You’ve got a big idea, youhave a vision. In my experience raising capital, investors have a tendency to ask similar questions around Team, Market, Product, Outreach, Business Model and Capitalization. In my opinion, there are better question to ask (more on that later) but these are the basic 6 areas you need to proactively address when pitching investors. Before we get into the list, I’d like to take a step back and talk about the two hats I have the privilege to wear.
In 2005, Jon Callaghan & Phil Black founded True Ventures and they asked me to join as a Venture Partner. At the time, I had recently founder Sphere so I was very focused on bringing to life my idea. Jon & Phil are entrepreneurial and they proposed a part-time investor role that would allow me to operate my start-up while investing in start-ups. My original plan was to help navigate Sphere to a logical “hand-off” point, switch to a board role and then focus my attention as a full time Partner investing in new opportunities. The mythical “hand-off” never happened (what a surprise!) and the team at True Ventures embraced the idea that I continue to do both roles (CEO/ Founder & Partner). I’m not sure how it works but it does, I’m a better entrepreneur because I invest and I’m a better investor because I’m a Founder. Since 2005, I’ve founded and successfully sold 2 business (about.me & Sphere), bought about.me back and True Ventures now manages 5 funds totaling $1 Billion with investments in 175+ start-ups. It’s been a privilege to be both a Founder and Venture Capitalist simultaneously. While the roles are symbiotic, they do require a different mind-set that has me switching hats frequently. For today’s article, I’ll wear my “VC” hat so let’s focus on questions Founders should be prepared for investors to ask when raising seed money. Next week, I’ll switch hats and we’ll tackle questions Founders should ask investors, something most Founders rarely do well. So let’s get into it – here are the basic areas most investors will want to dig into when you pitch them:
1. Team – Who are you and who else is on your team? Why is you uniquely qualified to solve the problem you’re tackling? What unique insight do you have? What unfair advantages do you have? Who are your key advisors? Which angel investors have indicated they’d like to invest? If you effectively sell the investor on your team, they’ll start to lean in and give you a fair listen.
2. Market – what is the big opportunity you are addressing and the steps to getting there? What are you doing that is different and uniquely positions you to become the market leader? How big of a market is your specific market really (i.e. the market or customers from which you will extract direct value, not “Local is huge, and we are in local, so of course we will be huge”)?
3. Product – What problem are you solving? Why do users care? How is this better than what is out there? How big of a difference is this really? What are your major product milestones that are coming? Who is the competition? Why will you beat them?
4. Outreach – How are you going to drive awareness and early adoption for the product? How are you going to acquire customers (SEO, SEM, viral, radio ads, direct mail, PR, other)? Some may ask about per customer acquisition costs and ARPU. What advantage if any do you have for distribution? How has distribution worked so far? What has worked/ not worked? What do you plan to do next for distribution?
5. Business Model – What is your business model? How will you make money? What is the market structure and dynamics? How do these dynamics map against your strategy? What are your customer unit economics (CPA, churn, LTV)? Are there any legal or regulatory issues that you’ll need to address?
6. Capitalization – How much are your raising? Why that amount? What will you use the capital you are raising for? What will you be able to achieve with that money? What is your pre-money target range?
As mentioned above, I’m not a fan of most of the above questions. They’re definitely important but our (True Ventures) primary focus is a bit different. We obsessively focus on 2 things:
1. Are you building a company or founding a movement? Why are you doing this? We want to understand what is driving a Founder. We want to dig into the emotional need of a Founder(s) to see their idea come to life – it’s essential to determine if they have the motivation to build a great company, and more importantly, do they have the magic to spark a movement. As an example, it’s why we invested in James Freeman, Founder of Blue Bottle Coffee, one of the founders of the coffee artisanal movement. When we met James, it was instantly clear that Blue Bottle Coffee wasn’t just about coffee drinks, it’s so much more than that. What we saw and why we got involved, is that James and his team are founding a movement. It’s not just the very specific experience around the coffee Blue Bottle roasts and serves, what we see is his core beliefs in the way he sources ingredients, supports farmers in developing regions of the world to grow the purest, highest quality organic beans that promote sustainability, the way he chooses his store locations that often acts a vote of confidence for a developing neighborhood, how he obsesses over small architectural details that make each cafe unique, how they serve the product [what cup, what glass, what temperature, single origin versus blended bean mixes, espresso drinks only on premise….] – thinking through every detail to offer something beautiful in our daily lives – it’s a philosophy/ an approach that has led to a movement around the integrity of experience around coffee.
2. Does your product capture the imagination? We’ve learned that the most inspiring founders do more than just create companies, they envision a way of life, a vision of how the world will be in spite of how people do things now (remember when carried physical maps not so long ago…) and it’s having a sense in their mind, knowing how people are going to use their product to impact their life is what makes it visionary. We want to support those type of Founders in a way that empowers them to go for it. Take Chris Anderson, Founder of 3D Robotics, former Editor in Chief of Wired magazine. Not only did his drone capture our imagination, it absolutely blew our mind. On Chris’s kitchen table, he decided with his kids to hack some Legos and make them fly. Fast forward a few years and 3D Robotics is the leader in commercial drone applications. We’re hearing a lot about drones because of privacy concerns and defense, etc. But what we’re not hearing about is how this technology is impacting agriculture industrial applications, farmers deploying for surveying, crop management, livestock management, sports coverage, the motion picture industry, real-estate – the applications for this technology are limitless – it’s that horizontal, it’s that profound and that’s why it captures our imagination.
When you prepare your deck, think about how you weave your motivation into the team slide. Similarly, before you demo your product, pause and tell a story around your product will impact people’s lives. If you can effectively do that, you’ve got a very good shot at attracting high quality investors.