Editor’s Note: David Frankel is a Managing Partner at Founder Collective, an early-stage VC firm based in Cambridge and NYC that has made investments in over 150 companies including Uber, BuzzFeed, Coupang, Makerbot, PillPack and SeatGeek.
Pitching VCs is a serious challenge at any stage, but asking for a $30-60 million check is usually the sale of a founder’s life. Convincing an investor to accept a valuation that most normal people think you’d deserve in a year’s time (at best) piles on the challenge.
I’ve recently been working with a few of our portfolio companies on these kinds of deals and wanted to summarize what we’ve seen work.
A word of warning: Most startups don’t qualify. Ten-figure checks go to those with significant tangible growth in revenue or DAUs, real margins, or a crystal-clear path to strong monetization. To qualify, your graphs should be at 45-degree angles at worst.
If your company meets that profile, here’s how I think you may be able to make it happen.
Before the pitch
Have the important discussions before you start scheduling meetings.
Consider your appetite for risk. Raising a growth round takes most of your exit opportunities off the table. Acqui-hires are out, the half-billion dollar exit that would have given your family financial security for generations may be off the table, too. Look in the mirror. are you really ready to go big or go home?
Dilution is a downer. There’s a big difference between taking $20 million on a $200 million valuation and $50 million on $200 million. Your old investors can avail themselves of pro-rata rights. Your new investors will get liquidation preferences. The new money dilutes you. Additionally, you’re usually required to refresh the option pool (more dilution).
Changes to board composition. Growth funding means welcoming a new investor to your board. The best-functioning post-series-A boards usually have two investors, two founders and possibly an independent director. A growth round usually shifts the balance of power to VCs. And in my experience board “observers” are exactly the opposite – they tend to be just as vocal as anyone else. Are you ready to ask your seed investor to roll off the board now?
Soliciting support from existing investors. Make sure your existing investors are 100 percent onboard about bringing in more money. It almost seems quaint to make this point in the current environment (with VCs often chasing markups and financings for the wrong reasons), but they had better genuinely love the story you’re about to tell. They have to tell it alongside you.
Balance risk and reward. Founders taking money off the table can be controversial. I have no doubts on this: As a founder, you don’t understand risk management if you don’t take 10 percent of your holding off the table now. This is defensible – you’re still “long” with your company but with some de-risking you’re even more aligned with your new funders and can now really “swing for the fences.”
Assemble your documents. At the seed stage, investors should be driven by conviction which is almost entirely about “you.” At the growth stage, consensus between fund partners becomes increasingly important. You’ll be subjected to much deeper audits than what you saw in your seed and Series A rounds and need to use the credible (your metrics) to pitch the incredible (your extremely high growth story).
The partner in the growth fund is your customer. As with a sale to one of your typical customers, you should always be asking “How do I help my customer win?” Arm her with stats and data to back up the initial enthusiasm.
There is a laundry list of documents and data that growth-stage investors will need to see. Before you start pitching, have these docs ready and vetted:
Basic documents: Monthly management accounts, budgets, and waterfall reports are all common.
Audited financials: Ideally, at least a year’s worth, prepared by one of the big four accounting firms.
Knowledgeable market/marketing analytics: This needs to be real market research that helps illustrate industry dynamics, not a sexy projected market size number from Gartner.
Acquisition analysis: Being able to unpack your CAC and LTV at a deep level is critical. Cohort analyses. Depth of knowledge on each channel (SEO, Twitter, FB).
Sales pipeline: For B2B companies, be prepared to answer who is in the funnel, statistical percentage of time at each stage, initiatives to accelerate stages, etc.
Preparing the pitch
Sell the dream
You need to tell a story about how your company will change the world in a meaningful way. When framing your pitch, think less of Joseph Schumpeter and more about Joseph Campell’s hero’s journey.
Take Uber as an example. They combine a well-designed app with a well-stocked marketplace, but what they’re selling to investors is a transformational change to civic infrastructure, unprecedented entrepreneurial opportunity, and an iconic brand. When analysts compared Uber to the taxi industry, a $40 billion valuation seemed insane, but when the story is the poster child for the sharing economy and rethinking urban transportation, it’s a bit more palatable.
Make a billion-dollar promise
If you’re raising $30-50 million against a $200 million pre, you’re signing up to deliver at least a 4x exit.
Thankfully, Instagram, Oculus, WhatsApp, and others have made this visualization exercise easier for growth investors. You still need to demonstrate that you’re already assembling an excellent tried-and-tested team and a product roadmap that truly augments and amplifies your initial ramp. If the partner who has your attention doesn’t believe that you can reach 4x from here, she can’t sell it inside her partnership.
Project a vision explained in slides
Every slide in your deck and the questions it answers, is there to sell your progress to date and explain why your vision is real. Your recipients at this stage are smart and experienced—let them fill in the inevitable gaps in your story with their own enthusiasm.
