If you’ve ever watched an episode of the show Shark Tank, then you would know how nerve-wracking it is to pitch to a group of investors and convince them to fund your startup. Multiply this scenario by at least 40 times, and you get the idea that any fundraising exercise is difficult and time-consuming.

For you to get the best results, it is necessary to prepare a compelling pitch deck that would capture the attention of your target investors and effectively communicate the story of your business. In this comprehensive guide, the founder will learn everything there is a need to about raising capital from a venture capitalist (VC) or an angel investor.

This guide is a culmination of over 200 hours of research as well as the collective wisdom of noteworthy venture capitalists and entrepreneurs who have successfully raised funds!

Before we deep dive into the nuances of a robust pitch deck, we shall cover some basic concepts. What is a pitch deck? And equally important, who are the intended audiences?

What is a Pitch Deck?

A pitch deck is an essential fundraising tool for a startup and should be part of a founder’s toolkit, whether s(he) is raising a few thousand dollars or several million dollars. A pitch deck is often a PowerPoint presentation that explains a company’s product, business model and vision for growth then showcased to potential investors.

It usually comprises 10 to 20 slides and is sent to investors to get them to meet you or used as an effective visual aid to help convey your story. Some say that creating a killer pitch deck is an art, but we believe this is more Science than art and can be replicated by a truly diligent entrepreneur.

Every startup looking to raise funding needs a pitch deck. Think of it as a resume that you would submit to a potential investor that would hopefully get you enough interest to move to the next rounds of the process. Investors dislike a cumbersome and unclear pitch deck as it is not only time consuming, but it also gives them an impression that founders may not fully understand their value proposition either.

Founders should always remember that first impression counts. Potential investors are inundated with hundreds of proposals in a year, and only those pitches that genuinely stand out gets remembered. That is why having a remarkable pitch deck is of paramount importance.

Knowing the audience is a critical element in coming up with a compelling pitch. As such, founders need to understand the basics of venture capital and angel investors.

Venture Capital: Five Things You Need to Know

1. Basics of a Venture Capital Fund

Venture Capital is a pool of fund from investors looking to take an equity stake in fast-growing startups with exponential growth potential. Venture capital is a subset of private equity and has evolved from a niche investment activity towards the end of the Second World War into a flourishing industry that supports continuous innovation.

One key difference with private equity is that venture capital tends to focus on high growth and emerging companies seeking substantial funding in the early stages of their existence while private equity firms tend to fund much larger, more established companies that are seeking capital infusion or sell out a 100% of the company.

There are generally three types of venture capital: domain experts, operators and networkers.

  1. A domain expert is someone who has in-depth and specialized knowledge of a specific field or industry.
  2. An operator is someone who has shown a successful track record in growing and scaling a company.
  3. A networker is someone with extensive connections and can make the necessary introductions to strategic partners, domain experts and operators.

A venture capital fund has a finite life, which is usually 7 to 10 years with a clause to extend for another two years or so. Profits are paid out as investments are liquidated (discussed at a later section).

Investors in venture capital funds are typically large institutions such as pension funds, insurance companies, university endowments and sovereign funds. These funds usually expect a return of 25% to 35% per year over the life of the fund.

2. Investments are high risk / high reward

The investments a venture capital usually makes are often characterized as high risk / high reward. This is because a startup has a high rate of failure. As per a recent study by CB Insights, 70% of all venture-backed startups fail.

There are a myriad of reasons for this insanely high statistics, but it all boils down to the fact that early-stage investors take a significant amount of concept risk. Concept risk ranges from whether the idea/product works, whether the business model is scalable and sustainable and whether or not there is even a market need for product or service offering.

A Harvard study found out that most of the "failure" happens at the stage where the fund needs to exit. Venture capitalists are not able to recoup all of their investment due to the lack of exit opportunities (Trade sale, IPO). In making a pitch to venture capital firm, while it is important to be optimistic about the company's growth potential, potential risks should also be covered and be prepared to address those questions if they come up.

3. VCs make money on successful exit of business

When you go meet with a VC, always bear in mind that they are not investing for primarily altruistic reasons. Venture capital funds exist to make money for their investors and for the partners and managers that manage them. Venture capitalists make money two ways: fee for managing the fund and through carried interest.

The first way they make money is through management fees. Typically, VCs charge a 2% management fee per year to pay for salaries and fund operations. As a VC firm raise more funds, management fees become a substantial source of income for these firms. But the real returns are made upon exit through carried interest.

Carried interest is the most lucrative way a VC makes money. Traditionally, VCs earn 20% carried interest on their fund. This means venture capitalists earn 20% over a specified return (hurdle rate) on their fund.

For instance, consider a firm that manages a $100 million fund. If the hurdle rate is 10% CAGR, this means that the fund will earn 20% of any returns over USD 260 million (USD 100 million x 1.1^10) in a typical 10-year fund. Naturally, this could vary between firms depending on the agreement with the investors in the fund (a.k.a Limited Partners).

VCs justify their existence when they make money upon exit. Exit routes generally include an IPO, trade sale or a buyback. In the case of a startup, the first two are more likely. Ergo, it's essential, that as a founder, you understand that VCs primary motivation is to make a successful exit. So it's advisable to align your startup and yourself with that in mind.

4. Founders must often give up a degree of control

Once an investment agreement is executed, VCs take equity ownership in a firm usually in the form of preference shares or a convertible note. Along with this equity ownership, the company will have to give board seats to the VC pro rata to their ownership stake. If there are several investors, the lead investor is the one who puts in the most money. The lead investor will also take charge of the negotiations and outline the salient terms of the investor agreement.

