solved. Demonstrating the effect of such a solution numerically will emphasise your point about the seriousness of the problem to any prospective investor.
4. Why Now
“We believe data and Internet services are becoming increasingly commoditised, thereby reducing corporate and consumer willingness to pay outrageous amounts for data consumption. Furthermore, we believe the current problems with data consumption will be compounded by the growth in mobile adoption and additional subscription for communication and social media applications.
The congruence of these events and occurrences will create a large and rich opportunity for compression based applications that will reduce file sizes, slash data costs, and improve security.”
Key Takeaway: The purpose of this section is to explain why market and technological conditions are, or will become, conducive to companies and consumers using your product, or products/services of a similar nature.
5. Market Size
“By looking at our core target markets, we currently preside over a R3 billion market opportunity.” This estimate is based on the following supportive factors:
- Our target corporate clients are media, financial services, medical and telecommunications companies, and we have segmented our consumer target market according to age and smartphone adoption.
- In South Africa, we are currently targeting users aged 18 to 40, LSM 6 to 8. Given the application of our technology, we expect these users to be moderately tech savvy. Based on this segmentation, we estimate a primary population of 4,5 million potential users.
- From a corporate perspective, three media companies, two medical companies, four financial services companies and two telecommunication companies have a need for our product, and are willing to subscribe to our offering.
- Based on our business and pricing model, we estimate our corporate cluster to be valued at R2,5 billion, and our consumer cluster R0,5 billion, based primarily on advertising opportunities.
Key Takeaway: You will often hear entrepreneurs say: “If I can just get 1% of this market, we will generate billions in revenues.”
That is top-down analysis and investors will tear that line of logic apart. Always use bottom-up analysis. No matter how hard it is to find data or information that relates to your external market, reverse engineering defensible numbers is more often the wiser and more defensible route.
Bottom-up analysis allows for an articulation of the number of customers in the market for your product or solution (defined according to the problem identified and the number of people or businesses experiencing the problem and in need of a solution), multiplied by the potential revenue in serving each customer individually.
“We believe Pied Piper is deeply differentiated from competing offerings, thus enabling us to capture market share more easily and directly than some of our competitors. We believe our freemium model will allow for wide adoption, with additional attractiveness driven by our wide product and service capability.
“While our competitors are only able to compress specific segments of data, the Pied Piper platform allows for data and informational optimisation across all categories.”
Key Takeaway: Use a series of tables or matrices to measure relative offerings from competitors or substitute products in highlighting the unique characteristics offered by your product or service. Your competition slide should state simply and convincingly why your product solves the problem in a way that competitors can’t. You should cover the following areas in your matrix analysis: (1) Price (2) Distribution (3) Funding raised (4) Business model (5) Key product features.
Outline what your product does.
Key Takeaway: Closely tie your product story into the PSM (problem, solution and market size). Explain why your product is able to solve the problem outlined without repeating your solution narrative. Your product story should be a molecular analysis of your technology, explaining why it constitutes a viable and defensible solution.
Moreover, your product narrative should be packaged and told in a manner that resonates with your market and opportunity analysis inasmuch as it must fit the customer base outlined, and the budgets from which potential customers will subscribe to your offering.
8. Business Model
“Our business model is two-fold and relates to our key target breakdown according to consumers and companies.
- We plan to deploy a SaaS based model for companies, where they pay a tiered amount of R1 million monthly, which will increase in line with utilisation. This allows us to align our interest with that of our clients, allowing us to benefit alongside them from the success of our product.
- For consumers, we will deploy a freemium model to provide users with free access to our platform, allowing for low costs of acquisition and registration of a large base of potential users. We plan to use this base for cross-selling and up-selling of additional product and platform features, thereby monetising our consumer-based users.
Key Takeaway: The business model slide is a bridge to the information set out in your financial analysis. State and explain how your business proposes to monetise its offering, carefully setting out the underlying unit economics and key value drivers. Astute investors are always on the lookout for untenable business models, so be sure to know your key value drivers.
Richard Hendricks — CEO
- Experience: Software developer for Hooli
- Education: Computer Science degree from Stanford University.
Jarred Dunn — Business Development
- Experience: Senior Vice President at Hooli focusing on strategic markets
- Education: MBA from Stanford University.
Erlich Bachman — CMO
- Experience: Founder of Aviato
- Education: Computer Science degree.
Betram Gilfoyle — CTO
- Experience: Full stack software developer for a number of successful start-ups and corporates
- Education: Bachelor’s degree from University of Montreal.”
Key Takeaway: The purpose of your team slide is to demonstrate why you and your core team comprise the necessary skills and experience to make your venture a success. Provide a short description of the backgrounds of your key team members and their skill sets, linking these to their current roles and responsibilities within your business. Such competencies should relate to critical and important areas of your business or your key success factors. Think carefully about critical areas in your business, key human resources needed, and why your current team fills such gaps and requirements.
“Pursuant to our go-to-market strategy, we aim to achieve the financial performance set out below:
- Break-even is at R12 million in revenue, equating to one corporate customer or about 0,48% of the total market.
- With an investment of R10 million, we believe we will reach a valuation of R400 million in five years, thereby offering a 10X return on our valuation of R40 million today.”
Key Takeaway: Slides on your financial performance or outlook should not go into detail that you can’t justify and defend. Ideally, your financial slide should set out any historical financial performance (for those of you in the seed or pre-seed stage, you probably don’t have any past financial information – don’t worry), with a reasonable outlook for future prospects.
Thus: Last year’s financial performance, if relevant, with a two-to-three year P&L and cash flow outlook. Your finance slides should also include a robust break-even analysis across a series of different scenarios. If you are not familiar with break-even tables, get someone knowledgeable to assist you.
(Break-even analysis is crucial to understand, as most investors would want to unpack this early on. Investors use break-even as a simple metric to unwind applicable risks, determine the number of customers you would need to acquire or products you would need to sell, and test the reasonability of your required customer base relative to the size and dynamics of the relevant market.)
In closing, your deck should be short, to the point, and relevant for investors looking for 10X growth in their investment. You will therefore need to explain why the market is large enough, why your product actually solves a problem, and why you will be able to turn any investment into a real financial return.
Lastly, make sure you understand your business and materials thoroughly, as investors are sure to probe deeply. Nothing will end your meeting faster than a wrong number, a misunderstanding of your business, or if investors sense that you are waffling.