Start with product/technology slide(s). Showcase your product up-front. Ideally illustrated with screenshots showing your app at the top of the iTunes leaderboard, or your hardware sitting on the shelf of the Apple Store. This deck will be the first exposure many people have to your company, so make sure all the highlights are captured.
Your earlier rounds were largely made on promise and vision behind your product.
Show these slides to trusted friends and advisors who aren’t involved in the pitching process. Founders are often underwhelmed or blind to the innovations that got them going in the first place. I’ve seen decks where brilliant founders glossed over key aspects of their products and quite literally “forgot” that their product had been fully featured in a leading magazine.
Unpack macro factors. Why is this the time for your company to grow? Are you taking advantage of a massive shift in buying habits? Are you mobile native versus web native? Surfing the sharing economy wave? What are you seeing that no one else does? This should be a mix of big-picture contextual analysis and specific details scrutiny for which you have privileged access and knowledge given your current market position.
Provide social proof. Smart VCs sometimes disdain the PR slide, and I agree that a big fuss shouldn’t be made of a constellation of tech publication logos. But if you’ve been featured in a periodical like Time, or have managed to repeatedly get covered by the press, use this to your advantage. A single slide, ideally filled with recognizable logos and headlines proclaiming your company’s genius has an impact. Don’t endlessly toot your own horn, but equally, don’t clam up when independents are out there singing your praises.
Explain your CAC/LTV. Growth round investors will be much more finely attuned to your ability to generate revenue, and more importantly, margin. Expect a deep dive into your customer acquisition cost and the lifetime value of the customer. Every business is slightly different in this regard, but expect questions like:
Which channels are your best performers? Are you sure? Can you provide documentation to support your thesis?
How does your performance look against industry benchmarks? If not, why not, and what are your plans to bring it in line?
Your earlier rounds were largely made on promise and vision behind your product. This round will succeed or fail based on the strength of your metrics. Everyone who will be talking to investors at this stage should be well-prepared to talk about how their functional responsibility impacts revenue and margin.
The team. The point of the team slide isn’t to tell investors how many people you’ve now got on staff, it’s to make them realize that you’ve assembled a team of all-stars. At this stage, a team slide should have head shots of 30-50 percent of the team. Each head shot should have one or more trust marks, the person’s school, previous employer or notable recognitions listed beside it.
A growth round VC should look at this and feel like you’ve assembled the nucleus of a team that could credibly build a public company.
“Money in the bank.” You should have a slide that shows your current burn and other basic financial metrics. Ideally, you should have several million dollars, or more than nine months of runway in the bank. Just as banks prefer to lend money to people who have money (collateral or cash flow), investors react far better to companies who can genuinely say “we don’t need your money.”
The ask. What will you do once the wire transfer clears? What burning problem will the new capital solve? How quickly?
A note on aesthetics. The aesthetics matter and all things being equal, a prettier deck is better, but spend more time surfacing insights from your data and metrics, and less time polishing the deck. If you’ve got a designer on staff, have them lend a hand, or better yet, spend a few hundred dollars and have an external agency dress it up so as not to distract your team.
Closing slides. Ideally, when you leave the meeting, your potential growth investor should be thinking, “This is going to be even bigger than they know.” You want to be audacious without abandoning the credibility you have worked hard to build.
It’s your job to understand the business of the various growth funds and the motivations of the individual partners.
Growth rounds should be treated like surgical strikes rather than carpet-bombing campaigns. Plan to pitch no more than half a dozen partners at well-understood firms.
If investors respond to your pitch, they’ll likely ask for more information, more references and more time. You’ll try to address this by creating a “data room,” but each investor will want slightly different information. Unless the answer is a reasonably quick no, each intro email kicks off a decision tree that costs time and adds stress, so choose carefully.
It’s your job to understand the business of the various growth funds and the motivations of the individual partners. Here are some questions to consider when pruning your list:
Is this really a “growth” fund? Not all large funds are created equally. What’s labeled a “growth fund” at many VC firms is not a mechanism to write a first check into a promising growing business, but rather, a bolt-on fund used to double or triple down on winners from an “in-house” smaller and earlier stage fund.
Does your company’s strategy match those of the investor’s? Just like startups, good VCs actually have a strategic intent to which they try to closely adhere. If you’re a consumer-facing company and the firm you’re pitching is known for enterprise SaaS investments, you’re in the wrong office. Pitching to “prepared minds” means spending less time convincing and more time compelling people to action. By definition…easier.
Fund size is destiny. A $250 million fund can’t write a $50 million check. A billion-dollar fund won’t write a $20 million check. Be familiar with each firm’s average bite size and right-size your “ask.”
