Pitching your startup to investors. Ah, that old chestnut. It’s every entrepreneur’s greatest dream and worst nightmare.
But there’s no need to stress over it. Because, we can help. Well this time it’s not us at Starttech, (although we do have a wealth of experience in this area), but a good friend of ours, Alexandra Choli at Metavallon VC.
For those that don’t know her, Alexandra is a Partner at Metavallon; a venture capital fund investing in very early stage technology companies in Greece, Europe and the US. She has 17 years of experience in the fields of operations, business development, and entrepreneurship, and is passionate about growing innovation-driven startups.
Pitching your startup to investors: an introduction of sorts
Pitching your startup to investors can be the most nerve-wracking experience. But it doesn’t need to be. First off, the key things that make some pitches standout against others are not always what you think. The common misconception is that it’s the core idea. Nope. More often than not, that is not the most significant aspect.
The majority of the VC’s interviewed in an interesting piece of research by Foundr said that they value the ‘why’, behind an idea. After that, it’s the startup team members. But, more on all of this later. First, here’s a quick look at what Metavallon.
Who are Metavallon VC?
Metavallon VC began life back in 2011 as an incubator and then as an accelerator. During these years they have worked with different companies from Greece and all over the world. They run three different accelerator cycles. Today, they focus only on the investment part, specializing in seed funding for technology innovation and business.
Definitions on pre-seed/seed terms vary, but Metavallon VC, as Alexandra explained, exclusively focuses on the following categories:
Innovating in technology or building intellectual property:
Mostly on Machine Learning, Big Data, Internet of Things, Hardware and (non-crypto) block-chain technologies.
Focusing on massive and growing markets
Specific industries that have potential to grow and also those that the Draper Venture Network, an exclusive global network of investors the fund is part of, has the power to help.
Greece’s market is not an entirely viable option for Metavallon VC and the B2B businesses they primarily support and invest in. The reason? The market is limited and not representative of international ones.
“Exceptions would be tourism and maritime. And that is because Greece represents a sizable market internationally in these industries, the needs of businesses are representative of the global market needs, and the respective solutions are applicable internationally.”, says Alexandra.
Having functional prototype and feedback from target market
Revenues are welcome but that’s not a prerequisite. The core prerequisite for Metavallon VC is initial market validation. The fund invests in companies that have already validated their idea; either through paying customers or via non-paying yet engaged professionals that have offered their time and feedback — and as long as the latter are clearly representative of the startup’s target market.
That’s really important — beyond a founder’s visionary hypothesis or an investor’s insightful opinion, it is a paying customer that indicates this product clearly covers a need,“ according to Alexandra.
Much like us here at Starttech, Alexandra says that Metavallon VC are “active investors”, not evasive. “Our offering is based on part financial and part value, in terms of business development expertise, international network access, and other added resources we provide. We made 14 investments the past 16 months. That’s almost one investment per month and we plan to keep up with this pace for the next two years.
Using other people’s experience
So, how do you get in front of an investor like Metavallon VC (and of course us here at Starttech)? And when you get the chance to pitch your startup, how do you go about it? Here’s where it all gets interesting.
Our CEO, Dimitris Tsingos, shared his experience with investors when pitching as an entrepreneur to raise funds.
“I had the false notion that investors just don’t understand. It was as if we spoke different languages. And that could be explained as the first early stage VCs back then would invest on a wide range of different industries. They weren’t focused on a specific field of interest in order to specialize and know at least the basics. We didn’t have a common ground. And what’s more interesting is that back then there wasn’t trust or faith in our intention to sell our products abroad. Investing beyond Greece’s borders was risky. And our ambition to go abroad was met with suspicion as if these goals were fond hopes. I’m not sure if this perception still remains.”
6 ways to secure venture capital
Or, to put it better, misconceptions that might prevent you from fundraising when pitching your startup to investors.
There are plenty of misconceptions about pitching your startup to investors and trying to get funding rounds. Alexandra outlines 6 sure-fire ways to make sure you can secure that golden goose that you’re looking for when pitching your startup to investors.
