An entrepreneur’s experience funding her business can be one of the most defining of her journey. The right capital enables you to realize your vision and requires a specific skill set to secure. What are investors looking for? How do you meet them and navigate the process?
BBG Ventures Co-founder and General Partner Nisha Dua has invested in over 70 startups and reviewed thousands of pitches. In her Project Entrepreneur class, she offers a rare glimpse into an investor’s mindset evaluating companies and highlights the areas they’re specifically assessing. Here, she walks founders through a comprehensive four-part roadmap to launch their investment process, beginning with how to identify the right funding through crafting a succinct strategy, pitch deck and story.
Part I: Raising the Right Capital
*View in Dua’s class video from 1:00 – 13:00
Every business needs capital to thrive and it’s important to distinguish which type of funding is aligned with your goals. There are a variety of paths, from bootstrapping to raising venture capital, and Dua encourages founders to have honest conversations with themselves about funding during the earliest stages of business.
Entrepreneurs who seek to own more of their company and focus on long-term growth and profitability, may be best suited to bootstrap their business with the below options in addition to personal savings. Equally, these avenues can help fund your early growth to demonstrate traction ahead of raising venture capital.
- Credit cards can be used for company expenses and may be viable for those who can make timely payments. However, high interest rates and outstanding debt pose risks for your business, including impacting your credit and ability to secure loans in the future.
- Loans are a form of debt financing that you pay back over time. They can be secured from banks, the government, and online lenders. Rates, terms, and qualifications vary across lenders so it’s important to find the right structure.
- Grants are capital given to small businesses by local governments, foundations, and private organizations. They are purely to support a startup’s growth, don’t need to be paid back, or require fees or interest. Keep in mind your company must be eligible to receive a grant; As such, the process is competitive and may take a long-period of time.
- Crowdfunding platforms offer a direct way to raise funds from your community and customers. The capital raised will fuel your growth without needing to give up debt or equity. Crowdfunding campaigns are a useful way to validate your concept, test your product differentiation and marketing, and begin building your audience.
Venture-backed startups often pursue an accelerated growth trajectory that may not be appropriate for every business. Dua shares these questions to discern whether it’s right for you.
- Does my product and/or business model require significant capital to grow quickly?
- Do I have a high tolerance for risk and failure?
- Is my goal to focus on topline revenue and grow as quickly as possible?
- Am I comfortable owning less of my company?
- Can I accept external stakeholders influencing my business?
For those who are considering venture investment, she details potential avenues as you progress from launch to achieving product market fit and gaining traction.
- Friends and family: “A lot of people say, who are these friends and family? I don’t have friends and family with this kind of money. Your friends and family round can be as little as $5,000 and up to $50,000. It’s the money you need to get off the ground.”
- Angel investors: These may be high-net-worth individuals in your network or angel groups who invest together. Angel investors are valuable early partners. However, they may not have the expertise to support your company as it scales and can take up a lot of your time. In this case, establish your relationship at the start and set expectations around how much time and information they’ll receive from you.
*Examples: Pipeline Angels and New York Angels
- Accelerators and incubators: Dua highlights these as beneficial options for founders seeking operational support, such as in marketing and sales. A common structure is 7% ownership for an investment of $100,000 to $200,000. This may seem high, but depending on the accelerator, their early support can be significant.
*Examples: Y Combinator and Techstars
- Venture capital funds: VCs are institutional investors who take equity in your company. They play a hands-on role shepherding it and need to make a substantial return. “It’s important to understand a VC’s mindset on how an investment needs to perform and the context within a portfolio,” Dua says. “Let’s say I allocate half my $50 million fund into initial investments; a third aren’t going to succeed and the middle may make their money back. So, in order to return money to my investors, I need to turn a few of those $1 million investments into $100 million.”
Dua also offers insight on whether you’ll be raising money as debt or equity. Convertible notes and priced rounds are two common forms of early-stage investment.