Is the partner you’re pitching able to sign checks? Most CEOs don’t take anywhere near enough time to understand the partner dynamics in a firm. It’s tough but not impossible to do this. How many partners will this partner have to convince to get the deal done? You require someone who has a visceral response to you and your business. Someone who has confidence and conviction. But critically, is also credible enough to convince their partnership to write a $50 million check. Pitch the wrong partner and you’re wasting time. Choose the wrong partner and you just headed into a dead end.
Nuts and bolts of running the process
This is where your early-stage investors should prove their value. They look at four decks a day, have the advantages of objectivity and experience, and must help you avoid the land mines.
You should be consulting with them during the construction of the deck, but also schedule a proper dress rehearsal where you make the pitch as you would to a growth investor. If you “practice” on a growth fund, make sure it’s the one you’re not afraid to lose.
Unless you have inbound interest from a firm, ask your investor to make the introduction. They’ll mostly be seen as a more trusted source of deal flow. Arm your investors with an email framing the opportunity, broken down into six compelling bullet points. The goal is to get the growth fund partner to ask for a deck. The deck earns you a meeting.
Focus your team. Your senior team’s focus will be monopolized by this process for at least a month. You will be inundated with an endless set of requests. It’s stressful. When you’re planning to run this process, be ready to backfill your key team members or plan for a near shutdown of their other work.
Beware calendar dead zones. Generally, it’s better not to kick off the process post 1 November or June 15th. Nobody really admits it but the risks of your being side-tracked by vacations during these periods statistically increase. Plan to clear your schedule almost entirely from meeting one for the next six weeks. This is a highly consuming activity for you and your management team. If you’re doing it, do it properly and run an effective process.
A perfectly run process would take a month from an initial intro email to signed term sheet.
Be mindful of seasonality in your own industry. If your business is seasonal, try to schedule the process so that it coincides with the best part of your year. As silly as it sounds, I’ve seen companies with strong growth but a seasonal dip, penalized for running the process during their slow period. Savvy investors see past these fluctuations, but nothing helps to clear the recipient investor’s vision as well as an increasing trend line.
Running the process
A perfectly run process would take a month from an initial intro email to signed term sheet. Diligence will take another month. Here’s what you should expect at each stage:
Week 0: Identify all your target funds/partners, prepare your materials and schedule all your meetings. Try to arrange them in order of least-preferred to most.
Week 1: You’ll learn a lot presenting to the first firm and can improve the pitch for the next in the queue. If the pitch goes well, try to schedule follow-up meetings within 24 hours.
Week 2: You’ll likely have requests for info from the first meetings, so be prepared. Make sure your team has time allotted to help refine the deck. Also, schedule sessions with your senior team as they’ll likely be a part of the diligence process. As with the previous round, try to get the next meeting on everyone’s diary within a day or two.
Week 3: Firms will be in diligence mode at this point. Have reference customers, financials and other critical diligence items ready.
Be on the lookout for red flags, sometimes shaped in the guise of the sixth request for more data. Visceral excitement has a half life, and these investors are inundated with interesting opportunities, so don’t let a deal get cold. If the partners don’t seem excited, worry. If they hand it off to a junior staffer, panic.
It’s important to keep multiple firms in the running. Nothing is as empowering as a credible alternative. Competition galvanizes action and closes term sheets. Regardless of the source, a signed term-sheet is platinum — it’s the forcing function for others who are genuinely interested.
VCs may feel pangs of premature buyer’s remorse along the way.
Many a slip between the cup and the lip
A word of warning — these deals are so fragile. Entrepreneurs tend to get far too confident about when the deal is done. Even with a signed term sheet, there is a small, but non-zero, chance that the deal will evaporate.
Growth VCs can hire small armies of consultants to vet the deal. They’re paid to be naysayers. I’ve seen high-stakes deals nearly scuttled over accounting opinions. Politics can easily creep in. VCs may feel pangs of premature buyer’s remorse along the way. Basically, the more voices and opinions, the greater potential for things to go wrong.
So the lesson is don’t let up on the deal until the money is in the bank. And you’ve spent a little.
Sow success by picking the right seed partner
This guide is intended to help successful startups navigate the growth stages, but choosing your seed and A round investors is obviously equally important. Navigating growth funding dynamics is a tricky business and it is incumbent upon early stage investors to dig in and genuinely help you through this process. In the end that is quite possibly their ultimate value-add in your journey.
Create bridges, don’t burn them
Within reason, you want to maximize value along critical dimensions. But a finalized deal isn’t just the end of a challenging negotiation, it’s the start of a long relationship that won’t succeed without mutual trust at its core. Remember, you’re going to be working with this growth round investor for years. They’ve just bet a huge amount of capital on you. Both in terms of dollars and personal reputation. When the deal is done, you owe that individual a meaningful “thank you.”
Entrepreneurship is a business of partnerships. At the beginning, you and your earliest investors are on opposite sides of the table, but in future rounds you’ll both be fighting for the same things. At all stages, if you can, try your best to choose your investment partners with great care.