How to Establish a Compelling Venture Capital Pitch Deck
Founders sometimes ask how a compelling venture capital pitch deck looks like. The answers to this question certainly depends on the financing round a startup is going through. A pitch deck of an early stage startup with only a product idea or a minimum viable product and little traction will certainly look differently than a pitch deck of a later stage company that has already achieved product-market-fit, product-channel-fit and seeks funding in order to accelerate growth.
There are however overarching aspects that you as founders may consider when establishing a venture capital pitch deck.
In this article, I share — as stage-agnostic as possible — my personal view on what should be reflected in a compelling venture capital pitch deck so that the content is relevant for all founders.
I hope that reading this article and reflecting on each sub-topic may also help prospective entrepreneurs better assess venture opportunities.
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General Remarks
Don’t establish a product sales pitch deck. Bear in mind that the pitch deck is not meant to convince customers to buy your products and services, but rather meant to convince venture capital investors to invest a significant amount of capital into your company. Against this background, put yourself into the shoes of a venture capital investor and ask what such venture capital investors probably like to know about your business and the corresponding investment opportunity. In short and very general, why can they make a great return on their investment into your company.
Research the venture capital investor you are pitching and tailor your pitch deck to the respective investor. Make sure your company generally resonates with the investment focus of the specific venture capital investor.
While the pitch deck should describe in a compelling way why investing in your company is the right thing to do, you should keep in mind that venture capital investors look for founders they can trust and build a long and fruitful relationship with. Founders should thus refrain from overstating important business aspects and focus on establishing credibility by providing a visionary, but authentic, transparent, true and fair view of their businesses. Be ambitious but realistic!
Keep your deck short and precise. Follow Mark Twain who allegdedly once said: “If I had had more time I would have written less.”
Make sure your slides and especially the action titles of your slides tell a consistent story.
Executive Summary
Whether or not a pitch deck should have an executive summary slide is a matter of opinion. I personally like such introductory slides that work as a teaser and summarise the content in a very short, simple and precise manner. Content-wise, the slide should really concentrate on what you believe the venture capital investor should be made aware of before reading the complete pitch deck.
Explain the Significant Problem You Are Solving
You may then explain the customers’ problem. VCs want to see that you are working on solving a significant problem, preferably one that is hard to solve, and that the customers are in extreme pain. Venture capitalists often talk about whether a product is a vitamin (nice to have), or a pain killer (must have). Just like in a drug store, vitamins are usually optional and priced lower than pain killers people buy in order to make immediate health problems disappear. As a venture capital investor, you look for companies that sell pain killers.
Demonstrate How Your Products and Services Solve the Pain of Your Customers
The pitch deck should explain how your products and services solve the customers’ problems and how they are different from existing offerings. Links to YouTube videos showcasing the products and services and how they solve the customers’ problems can be a nice means to help VCs better understand how your products and services work in the real world.
In addition, you may explain your vision as regards how the product is supposed to look like in 9–24 months (Product Road Map).
Demonstrate that the Technology Ensures Stability, Scalability and Security
The pitch deck should demonstrate that your technology supports scaling your business. The pitch deck may thus stress that the company has been focusing on ensuring tech stability, scalability and security, and eventually customer success from the very beginning, by e.g. avoiding monolithic web applications and embracing micro-services. The loosely coupled architectures speed-up development, testing and deployment.
If the technology is patentable, the pitch deck should also mention whether patent applications have been filed and whether patents have already been granted, including the respective geographies covered by the patents or the applications, respectively.
In contrast, if the company is not there yet, the pitch deck should state this fact and the work that needs to be done as well as the costs associated with bringing the IT to a state-of-the-art level or filing patent applications. In such case, there is a direct link to the later pitch deck section about the investment amount required and the use of the respective funds (i.e. covering the required development costs).
Analyse the Market Size Realistically Bottom-up
The slides dealing with market size, structure and dynamics are usually the ones where investors check how big the market opportunity really is. Despite the incredible importance of this topic for an investor’s decision to invest in a company, slides unfortunately very often only show huge bubbles with large numbers and a statement according to which the market is incredibly big. Such slides make investors skeptical, since they either show that you have not analysed the market properly (and are not as diligent as they want you to be) or the market is actually not that big at all. Hence, please be precise here and clearly define your target customers, calculate the total addressable market (TAM), explain relevant market dynamics and state your respective sources.
The total addressable market should be analyzed top-down and bottom-up, in any event bottom-up . A top-down market analysis is actually not more than a reference to a certain statistic stating that a market has a certain size. With this approach, I am left with the option to either believe the statistic or not. In contrast, the bottom-up approach makes use of real tangible information and starts at the company’s target customer base telling the reader how many potential customers exist and could buy the company’s product or services at a certain price point (e.g. there are 1,000,000 target customers globally who could buy the company’s product for an annual fee of 1,000 Euros so that the total addressable market amounts to 1 billion Euros). From there, you can show the serviceable addressable market (SAM) and the serviceable obtainable market (SOM) explaining the market share the founders believe they can get in the serviceable addressable market.