Apart from board seats, VCs would often include provisions that will help them control their exit. Some of these could include pre-emption rights on transfer and tag-along rights, drag along, a put option anti-dilution rights and representations and warranties.

5. VCs operate on a specific time frame

Venture capitalists are not permanent investors. Given that a VC fund has typically a 10-year life, they make investments with a time frame of 5 to 7 years. Hence, founders are often asked to prepare a 3-5 year business plan and the pitch deck should ideally follow this mindset.

Angel Investors: Are They Heaven Sent?

Angel investors are high net worth individuals (HNI) who provide capital for startups and whose motivations may go beyond profitability. Their typical investments are early stage ventures, and they serve the funding gap between family and friends and that of more formal sources like venture capital funds.

For early-stage ventures, turning to angel investors have a lot of advantages, including but not limited to:

  1. They can provide additional value through strategic advice. Most of these angel investors are entrepreneurs or executives themselves who made money working through successful business exits or accumulated savings.
  2. They are more flexible when it comes to terms and can do a decent follow – on investment
  3. There is potential to meet other angels within their network
  4. They provide equity funding and not a loan. They are making a bet that the company will be a winner.

Like VCs, angel investors will require significant returns to their investment relative to the risk. Unlike VCs, they are more flexible on the timing, and likely be more opportunistic in terms of exit.

Stages of Start-up Funding

As your company grows, financing your financing needs also changes. There are typically five stages of funding rounds an entrepreneur needs to prepare for:

1. Seed Capital

Seed capital is the earliest source of investment for the company. Sources include family and friends, personal savings, crowdfunding or credit card debt. Money raised during seed capital is usually used for market research, product research and development and business plan development. Seed capital turns ideas into tangible elements.

2. Angel Round

As funding requirements grow towards product development or just expanding your team, the next stage of fundraising would be provided by Angel Investors. At this point, an entrepreneur would need to work hard on coming up with a compelling pitch.

3. Venture Capital Round

The more formalized fundraising exercise happens when the founders approach venture capital for funding. VC funding can come in multiple rounds and each round is given a letter of the alphabet (Series A, B, C etc.). We can zero in the first three series and how they differ.

a. Series-A: This round is usually the first fundraising round to raise significant capital. Series A investments raise amounts between USD 2 million to USD 15 million. During this round companies should meet one of the following goals:

1. Establish a business plan
At this point, the entrepreneur has a working business model that he would want to execute at an increased scale. It could also be a situation wherein the founder has a plan to modify his business plan to reflect certain realities encountered.

2. Distribution
Identifying the right distribution and sales channels become paramount. The founder should also come up with an effective advertising and marketing plan, even with resource constraints.

3. New Markets
Successfully launch a product/service into a new region or new market. It would also be a positive development if at this point the company can demonstrate its potential to scale geographically or across verticals

4. Address negative cash flow
Companies at this stage are usually "burning cash" meaning their cash requirements outpace that of their cash sources. This is to be expected, especially for an innovative product or service that is currently trying to get market share from incumbents. Funding at this point will help the company grow faster by staving off liquidity concerns.

b. Series-B: At this stage, the company is well on its way to becoming an established business. Production is now well managed, advertising and sales are in full flow, and revenue and profit are growing significantly as the market starts to scale. Amounts raised at this point are in tens of millions of dollars. Companies usually would want to meet one of the following goals during this round:

1. Team Expansion
As the company scales its operations, its headcount also grows. The company would want to fill out the organization with middle managers and staff to handle day to day operations. Top executives may also be needed to manage new product/service offerings or expansion to new markets.

2. Global Expansion
A company may have the potential to replicate its business in multiple geographies, often in its region. Truly innovative companies may be scaled globally. At this point, the company would need significant funding to build the market in those geographies and support its nascent operations.

3. Mergers and Acquisitions
At times, there will be opportunities to grow the company through mergers and acquisitions. Opportunities to consolidate businesses that either compete or complement would present itself, and fundraising could focus on capitalizing on those opportunities.

4. Growing the Customer Base
A company may focus on just expanding their customer base. Customer acquisition cost could soar higher as aggressive market building activities are undertaken.  The value of scaling the customer base goes beyond just selling the direct product or service offered. In this age, data is a byproduct that can be mined and used to create more revenue opportunities.

c. Series C and beyond: These rounds are sometimes not necessary in some cases. Common goals of these rounds are to continue rapid growth and expansion, expand to international markets, and make further acquisitions of businesses or intellectual property. This round could also expand the pool of investors to include late-stage venture capital, private equity, hedge funds or conglomerates. Amounts raised can reach up to hundreds of millions of dollars.

4. Mezzanine financing and bridge loans

Mezzanine financing is a late stage financing tool used by startups who do not wish to fund growth initiatives through additional equity, but at this point, the company is unable to borrow from a bank. Mezzanine finance is a hybrid form of financing that mixes quasi-debt/equity instruments. Mezzanine loan investors have seniority to that of shareholders.
Another form of debt financing would be a bridge loan. This is short term debt and is structured in a way that can be repaid after a liquidation event (IPO / Acquisition). Bridge financing may also be conducted following a management change. This enables founders to purchase back shares from former management and individuals prior to exit.

5. IPO / Trade Sale

As the company becomes more successful, it would then need to answer the question of how and when to cash out. The most popular way to liquidate is via an Initial Public Offering (an IPO). With an IPO, a company's founder and investors can sell some of their shares to the public.
At times, the company could also become a good acquisitions target for a larger company, usually a rival or a company looking to complement its existing business. No matter what the route is, this phase is the ultimate goal of most entrepreneurs.

In the next part of the startup pitch deck guide, we will decompose the key success factors of an investor deck.

Do you find this guide useful? Do let us know your thoughts.