- A convertible note is short-term debt that converts to equity. They may be convenient for founders due to speed, low cost, and rolling closes but Dua cautions against more than one and advises small amounts ($250,000 to $700,000 for pre-seed). “Convertible notes can come back to bite you because they build up and muddy the waters on dilution,” she explains. “You end up in a negotiation where a VC wants a certain amount of equity that translates into a lot less when the notes convert. As a founder, you take a hit on that and end up with more dilution.”
- A priced round is an equity investment. Investors will take equity in your company and set a pre-money valuation for your business.
Most entrepreneurs’ funding journeys will be an amalgamation of different capital sources and Dua advises that not every company needs significant VC dollars to scale. Take Native Deodorant, which raised $500,000 from VCs and was acquired for $100 million, as compared to a venture-backed startup that was valued at $1.1 billion, raised $375 million, and ultimately went public at $476 million.
The takeaway? Venture capital isn’t the only path to build a successful business. Be intentional about the capital you’re raising.
Part II: Sourcing Aligned Investors
*View in Dua’s class video from 13:00 – 19:00
Once you decide on the right fundraising approach, the next step is to create a deliberate plan to meet investors. “It’s really a sales and marketing process,” Dua explains. “You should approach it with the same rigor you would with selling your product. You need an organized and efficient plan to run a successful fundraising process.”
Start by creating a VC CRM: a target list of qualified investors. Before including an investor, research whether they invest in your stage, sector and geography; The size of their fund and if they have dry powder (available capital to invest) is also valuable to include if you can gather this information from your network. Dua also suggests noting an investor’s position and decision-making ability within the firm.
“Your CRM is a priority list you’re constantly updating and re-organizing by status or likelihood of investment based on your meetings,” she explains. She recommends organizing investors into three tiers – A, B, and C – and starting with your B and C groups to refine your pitch ahead of meeting your top choices.
An updated CRM isn’t solely for your outreach but to share with advisors and investors who are making introductions. “Your CRM helps them gain a pulse on your process, back-channel and see who else they can introduce you to. Make it very easy and contextual for people to make introductions.”
The Art of the Warm Intro
Warm introductions are the most effective way to get on an investor’s radar and a critical component of a successful fundraising process. “They’re so important – I’ll always take a meeting with a founder who comes highly recommended by someone I trust,” Dua adds.
Here are three tips to streamline the process.
- Write a great forwardable email paragraph. This is a brief paragraph advisors will include in an email to a potential investor to gauge if they’d like an introduction. “It’s important to equip people with the right information to make introductions,” Dua says. “The goal is to have a tight paragraph that demonstrates why your company is relevant to an investor and compels them to meet you.” Focus on these key points: your company’s big vision and product, the team’s relevant or impressive experience, traction you’ve seen thus far, notable partnerships, why your sector is intriguing, the state of your funding round, as well as current investors and advisors. (You can find an example email as well as CRM in Dua’s presentation).
- Ask advocates for introductions.“Get introductions from people who are bought into your success and willing to say: ‘This person is a star. You should meet them.’” Be confident they’ll give you positive marks. Introductions from individuals who don’t know you well make less of an impact.
- Develop The Halo Effect. “When you pop up in different places, like at events and panels, by the time the warm introduction comes you’re already known within the ecosystem. A lot of this is about getting to know a person and having external validation they’re going to execute on what they say in business.”
Part III: Crafting Your Pitch
*View in Dua’s class video from 19:00 – 39:00
All of the above efforts lead to the big moment: your pitch. These are the essential steps to take before, during, and after to prepare for a successful meeting, beginning with creating your deck. Below are a few insights on the principal slides to include, as shared by Dua. (For an in-depth description of each slide, tune into her class video).
She strongly encourages emailing your deck prior to your meeting (as a PDF or Google Slides versus a DocSend link that expires) so investors can refer to it throughout the process. “A lot of founders worry their deck is going to be downloaded and shared. You want an investor to send it to their partners and say: ‘This is really interesting. I’d love to get your opinion.’” Make it as easy as possible for investors to advocate for you.
Problem and market size: The most impactful pitches start with a story: Why did you choose to solve this problem?
Next, they unveil the opportunity. Dua advises focusing on these three questions: Is this market huge? Is it growing? Why is the time right now?
