The Fundraising Toolkit – Startup Success: A Startup Fundraising Series
The previous Startup Success column focused on planning out a fundraising campaign in such a way as to optimize for both efficiency and effectiveness. Armed with the plan, you are almost ready to launch the campaign. Some key tools will be needed for that.
A fundraiser’s most important tools are their elevator pitch, pitch deck, and financial projection model. If crafted and used correctly, the toolkit will not only serve as a helpful guide but also become a difference maker in their fundraising efforts by setting them apart from others who don’t put in the same effort.
Tool 1: The elevator pitch
There’s a reason it’s referred to as an elevator pitch; it’s meant to be a succinct description of the venture that can be delivered on a short elevator ride with a potential investor. It must be expressed in a few sentences so that it takes no more than 15 to 20 seconds to deliver. And that might even be a little generous.
I have a mantra about effective elevator pitches. They only need to accomplish one thing: They need to generate enough interest with the recipient to cause them to ask a question—any question. With that, you might get an additional two to three minutes to expand further and hopefully generate enough additional interest for a full-blown conversation. It doesn’t matter if that extended conversation happens right away or at a later time.
Two sentences will do it
A lot of startup founders overthink their elevator pitch. They feel like it must close the deal by incorporating anything and everything of possible interest for a variety of audiences. The opposite is true. Too much information actually makes it less interesting for some audiences and causes the pitch to surpass a normal human’s attention span. Coming up with something short and compelling is actually much harder than something more broad and complete. It reminds me of Mark Twain’s quote: “I apologize for such a long letter—I didn’t have time to write a short one.” A strong elevator pitch only requires two sentences, which should answer these two questions:
What does the company do?
My Capital Factory colleague Mikey Trafton teaches startups to simplify their approach to this sentence using the following format: “We help (customers) solve (problem) for (benefit).” An alternative format I sometimes use is “We created (a product) for (target customers) so they can gain (result).”
Easy, right? Actually, it is much harder than most people think, because they are burdened by all of the knowledge they possess. Simplifying a complex project into a couple of phrases requires dramatic focus on what will be interesting to an outsider and what they most need to know to understand the problem being solved.
Beyond the simple purpose of the venture, you have to describe why it’s important. Why should someone care about what you’re doing? The second sentence must complement the first sentence that describes what you do, and it should be compelling enough to give the other person no choice but to ask a question. Try making a bold claim or bragging about some results you’ve achieved.
To help identify the most compelling options for your elevator pitch, try using my “so what?” test. After reciting the elevator pitch to yourself, imagine that someone responds, “So what? Why should I care?” Your answer to this question might belong in the elevator pitch. I regularly hear elevator pitches that have too much “what” and not enough “so what.”
Keep it simple and conversational
Don’t use complicated industry or technical jargon in your elevator pitch; keep your vocabulary around an eighth-grade level. You want to pique their interest, not glaze their eyes. Even if your potential investor is an industry professional, you should be able to discuss your venture in clear, simple language. Otherwise, it may seem that you are focused on the mechanics of the problem rather than a meaningful fix. Think like a layman, not an expert.
You can write down your elevator pitch, but remember that how we write is often different from how we speak. Simplified language goes a long way toward making a short, prepared speech feel like a spontaneous conversation. You want your elevator pitch to sound natural, in the conversational sense. And like any business conversation, what you say should be clear, convincing, and relevant to the specific person you’re talking to.
You can also try to quantify your claims with numbers or factoids. They help certain claims sink in better and often help facilitate the desired question. But remember to keep it simple: Don’t just list a bunch of figures. Focus on one or two crucial and impressive numbers.
Time for a test drive
After working in an isolated environment, it’s time to take your elevator pitch on a test drive so you can refine it. Recite it to 20 people who don’t have much prior knowledge of your idea or your company. Ask them to react with the first question that comes to mind, but don’t answer their question right away. Instead, next ask them to tell you what they think your company does from only hearing the elevator pitch. Are you getting the questions you want? Are they in the right ballpark with regard to their guess about what you do? If not, make changes to your elevator pitch until you’re satisfied.
Tool 2: The pitch deck
In the old days, we actually wrote out a 20- to 30-page business plan document. Today, a tool called a pitch deck serves as a summarized and visual version of a business plan. It is in the form of a slide presentation and will become the single most valuable communication tool to use with audiences of all types. You will rely on it for multiple purposes. You’ll use it for presentations to investors; and if you ever decide to pitch at a formal pitching event, you’ll obviously need one. You can also use it as a supporting visual backdrop for sit-down conversations with investors.