1. Focus on market validation
Investors invest in companies. They don’t invest in ideas or technology alone. Of course, there are specialized funds that focus on the idea or technology “stage”, yet investors are devoted to funding businesses. To put this into perspective — think of a huge space in front of you; there is a small sphere in the very middle, this is the technology; then around it is a much larger sphere, the product or service that includes and leverages the technology along with other tangible and intangible elements, such as user design and packaging if this is physical.
And finally, imagine a huge all-encompassing sphere, the entire business, which includes customers, employees, internal operations, financials, and the entire business model and strategy. Now this is what may bring technology to the market — and this is what we are passionate about as a fund and invest in.
2. Have a clear financial plan — then, pitch your startup
You’re there to pitch your startup to investors. You have to give them the specifics, at least. How much money do you need? What are you going to do with it? What are you going to achieve with these funds? A presentation with extensive details of the product, without mentioning what you’re asking for and what’s the investment plan, is a misaligned presentation. When approaching investors, keep in mind that you need to be straightforward and leave aside any ill-conceived shyness. After all, investment is why we are both at the table. Be forthright and be prepared, talk funding!
3. Remember that numbers are above ideas
A great concept, a great team and a great product are absolutely essential, yet not enough. At the end of the day, it’s the market numbers that make or break a VC case. And the best demonstration of such a compelling case is through market capture and related financial projections; which take into account both a top-down and a bottom-up approach to support their viability:
Start with defining your target market, its size, and what may be addressable by your business. Note that by market, rather than the number of people or businesses, we always mean EUR/USD amounts; it is the difference between one million people with 0 willingness to pay and 100 businesses with EUR 1.000.000 annual budget already assigned for solutions such as yours. Once pinned down, go ahead and estimate a reasonable market share you aim to get. This approach is certainly frowned upon as theoretical, still it is a good indicator of market potential or of goals to set.
This approach is about planning for and demonstrating that it is possible to reach the above goal. Prepare a customer acquisition plan i.e. “I’ll get my first 10 customers now; next 20 customers will come next month and so on.”
Estimate a viable acquisition growth rate based on what your business model may handle and how much you may charge each customer — these are assumptions much more practical and reliable compared to a desired market share. Then put it all together and project for 2 years month-to-month; Is the desired growth achievable? Is your projected growth enough? This will help you see how realistic your growth hypothesis is and first and foremost what needs to change.
4. The 10 million in Y3 rule of thumb
It must become clear that venture capital is suited for a particular type of business, one that has the potential, due to its unusually large target market size and unique offering and economies of scale, to achieve extraordinarily high growth. Even if the potential is there, the risk of reaching it is still extremely high. And so is the actual failure rate in the market.
This means great losses; it also means that very early stage investors may only invest in companies that can demonstrate their potential to bring extraordinary returns. How can you know if your business has the potential – or rather, how to demonstrate it?
There is this rule of thumb — and a disclaimer in advance. Tt is just that, no more than a way to get a better sense of things. And certainly not to be quoted during a pitch. Here is a question to ask, or an exercise, rather, to work through:
Can your company reach 10 million euros in revenue in year 3 of operations?
Note here that investors are interested in revenues rather than profits; and revenues are expected to be reinvested to achieve the desired growth.
Now the number may seem easy to achieve at first or extra high when you get to work towards it month-to-month, yet it is a rather average target for a pre- or at-revenue company seeking to raise venture capital. After all, as a startup not only will you be competing in the international arena, you will also need to achieve such growth as to warrant your next — much higher — financing round.
5. Are you an entrepreneur working on raising money or making money?
We see quite a few entrepreneurs focused primarily on raising money. They are easy to spot as they tend to negotiate extensively from this first, very early round a wide range of terms. Now first of all, this is quite useless in reality. Even if everything goes according to plan, you’ll soon get to the next round. All previous terms will be re-adjusted to those of the lead investor.