Your solution and advantage: Keep this slide simple and tailored to the question investors really want to know: Is this 10 times better than what is on the market today? Articulate your advantage and include photos and demos when possible.
Team: This is the most important slide, according to Dua. “At the early stage, we’re investing in the team behind the product. I want to understand: What is your experience individually and as a group? Why does it make you the best team to solve this? Don’t bury this slide in the back. We’re investing in you.”
Traction: What benchmarks do investors use to evaluate your company? These metrics are unique to your business model and stage but center on ones that demonstrate your growth, such as number of users and sales, and how customers are engaging with your product, like your repeat purchase rate.
If your company is pre-launch, focus on the milestones you’ve reached so far. Data from focus groups, relevant research or test metrics may be included here. Then, share projections of anticipated metrics and margins, such as assumptions around frequency of purchase and lifetime value of a customer.
For companies that have launched, investors expect to see your historical data and how you’re growing month over month.
Go-to-Market: Use this slide to detail the channels you will use to launch and scale your company. Be sure to explain why your team is capable of executing this plan.
Competition: There is always competition, Dua says. She suggests creating a simple 4×4 grid to show where you sit in your industry and how you’re truly filling a white space.
This slide ultimately centers on the question she emphasized above: “Why are you 10 times better than most on the market today? Particularly in the startup space, where companies are constantly starting and failing, why have they failed and you will succeed?”
Unit Economics: Your unit economics reflect the different costs and revenue associated with your product and depict the profit or loss they produce on a per unit basis.
Here, investors are looking to learn: What are your margins? Do they improve with scale? Are you profitable on first purchase or is there a longer payback period?
Investors generally look at unit economics for a unit sold and will focus on Gross Margin, which can be found by subtracting the direct costs from the price of your product: Gross Margin = Price per Unit – Cost of Sale.
They may further consider whether you are profitable on first purchase, which they’ll determine with this equation: Payback Period = LTV/CAC (Note: LTV should be calculated considering profit, not revenue.)
Financials: The key question to address about your financials, according to Dua, is: What will this business become in the next three to five years? VCs want to hear how you can become a $100 million company.
Include your historical financials (if you’ve launched), a three year outlook (at minimum), and be prepared to answer questions about your revenue projections. You’ll share your financial model after your meeting. Investors will use it to validate your forecast by assessing the assumptions you made to get there.
Dua adds an essential piece of advice: “A lot of female founders pitch the business they can build today rather than the big vision that is reflected in their projections. Be aggressive and optimistic in your assumptions.”
“Pitch the unicorn not the immediate business you can build today.”
Fundraise, Use of Proceeds and Milestones: Dua advises being very detailed here and including the amount of money you’re raising, the capital you’ve raised to date, how you plan to use the money, and the milestones you’ll achieve with it.
“We want to see a founder who knows specifically how they are going to allocate capital to product development, engineering, marketing, and their next hires,” she says. “What I really want to know is: Are you raising enough money to meet your milestones? When will you run out of money? Do you have enough for 18 to 24 months? It’s about cash in, cash out.”
Valuation will also be addressed here, though you don’t need to calculate it yourself or include it on the slide. “VCs are always going to ask you about your last valuation. Don’t be shy sharing it,” Dua assures. “What we’re trying to understand is: How much capital has gone into the business and have you used it effectively? Next, we’re saying: ‘Okay, you’ve raised this amount, and you want to raise this much more.’ Then, at the early stage, we back into the valuation for your current round.” VCs generally lead the conversation around a company’s valuation. Founders commonly give away 20 – 25% of equity at the seed stage with a lead investor taking between 10 – 20%.
Appendix: Your appendix is for referential information that can help you answer more detailed investor questions. Common inclusions are: customer demographics, cohort data, your product roadmap, a detailed traction slide, and a marketing and customer acquisition breakdown. You likely won’t speak to them in the meeting but it’s always worth preparing.
A key recommendation: “Know your data. When I meet a founder who can’t remember an aspect of their model or needs an advisor to explain their tech that tells me they don’t have a good grasp on the business. Know the details behind your company.”
