We recently found an incredible resource from NfX that we wanted to highlight and share our thoughts on for our community of underrepresented entrepreneurs here at Colorintech.
In the leadup to our 2023 Rise Accelerator programme (which has applications open until Jan 12th 2023 here!) we hope that this is useful for our community and for applicants to consider.
So, what are VCs looking for when a founder is pitching to them? Well, a lot of things, but don’t worry, because we can boil it down to be fairly straightforward.
1. Team – How do they know your team is excellent?
When you’re early-stage and don’t have the revenue to prove that you’re worth backing, then it’s mostly about betting on you and your team. Your past successes help paint a picture of excellence, whether in startups, school, the military, or other places you have excelled.
We recommend demonstrating the ability to learn - to be coachable - as well as strong leadership skills, and a connection (whether personal or professional) to the solution that you’re building. We’ve had feedback from firms like Forward Partners, LocalGlobe, and Blackseed VC that it’s not just about a great background, but also about key skills and a strong connection to your solution that makes you passionate about it.
Proving that the team also knows about the numbers - the revenue goals, the industry, your product market fit, and how to market your solution are all necessary too. There are a few things you should know in detail, and these are the most important examples.
2. Company – Can you describe what your company does in one sentence?
Nailing your short pitch or one-liner is an important part of the fundraising process because it will become the foundation of the story you tell — to investors, but also internally to employees and also to customers.
We’ve worked with a lot of founders that struggle to communicate what they do and who they serve (hint: you’re here to change a customer’s life, so get used to seeing yourself as someone who serves a community). Long winded descriptions, especially for techie founders, are common. And, are unhelpful.
For example, when the iPod first launched, the pitch was “a thousand songs in your pocket”, not a description of its memory space, hardware, or even what the device looks like. “A thousand songs in your pocket” is an emotional construct that makes you think “yeah, that’s a need I have, and I want that.” For startups one-liners, eliciting a response like that is really important and can’t be achieved with a literal description of what you’re building.
3. Market – What is the market opportunity and will it be big?
Investors focus on the market you’re entering. Some investors are passionate about some markets and not others. It’s critical to show you’ve been thoughtful about the market and have a compelling line of reasoning for why you think there’s a market opportunity.
4. Business model – How do you make money? Who pays? What are the margins?
You’d be surprised at how badly Founders typically bury this in their long PowerPoint decks or in-person presentations. The VCs are often still left scratching their heads and thinking, “So HOW do you make money again?"
It’s important to bring this out front and make it simple. At least show investors how you think about it and what numbers you have so far. Even at the early stage, you should have an idea about your business model, how you’ll make money, and assuming you capture a percentage of your market, what you’ll be worth in X amount of time.
5. Team location and size
Geographic location and team size matter when talking to VCs, at all stages, but especially as you start to grow. Generally, VCs like to be nearer to their teams, and to know how many full time, part time, and outsourced staff you have. All of these will play to their preferences and to help them understand your size, expenses, and how much they can help you.
The reason we don’t have a hard and fast rule for this one is because preferences will differ for some VCs, so the most important thing to do here is research who you’re pitching to as much as you can.
6. Timing – Why now?
Founders who make a strong case for the timing of their startup have a higher likelihood of getting a meeting. Often, VCs will have heard of something similar to your idea before. Pitching the timing as much as the idea can help them decide to meet with you, even if they passed on a similar idea before.
Mike Vernal of Sequoia Capital says that a question he will often ask is “why is this company being started today? Why wasn’t it started 3 years ago, or why shouldn’t it be started in 3 years?” And that is one of the most important questions for the entrepreneur to have a good answer to.
If something seems like a good idea and it seems like the world should work a certain way — and that was true 3 years ago — then there are two possibilities: either no one has ever thought of the idea before (unlikely), or someone else thought of it and tried it, but it didn’t work for some reason (more likely). Unless there’s some clear macro trend to indicate that the timing is better now, there’s no reason to expect a different outcome.
7. Traction – What are the metrics that show what you have achieved so far?
Traction can mean different things depending on the stage you’re at. At the earliest stages, it can include unpaid traction, where you have early test users who love your product. It can even be pre-product sales, expressions of interest, or anything else that shows people want what you’re doing. Ideally, you’ve made connections with these early people, but the more you have the better (as long as it’s good quality).
In later stages, this almost always means revenue and customer growth, and their satisfaction, over a period of time, to show that you’re actually growing.
We’ve actually released articles on traction previously on Startups Magazine, which you can read here to learn more about what VCs look for.
8. Fundraising – How much do you want to raise and why?
Every VC will have a stage or a “ticket size” they invest. If you’re raising to much or too little, or at the wrong stage, then it won’t stick.
They’ll also want to know where you plan to put the money. How much goes into staff salaries? How much into marketing? How much into product development? Why?
And for those who have raised before - who have you raised from? How did it go, how much equity (if any) do they have? When did that last raise occur? This all affects the relationship the VC will have with you, so they’ll want to know your other investors and how those relationships have panned out.
9. Fit – What about this particular investor (or firm) makes you interested in meeting with them?
Different investors will have different skills and experiences, and different firms will have different remits, including the industry and stage they invest in. You’re unlikely to be a fit for most VCs, so don’t waste your time or theirs pitching if they aren’t relevant. VCs are likely to ignore founders who are obviously not a fit.
So in any opening information, a focus on stage, industry, amount being raised, valuation and a few other details to capture this individual’s attention uniquely could be powerful for you.
10. Referrer – Who introduced you to the VC?
Your chances of getting a meeting with a particular VC is directly proportional to the perceived quality of your referrer. You must, however, make sure that the email or phone call introducing you hits on all the key points the VC wants to know to get them excited. You must arm your referrer with the right information.
This is a big part of what we do on our Rise Accelerator programme - making introductions between our participants and our investors. We also help our community to prepare for investment and make those introductions when they’re ready. Just one of the reasons why applying for our programmes is such a good opportunity!
Alright, that’s it for now. Good luck with your fundraising journey!