The Secrets to Winning VC Money, According to Livemocha’s Founder

As a serial entrepreneur, I've built companies from the ground up and sold them at a huge profit. Here are my strategies for getting the investment you need to grow your business.

Written by Shirish Nadkarni
Published on Aug. 25, 2021
The Secrets to Winning VC Money, According to Livemocha’s Founder
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Once you have identified your target VC firms, it is time to develop your investor pitch. You should give yourself a good four to six weeks to develop your pitch, as it will take multiple iterations to put it together and get feedback from your team and existing investors in your company. A well-developed investor pitch can also serve as the foundation for your pitch to potential customers as well as potential employees for the company.

VCs like to invest in smart people. You want to use the investor pitch to show that you are several steps ahead of the VCs in thinking through how you will win with your company.

A typical investor pitch should be no more than 12 to 15 slides.

Your goal with the pitch is to stimulate interest in the company and to get the next meeting from the VC firm. It is not to provide every little detail about the company. As mentioned earlier, the VC firms will typically hold several meetings with the company to go into more details about the product, the technology architecture, and the traction before bringing you in front of the entire partnership.

The objective of a pitch is to demonstrate that you have a deep understanding of the problems facing your market, and you have a clear, long-term vision and a well-thought-through plan on how to tackle the problem space. VCs like to invest in smart people. You want to use the investor pitch to show that you are several steps ahead of the VCs in thinking through how you will win with your company.

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Storytelling

One of the most important aspects of a pitch I try to understand is the founder’s journey in starting their company. What is the founder’s specific insight or experience with the target market that has allowed him or her to build a compelling solution for the market?

In selling the vision around Livemocha in 2007, I described a world being swept by globalization, rapid adoption of broadband internet, and social networking solutions.

As an example, I am an advisor to a company called Ally, which offers a SaaS solution for managing OKRs (objectives and key results). Prior to starting Ally, the founder had built his own internal solution using spreadsheets to manage OKRs at his previous company. However, he struggled to make this solution work effectively as spreadsheets were not the right platform for building this solution. He then built a custom application for managing OKRs, shared it with other founders, and got excellent feedback. His experience gave him the insight and the confidence to start a new company to commercialize the solution he had built.

As of October of 2020, the company is growing rapidly and has raised more than $23 million in funding from top VC firms.

Another aspect of storytelling is how you project the market opportunity to investors. It is not just a dry set of numbers regarding the potential TAM (total addressable market); rather it is a story about the trends sweeping your target market. In particular, you need to sell the investor on what changes are transpiring that make your solution ripe for the market.

What’s a Venture Capitalist (VC) Looking for in a Pitch?

  1. Team, team and team
  2. Traction
  3. Market size
  4. Competitive moat

For example, in selling the vision around Livemocha in 2007, I described a world being swept by globalization, rapid adoption of broadband internet, and social networking solutions. It became relatively easy to convince investors that there would be billions of users who would turn to online language learning tools to learn English so they could get ahead in a globalized world.

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What Are Venture Capitalists Looking for in a Pitch?

TEAM, TEAM, AND TEAM

Most VCs will tell you that the team is the most important criteria that they invest in. Largely, this is true for most investors, though they will take a bet on inexperienced founders when the idea and traction are compelling.

A single founder raises doubts in the minds of the investor about whether you have the capacity to convince others of your idea.

Investors look for founders who have a deep understanding of the problem that they are trying to solve. Generally, this comes about because the founders come from the industry, bring deep expertise, and have experienced the problem themselves. They look for founders who are clearly passionate about the problem they are trying to solve and the company they are looking to build. They prefer to work with founders who have a growth mindset and are open to learning and feedback.

Investors also like to invest in a founding team as opposed to an individual founder (unless they are an exceptional entrepreneur). Two (or more) minds are always better than one. A single founder raises doubts in the minds of the investor about whether you have the capacity to convince others of your idea.

TRACTION

A key area of assessment for VCs is to understand whether the company has achieved product-market fit with its solution. The best way to demonstrate product-market fit is to show that your solution is hitting it on all cylinders in terms of user adoption, engagement, and revenues. For example, in the early days of Facebook, at Harvard, they had extraordinary user engagement with 65 percent daily active users and 95 percent monthly active users. The total user population was quite small, but it was clear that the Facebook team had achieved something magical with its solution.