Perfect Your Pitch
A pitch deck is only impactful when it’s brought to life with a compelling story. Practice, then, is one of the most important parts of the process. “You should be practicing your pitch multiple times with different people before you go in for real pitches,” Dua says. “Do it in front of a mirror if you have to.”
She encourages founders to practice three versions of their pitch – 30 seconds, 2 minutes, and between 20 to 30 minutes – and prepare for various scenarios. Common ones include: being interrupted or asked to skip ahead, technical difficulties, and most importantly, pitching without slides.
“The most effective pitches we see are people who come in and tell a story without relying on their deck,” she says. “You can flip through it or refer to it but a great storyteller can pitch without their slides. Get really comfortable sitting down one on one with investors and sharing your unique story and vision.”
She shares a few do’s and don’ts for your meeting:
- Do: Be open to conversation, questions, and feedback. “Anticipate that you are going to get interrupted often and need to skip around. Continue to lead the conversation and bring it back to your narrative.”
- Don’t: Get defensive. “Being defensive is a sure way to kill a pitch meeting. Instead, think about brainstorming with an investor, especially if they’re interested in sharing feedback.”
- Don’t: Panic if you don’t know the answer to a question. “Explain how you’re thinking about it and offer to follow-up with more information.”
Your most significant task? Create a throughline of your story in your deck and pitch.
“Remember that VCs are looking to make 20 or 100 times their investment,” Dua says. “What I’m really trying to understand in the meeting is: Are you shifting a paradigm? Are you changing a market? That’s why the big vision as the thread of your story is so important. It’s what investors get excited about.”
Part IV: Navigating the Investment Process
*View in Dua’s class video from 39:00 – 43:00
You nailed your pitch! Now, what?
Keep the momentum going, says Dua. “Consider ways you can get back in the room and keep engaging with that investor or team.” She encourages founders to follow up with materials, such as their financial model or Frequently Asked Questions, and address specific questions investors posed in the conversation. They’ll initiate a second meeting or invite you to meet their partners if they’re interested.
Do Your Diligence
Just as investors are doing diligence on you, it’s equally important to do diligence on them. Dua encourages founders to close pitch meetings asking investors about next steps and their decision-making process.
Every firm has a unique method and it’s important to learn whether they invest by conviction or consensus. “A conviction driven process is led by a single partner,” she explains. “A consensus-driven process is when everyone around the table needs to be unanimous in their decision to invest in you.”
A firm’s decision-making process is also influenced by where they’re at in their current fund; Asking about the size of their fund, average check size, and whether they’re actively investing can offer context into how they’re thinking about your company. “If I have a $50 million fund and have already made 22 investments, I’m going to be slower investing. It doesn’t mean I’m not going to invest in you. It just gives you a sense of where I’m at. If I’ve only made five investments, it’s a different story,” Dua says. “There’s more to a decision than just your pitch. Don’t get offended if you get a pass.”
She encourages entrepreneurs to develop a thick skin early on. “My push to founders is: get comfortable hearing ‘No.’ Hearing ‘No’ helps you prioritize your time and refine your pitch.”
Investor conversations may also plateau throughout the process. Dua shares an insightful tactic to mitigate the uncertainty. “One of the questions I like to ask is: What are you still unsure of? What would you need to know to turn to your team after this meeting and say ‘We need to make this investment.’ It often gives you a sense of what’s missing and a more concrete answer. Sometimes, you have to ask investors the questions they haven’t asked yet. Push them to dig deeper. It’s okay if it leads to a ‘No’ but it might also lead to a ‘Yes.’”
As a founder, you can’t control the outcome of a meeting or your raise but you can always dictate your preparation crafting an intentional process, deck, and, most importantly, story. “You never know when you’ll get 30 seconds to tell someone about what you’re building,” Dua adds. “It goes back to the idea that you are always raising. Constantly be looking for people to share your company with. You never know what it will lead to.”
Dua provides detailed explanations and processes to master each of these concepts in her Project Entrepreneur class presentation here.