What Matters Most to Venture Capitalists

Take a tip from those who have been there before to perfect your pitch.

Make no mistake — pitching your startup to investors is tough. You may think your company is the next big thing, but so do a lot of other founders. And just like you, they’re keen to get their hands on venture capital.

How do you stand out? Having a unique product is a no-brainer, but a successful pitch relies on a lot more than that. To gain the advantage over other startups, you need a deep understanding of your market, a proven business plan, and a strategic plan for targeting venture capitalists.

What Matters to VCs

There are three standard areas investors look at when evaluating an investment candidate, and you need to make a compelling case for your company in each one.

1. Market size: Venture capitalists want to find the next unicorn, and even really great businesses often fall short of that $1 billion mark. If you want to make investors sit up and pay attention (and give you their money), show them that your company has room for exponential growth. Explain how you’re going to disrupt your market and how long it will take you to do so.
2. Product differentiation: Startups face so many early challenges to profitability — such as a lack of capital and brand recognition — that good investors only want to see products that already have “rabid demand.” Your company must excel at what it does by offering a service or product that customers can’t get anywhere else. At FormSwift, for example, we provide a complete document creation and editing solution, which sets us apart from companies that only focus on one aspect of that process.
3. The team: Successful companies begin with strong leadership. You need smart, charismatic personalities who can generate audience enthusiasm for a product and contribute unique, effective ideas. Ask yourself what conflicts could arise between you and your executives, then devise a strategy for resolving them. Investors want to know who’s running your business and how well you manage your team.

Metrics That Matter

Your company’s finances back up your claims about market size, product differentiation and your team’s expertise, and show investors that you know how to make and manage money. VCs will look at five key numbers to assess whether your startup is worth their investment:

1. Traction: You’ll need to show rapid growth in a key metric, such as revenue or active users, to raise money at a favorable valuation. You’ll need at least double-digit monthly growth or an active, rapidly growing user base to catch investors’ attention. Early LinkedIn and Facebook investors knew that even though those companies didn’t have revenue yet, their large active user bases indicated the potential for something big.
2. Gross margins: High gross margins prove that your company can eventually become a profit machine. Investors are especially attracted to businesses with excellent operating leverage, which indicates that as revenue increases, profits will rapidly increase as well.
3. Low churn: The churn rate of your product is a key metric that shows how satisfied your users are. High customer satisfaction indicates that you have a differentiated, valuable product. Be sure to track customer engagement so you can show investors that you’re attracting and retaining users at a significant rate.
4. Low burn: Your burn rate tells VCs how efficient you are with capital. They’ll want to know your current and projected burn rates so they can assess how long their investment will last and how well you’re likely to manage it.
5. Lifetime value vs. the cost of acquiring a customer: This is the ultimate ratio: how much you spend to attract customers vs. how much you expect to earn from them. The better the ratio, the easier it is to achieve a high valuation.

Prepare to Pitch

Once all the components of your pitch are in place, you’ll need to build momentum before contacting potential investors. The following steps will help you identify prospects and prepare for your pitch meeting:

1. Build a media presence. You want VCs to know who you are before you approach them. Create an AngelList profile and build a following there. Then, contact media outlets you know VCs read — such as the Wall Street Journal, PE HUB, VentureBeat, and TechCrunch — to generate publicity. The more places you tell your story, the more likely VCs are to take your call. Dropbox executed this strategy brilliantly by creating serious media and investor buzz ahead of its $4 billion valuation in 2011. Everyone knew what Dropbox was, and everyone wanted a piece of it.
2. Create a targeted VC list. Use CrunchBase and Mattermark to find out which funds invest in your space. Then, identify which partners are best suited to your company and whether they’ve invested in your competitors. Finally, create a spreadsheet with this information, and narrow your list down to the 20 most promising candidates.
3. Organize your books. You don’t want to sabotage a deal because of legal issues. Make sure your accounting is current, all taxes are paid, and all employment contracts are in order.
4. Hire an attorney and business advisors. A good attorney will protect you against unfavorable clauses and prevent you from signing a deal that jeopardizes your company’s future. Likewise, seasoned advisors who have successfully raised funds themselves will help you polish your pitch and avoid rookie mistakes.

Wowing investors isn’t easy. But if you follow these tips, do your research, and clearly articulate your company’s strengths and achievements, VCs will have more confidence in you — and will be more likely to invest.

The Young Entrepreneur Council (YEC) is an invite-only organization comprised of the world’s most promising young entrepreneurs. In partnership with Citi, YEC recently launched BusinessCollective, a free virtual mentorship program that helps millions of entrepreneurs start and grow businesses.

Image credit: CC by Nguyen Hung Vu