Raising venture capital is no easy task; many variables need to come into play and align for a round of funding to happen.
We've covered extensively what a pitch deck should have and what your financials should answer, but today we are going talk about the deal-breakers.
The stuff that (ourselves included) didn't know was working against us until it was too late. Let's do it.
I have this theory that the founders should have the capacity to generate the first $100K of revenue for the company, without needing any external talent. If there's a skill you are missing to get your company to revenue, then that person should be your co-founder, not your employee.
Imagine a biotech company started by two founders with a business background. They are raising money to hire a scientist to join them. It doesn't make sense, does it?
Well, the same applies for a tech company (app, website) trying to raise money to recruit a CTO. It makes no sense, and I see plenty of founders trying to get away with it.
If you are a tech company, then at least one of the co-founders, needs to be technical. Period.
Don't underestimate distribution, either! Who is going to sell this? Is any of the founders a growth marketer? Or do any of them have a strong network? Once again, critical requirements for the business to succeed.
Can't you hire that talent? Well, you can, but you'll be paying market salaries for it. A market salary for a CTO is $150,000. If you hire a dev agency or a marketing agency, they'll be paying market salaries for their employees, and they'll charge a profit margin on top of that.
Nobody wants to pay market costs for developing or marketing a startup; that's why having these skills on the team is necessary!
A complicated cap table can also become a deal-breaker. The cleaner your company, the better.
Common problems on a cap table are,
Other problems I've seen are,
If you already have an operating business, consider leaving that behind and starting a new corporation.
Nobody wants to pour money on a sinking ship. The reason why you raise capital should be to scale, and to grow faster, not to 'save the business.'
I've tried to raise money with short runways, and every single time I failed. You could say that investors can smell fear.
If your company is struggling, don't consider raising capital as your first solution. It's an all-in bet: the CEO will need to dedicate most of their time to the round and inevitably spend less time running the business. Are you willing to bet in your ability to raise capital, vs. your ability to salvage the business?
I've seen Financial Models with a $300,000+ salary for the CEO. That's not how it works when you are using somebody else's money to grow your company.
You are expected to take away, way below market salary at the early stages. To give you a reference, when we did 500 Startups, we lived in the Bay Area for a few months, the salary for the founders was $30,000/yr. It sucked, but we had a long term bet in the business, and it paid off.
Sign-ups, app installs, beta users are vanity metrics. They don't mean anything, and if you are using them, it's either one of two reasons,
Either way, it's a red flag. Sign-ups are irrelevant; what matters is monthly active users. Or revenue. Or conversion rates. Or retention rates: metrics that paint a picture of how much your customers love the product, and how much it's essential for them.
You need to know your KPIs by heart. You need to live and breathe those numbers every single day. If you are tracking them correctly, there is no way you haven't memorized them.
Now, knowing which are your KPIs is no easy task either. In the early stages of Slidebean, we would have thought that the number of presentations created would be a core metric. We were wrong. Most companies only make one or two versions of their pitch deck, so it's not about more presentations. It's about their understanding of our platform and how many times they share that deck.
Investors expect your complete dedication to your business. No side-hustles, no other gigs, just growing this company. They are betting their money on this product or service, period.
While that's not as common, what I do see with particular frequency is pitch decks that try to focus on 3 or 4 products at once—a suite of services. Wrong.
In the early stages, you just don't have the capacity to build more than one product. There's just no way to do it unless you have tremendous resources.
If you have other great ideas about how the company could evolve, talk to them, by all means, but know when to talk about them.
The problem/solution statement should talk about your core product, nothing else. These added features, concepts, satellite products fit very well on your go-to-market slide. Draw a roadmap of the near future, significant releases, user milestones, draw a long-term format, and talk about these other ideas briefly.
Remember, investors expect a 15-slide deck. You can stretch that to 18, maybe, but no more. And don't forget the balance: in that 15-slide deck, there's one slide about the problem, one slide about the solution, one slide about the business model. Doing three slides on future plans breaks this delicate balance.
In the end, the deck should talk about your overall vision, yes, but it needs to focus on the parts where you have visibility. Where is this money that you are rasing, going. And how does it get your company to the next stage?
These pitch decks are our bread and butter, and if you need help, you know where to find us.
Speaking of the next stage, the money you raise must get your company to a tangible milestone. A fundable milestone.
If you raise $250,000 to build the product, but you need to raise an extra $500K to launch it, you are in a bad position. It's a red flag.
You need to raise enough money for the next milestone. Usually, that will be a new round of funding, but it might very well be profitability.
For a future round of funding, do some research on the KPIs needed for the next rounds. For example, on a SaaS business, Series A investors often expect at least $1.5M in ARR and annual growth of at least 3x. Those are the metrics for a SaaS Series A, and if your seed round doesn't get you there, you might end up in a weird limbo where you are too big for seed investors, but too small for series A investors. I've seen companies go out of business because they weren't prepared for this.
If you need help solving your pitch deck or projecting your use of funds, look at our Founder's Edition plan. It includes every single one of our financial model templates, our pitch deck templates, and analytics for your slides to know which slide your investors spent the most time on. It also involves office hours with our team, including a monthly strategy call with me.
More recently, AWS joined our suite of tools so that any seed-stage startup can get $5,000 in AWS credits and one year of AWS Business Support and 80 credits for self-paced labs.
This is a functional model you can use to create your own formulas and project your potential business growth. Instructions on how to use it are on the front page.