The absolute most important aspect of an effective pitch deck is the storyline that serves as the foundation. Second most important is the flow (topic order) and content. Formatting is also important, but if the prior-mentioned ingredients aren’t right, formatting alone won’t save you.
A great pitch deck takes the audience on a journey. It should be like a story—compelling and with a beginning, middle, and end. After hearing the story, you want the audience to be interested in more information, to ask more questions, and to draw certain desired conclusions.
Those desired conclusions should be identified ahead of time so they can serve as the foundation for your pitch deck; you’ll build your story backward from these. Before worrying about the order of the slides and certainly before typing words onto the slides, first decide what you want the audience to conclude regarding your venture. That’s your foundation, and both the content and flow of your pitch deck should be optimized to support it.
What sort of things might you want the audience to conclude? Below are some examples that might apply to your venture:
- This company’s market opportunity is HUGE.
- That’s a really innovative solution for a really nasty problem.
- These founders are total badass ninjas.
- Wow, they’ve already got some unbelievable traction.
What is most exciting about your business plan from an investor’s perspective, and what conclusions are you hoping they will draw? As you tell your story using your pitch deck, you should put extra emphasis on the sections that specifically correspond to those same topics. This means extra slides, extra content, and extra time spent on those sections to help ensure the desired conclusion is reached.
The sequence of topics in your pitch must support the objective of creating a compelling story. There are multiple ways any given story can be told, but for fundraising purposes, there is a common pitch deck flow that active investors are used to seeing. Rather than cover that detail here, you can find it in an article titled “Pitch Deck Flow” on my Shockwave Innovations website (shockwaveinnovations.com).
Tool 3: The financial projection model
You might include financial projections in the pitch deck, but there you will typically want to show a high-level summary of your projections focused on revenue growth. Investors also want to know that you’ve projected your financial future in more detail and that you understand the underpinnings of your projection model.
In fact, I initially ignore the actual numbers that result from the projection model. Instead, I first want to see if the founder actually understands how the model works and which metrics provide the most leverage. If someone else put together your financial model using your input, make sure they explain every last detail, and make sure to experiment with the various knobs and levers within the model to understand their effects. You will be quizzed deeply by some investors. And you don’t get credit for just having a financial model; you have to understand and defend it.
Startups in the pre-seed funding stage don’t need a sophisticated financial model and don’t need to project out more than about 18 months. The focus should be on the projected profit and loss (P&L) because it shows both revenue growth and the expected net loss over time. With each subsequent funding stage, the model needs a longer projection, more detail, more input variables to experiment with, and generally more sophistication. A Series A funding round will project out three years and probably also require a cash flow projection, since net loss and cash consumption often deviate from each other.
Remember that financial results are derived from operational outcomes. For example, a startup with a self-service business model might encourage their website visitors to download a freemium version of their product and then nurture those users in a way that convinces a subset of them to upgrade to the paid version of the product. Operational metrics like monthly website visitors, the ratio of freemium downloads, and conversion rates to the paid version are critical for this company and, therefore, should be incorporated as inputs in the financial projection model. Believe me when I predict that you will become an absolute ninja with your operational and financial model as a result of the fundraising process.
Your elevator pitch, pitch deck, and financial model will serve as foundational fundraising tools, and that’s why I covered each of them in so much detail. Beyond that, you will almost certainly develop additional tools to best support your campaign. One example is a monthly update template for allowing interested investors to monitor your progress and, thereby, keep them warm. If you send those updates like clockwork every month and give an honest picture of the company’s accomplishments and issues, you’ll also earn needed respect and credibility with investors.
Another example is a one-page executive summary of your company and investment opportunity (called a one-pager). You will find numerous templates to consider and might find that it is the best piece of collateral to send an inquiring investor rather than your whole pitch deck. Remember, you want to present your pitch deck in person whenever possible.
If you follow the various recommendations and best practices that we have covered so far, you will be better prepared than 90 percent of the hundreds of startup founders I work with every year. Strategy set? Check. Battle plans ready? Check. Tools sharpened? Check. Great, in the next issue of Texas CEO Magazine we will emerge from the strategy, planning and preparation phases and dive into the actual fundraising campaign.