Investors will not only double-check the founders’ calculations and do their own market analysis but also check whether the envisaged serviceable obtainable market (SOM) suits the revenues forecast reflected in the financial plan.
If you have already found product/market fit, stress this here and the fact that you are ready to fuel your growth engine now. But measuring product/market fit is not easy. Hence, you may describe how you measure product/market-fit.
In the Go-To-Market section of a pitch deck, you can show which channels you use to acquire new customers and at what cost. Inbound, outbound, direct and indirect approaches suit different customer segments and come with different requirements (e.g. if you target small companies, you will probably have to pursue a low-toch/tech-touch approach as to attracting, converting, onboarding and supporting customers). In this section, you may also already elaborate on respective unit economics (e.g. CAC and Payback Period, maybe already CLV and CLV/CAC). Use the standard methodologies and do not tweak your KPIs so they look better. Good unit economics are usually a good indicator that the company has found product/market fit and product/channel fit.
This section should not only explain what you have been doing so far but — given that it might be easy to get first traction with e.g. early adopters but not so easy to acquire customers at scale — also what your respective plans and potential obstacles are going forward.
Companies have competitors! And investors want to invest in the winner. They thus need to understand which companies you believe are your competitors or could become your competitors. But even more importantly, they want to understand why they should invest in your company. What is your company’s differentiator and competitive advantage? I very often hear that being the first mover is the advantage and I likewise very often respond that I do not believe that being the first mover per se is an advantage. There are rather several examples where followers ended-up being the winner (e.g. there have been several social networks before Facebook).
Hence, what really counts is the ability to build a competitive moat (maybe on the basis of being the first mover). There are many ways to build a competitive moat and investors need to know what makes your company stand out, e.g. resources or partnerships that others do not have, complex technology and respective patents or network effects that make it unattractive for customers to switch to competitive solutions.
While the section on market size, structure and dynamics should demonstrate that the company is active in a big market with a correspondingly big and attractive market opportunity, this section should clearly state how and why your company will win this market.
Describe Management Team, Board Composition and Cap Table
Investors look for excellent founder teams that have the required complementary skills, are resilient and persistent, have relevant industry expertise (sometimes called founder/market fit) and experience, can attract high caliber talents and eventually show the ability to build not only products, but successful teams. In this section, you can hence demonstrate the strengths of your team and explain how you want to deal with weaknesses (e.g. missing team members and corresponding hiring plans).
In addition to the members of the management team, it is also helpful to get relevant information on the backgrounds of the members of the board of directors and the shareholders in the company. A fully-diluted cap table showing shareholders with their percentage shareholding and employee stock options that have already been allocated and those that are still available for allocation may complete this section.
Show Historic Financials, Business Plan and KPIs
The section showing the company’s financials should contain historic financial information (at least P&L and Cashflow), current trading, the financial plan going forward (for at least the next 3 years) and the company’s key performance indicators (KPIs).
While you may present the financial information in the pitch deck on a quarterly or annual basis, the financial model that you will have to provide investors with and that investors will carefully review before investing in your company should contain the information on a monthly basis.
A strong emphasis should be put on showing the key performance indicators (KPIs) and their development over time. The KPIs that should find their way into the pitch deck may differ from company to company and business model to business model.
For a marketplace business model, you may show e.g. the gross merchandise value (GMV), the take rate, the corresponding internal revenues, contribution margin calculations as well as metrics dealing with activity, liquidity and retention. In another blog article, I have described how to calculate unit economics for a platform business model.
For a SaaS business model, you may show customer development, average revenue per customer, gross margin, churn, corresponding customer lifetime value, customer acquisition costs (fully-loaded) (i.e. including all sales and marketing costs), CLV/CAC-ratio, payback period, monthly and annual recurring revenue development as well as conversion funnel metrics.
For both SaaS and marketplace business models, a cohort analysis is very important and should either be reflected in the KPI section or provided to the investor together with the financial model.
The pitch deck should also tell the reader how you have calculated the KPIs. For example, some founders of SaaS companies try to show lower customer acquisition costs by not including all sales and marketing costs (which would be industry standard) or to show a higher customer lifetime value by not multiplying the average revenue per customer with the gross margin (or not including all SaaS business-relevant costs of revenues in the gross margin calculation, e.g. customer success and activation costs, hosting costs and transaction fees). As stressed before, do not tweak your KPIs if you want to build trust.
Explain Financing Need and Use of Funds
Deriving from the financial plan going forward is usually a certain financing need and the pitch deck should clearly state the amount you want to raise in this round of financing. And it is always better to state a specific number (e.g. we are raising 5m Euros) rather than a range (e.g. 4–6 million Euros), since a specific number demonstrates that you have a clear view of what you need to achieve in order to bring your company to the next stage and the cash required to do so. In addition, you should articulate what the funds will be used for (e.g. R&D, sales and marketing, internationalisation, hiring key personnel etc.).
Explain Potential Exit Scenarios
If you are a founder of a later stage company, you may want to end the pitch deck by explaining potential exit routes, e.g. potential acquirers.
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Originally published at https://www.smartscaling.io on January 2, 2020.