MARKET SIZE

VCs like to invest in markets that are at least tens of billions of dollars in size. They want to see companies that can grow to at least $75 to $100 million in revenues over five to seven years. This means that the company can be valued in the billion-dollar-plus range when it goes public. With this kind of a valuation, a VC firm could achieve a cash-on-cash return of five to 10 times, assuming that they own 25 percent of the company.

COMPETITIVE MOAT

VCs look for companies that can create an unfair competitive advantage over their competitors. They don’t like to invest in companies that are in a crowded space, and the only competitive advantage is a few extra features.

VCs are also increasingly looking for companies that have access to proprietary data sets that will allow these companies to develop unique machine learning models to solve industry-specific problems.

They like to invest in companies that are in industries being swept by significant market forces or disruptive technological changes. They look for companies that can establish significant network effects where it becomes a winner-take-all market.

With AI/ML (artificial intelligence and machine learning) taking off, VCs are also increasingly looking for companies that have access to proprietary data sets that will allow these companies to develop unique machine learning models to solve industry-specific problems.

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Pitch Deck Outline

For the pitch deck outline, I like the business plan template developed by Sequoia Capital. I have outlined a slightly modified version of the template below.

Company Purpose

This can also be your title slide. You should use this slide to provide an elevator pitch about what the company does. Outline what problem the company is solving and your key value proposition. Where possible, use an analogy to make the value proposition simple and easy for the audience to understand. For example, you could be “An Uber for after-school rides” or “An Airbnb for physical storage.”

For Airbnb, its one-sentence tagline from its original pitch deck was “Book rooms with locals, rather than hotels.” From there, the pitch immediately jumps into a more detailed explanation of how price is an important consideration for travelers and how hotels leave travelers disconnected from the city and its culture.

You could be “An Uber for after-school rides” or “An Airbnb for physical storage.”

LinkedIn’s tagline from its Series B pitch was “Find and contact the people you need through the people you already trust.” While it is a longer statement of purpose, I find the tagline is easier to understand and conveys a stronger benefit in comparison to the Airbnb statement.

The LinkedIn pitch follows up on the tagline by describing itself as People Search 2.0 and contrasting how People Search 2.0 differs from People Search 1.0 by leveraging people’s network of relationships. To further illustrate the differences between 2.0 and 1.0 platforms, it gives other examples of online goods, payment platforms, and internet search, and how they have evolved in a similar fashion based on similar types of networks.

Problem

Describe the unmet problem that you are addressing and why it is important to address it. Specifically, outline the pain points that the target market is experiencing. Most VCs like to fund “aspirins, not vitamins,” meaning that the customer has to be experiencing a pounding headache. Discuss why it matters that the problem be solved and how current solutions are inadequate. Outline the major industry trends or technology shifts that are causing this opportunity to emerge now.

As mentioned earlier, Ally is a company that helps enterprises of all sizes manage OKRs (objectives and key results). OKRs are a goal-setting framework developed by Andrew Grove, CEO of Intel, and later popularized by John Doerr, a legendary partner at Kleiner Perkins.

OKRs have become a hugely popular methodology by which a number of companies are managing their employees and their execution priorities. In a hyper-competitive world, where the speed of business has increased dramatically, it has become more important for employee work to align with the objectives of the company.

Millennials are also demanding increased transparency regarding the company’s objectives. The OKR methodology requires that all OKRs, from top management to the lowest-level employees, be visible throughout the organization.

Most VCs like to fund “aspirins, not vitamins,” meaning that the customer has to be experiencing a pounding headache.

Companies have tried managing OKRs using spreadsheets. However, the problem is that spreadsheets are clunky tools to manage OKRs because it is difficult to clearly see the hierarchy of relationships between a manager’s OKRs and her subordinates. As a result, more companies are looking to off-the-shelf, SaaS-based OKR management solutions like Ally to manage their company’s OKRs.

Solution

Describe the solution that you have built and how it uniquely addresses the problem or pain points that you have identified. Make sure to describe your solution at a high level — don’t get into the weeds of every feature that your solution includes. You will have an opportunity to go into a lot more detail when the VC firm organizes a follow-up meeting to do a technology deep dive.

Make sure that you put together a killer five-minute demo for your product.

Detail any cost savings that your solution provides if appropriate and what kind of return on investment the customer will get. Discuss the specific technical expertise that you bring to bear in developing the solution. Highlight the proprietary nature of the solution or the data you’re utilizing or collecting.

Make sure that you put together a killer five-minute demo for your product. Where possible, do a live demo but have a back-up video ready if your demo fails for any reason or you don’t have a proper set-up. Use a customer scenario to demonstrate the capabilities of the product as opposed to simply demonstrating the product features.