And second, how we spend our finite time is an indication of our direction. You are either raising money or making money. Cannot do both equally well during these very early resource-strained stages.
Indeed, on the other hand, we see entrepreneurs passionate about their businesses. Raising funds is necessary for what they envision, yet their unmistakable focus is satisfied customers, and lots of them. They want a good financing deal that is fair for both sides and investors that can add value through their advice and network. They focus on business results and achievements, not on a big round or hard negotiations. And they want to build a ground-breaking, successful business. And they do it for themselves. That’s what motivates them and this is a huge indicator for investors too. If you are focused on generating —rather than claiming to be — market value, you are extremely more likely to create a successful business.
6. Invest in yourselves before pitching to investors
The majority of founders that succeed are those who “invest” in themselves. And this might be a bit of a secret sauce when you get to pitching your startup to investors. And what I mean is this:
The most promising founders will expend something with the expectation of achieving surplus, assuming risk, rather than to be invested on.
Initially these founders invest phenomenal time and effort in order to bring results — time and effort disproportional to the initial funds they may have raised. Once they achieve their targets, they boldly claim the value they created in the financing rounds to come or even through an exit.
As Alexandra explained, “Risk, and return, is different for investors and founders. Investors may have let’s say 50 companies in their portfolios. When one of them fails, this leaves them with another 49 potential successes. But things are different for founders. Each founder has a unique opportunity; to succeed or fail in their business.”
In other words, it’s really important for you as an entrepreneur to do everything you can in order to succeed. Invest your all and grab every opportunity — raising money is just one of these. And it is important not for the risk you take on, but for the returns that come with it. The financial — higher than of any single investor — and the intangible of creation and of remarkable accomplishment.
Our quick-fire questions
Some great insights there for any budding entrepreneurs out there interested in pitching your startup to investors. Now let’s see what Alexandra had to say when we fired some quick questions back at her on the above.
Q: Is the 10 million of revenue in three years rule of thumb feasible or not? Or do all of the above actually apply in practice to all startups?
A: Well, indeed the majority of companies don’t reach 10 million revenues within three years or rather at all. We should take into account that only 10% of funded companies make it at all, so not reaching this target is representative of the high risk investors take, rather than an error in the target.
Do those companies that actually succeed reach this growth? Yes, some sooner, some later. Still such a preparation and goal helps you stay focused and it also shows that, given your assumptions are correct, your company has indeed the potential to achieve such growth and value; it is a matter of finding how, in time.
Your plan itself also helps your investors and yourself understand how close you are to your goal.
In other words, it works as a tool that you consult to see where you were supposed to be and where you are in order to re-adapt you strategy and stay on track.
Q: Do letters of intent increase success for startups and how do investors see them?
A: Well, it’s easy to write one; noncommittal; no skin in the game really. From our part at Metavallon VC we focus on market validation. We value the companies that have already received customer feedback, have identified the pros/cons of their product, and are moving forward based on these.
Feedback may come pre-revenue through a pilot just as well; if a professional from your target market has taken their limited time to use your product or service, to give you feedback, and to continue using it. Then, you have covered a need.
Q: What is the most common weakness that you see in startups that fail?
A: I wouldn’t say that it’s a weakness. It’s more a matter of timing. Some companies approach us at a very premature stage and they don’t really know where they’re going. From our part, if there’s a company that has the potential to create value, either because they have a unique technology to build upon, or because they have a strong technology-skilled team — experienced and able to deliver on their concept — we definitely re-examine these cases later on.
In fact, we have examples of companies in our portfolio that were not initially ready. They progressed steadily, and kept us in the loop — we invested. Every single one is now on to great things.
P.S. If you like articles like this and want to read more on topics ranging from investing and entrepreneurship to personal growth and marketing, have a look at our Q&A Talks hub. It’s full of eye-opening discussions from people from all walks of life who share their wisdom with us. Much like a mini TEDx for the entrepreneurial ecosystem. 🙂