Traction

This is one of the most important slides in your presentation deck as it will demonstrate whether you have achieved product-market fit. Share charts showing growth in customers, daily and monthly active users, bookings, monthly or annual recurring revenues, conversion rate from free to paid customers, and so on. Show retention rates for a daily or weekly cohort of users.

If you are an enterprise offering, show your pipeline of potential customers. If you have a freemium offering, show the conversion from free to paid customers and the churn rate of paying customers. Ideally, you want to show a rapidly growing trend in all these metrics.

When presenting annual recurring revenues, make sure that you are truly presenting annually recurring revenues. For example, if you have a contract that’s paying you on a monthly basis but has a definitive end date, you cannot include it in your ARR calculation.

You should only use monthly recurring revenues that have no end date. Finally, don’t show cumulative metrics as that is a sure sign that you don’t have strong month-by-month growth, and you are trying to hide it by showing cumulative numbers.

Market Opportunity

Describe the total addressable market (TAM) for your solution and how fast it is growing. Discuss the trends that are driving the overall growth in the market, especially why these trends create the opportunity for your solution now. Where possible, you should present industry data published by reputable market research firms like Gartner, Forrester Research, and so on.

Make sure that your market is at least several billion dollars in size, otherwise the VC firms will not be interested. You should present both U.S. market data as well as the international market opportunity.

Be prepared to share data about the revenues of existing players in the market as well. This will serve to validate the overall size of the market and provide a picture of how crowded it is.

Be careful about limiting yourself to the current industry size. Icertis is a leader in the contract management space. When it started in 2010, the total size of the contract management space was estimated to be only $300 million. Existing players in the market were at most $20 to $30 million in size.

Looking at the market then, most VCs would have rejected the market opportunity as too small. However, Icertis redefined the market as one in which companies could extract information from the contract and unlock the value in these contracts. By redefining the market, they were able to dramatically grow the market, and today most analysts size the market as $20 billion in size.

Competition

This is another important slide, as the VC firms will try to understand how crowded your market is and if you have a clear, unfair competitive advantage that will allow you to win. You should outline the overall competitive landscape in the form of a 2x2 chart showing the different axes of competition. Pick axes that are meaningful from a competitive differentiation point of view. You should always show your company at the top right-hand side.

You should outline the secret sauce that will allow you to build an unfair competitive advantage that is difficult for the competition to replicate. Network effects are a great example of a competitive advantage that is very hard for competitors to overcome. I love marketplace companies such as OfferUp, Poshmark, and so on, as a growing installed base leads to network effects that create a significant moat for these companies.

If you are leveraging AI/ML to build your solution, having access to proprietary data can also be a significant competitive advantage.

I am not a big fan of feature comparison lists. It simply highlights that you have some temporary competitive advantage based on a few features. It is not going to give the VCs a sense that you have a clear, sustainable, competitive advantage that will allow you to win over your competitors in the long term.

Go-to-Market Strategy

In this section, you should start by discussing the type of customer you plan to target and how you are planning to acquire these customers. You should discuss if there are customer segments that you are specifically targeting. Initially, I highly recommend focusing on a narrow customer segment, as your marketing messaging can be targeted to the unmet needs of your target customer segment.

Your product feature set should also be highly tuned to address the needs of your target segments. Once you have successfully penetrated a specific customer segment, you can expand to other customer segments.

startup-to-exit-vc-pitch
Image: HarperCollins Leadership.

Facebook is a great example of a highly targeted customer segment focus at its inception. Mark Zuckerberg started by offering his service only to Harvard students. Once he had successfully penetrated Harvard, he expanded to other universities and eventually opened up the solution to consumers at large.

If you are targeting enterprise customers, you might target by customer size — for example, small businesses versus Fortune 1000 (F1000) customers or by specific vertical. The marketing and sales strategy that you utilize to target small businesses will be very different from those that you use to target large enterprises. For example, to target small businesses, you might look at a combination of web advertising, SEM (search engine marketing), and insider sales to address this market. For large enterprises, you may need a combination of web advertising, industry analyst PR, and a dedicated enterprise sales force to call on potential enterprise customers.

Ally, the SaaS tool for managing OKRs, started off by utilizing SEM to generate leads. These leads directed potential users to Ally’s website where customers could sign up for a two-week free trial, after which they must pay to continue to use the service. The Ally sales team would then try to identify accounts that were departments within large enterprises and call on these accounts to get larger enterprise-wide deployments of its SaaS solution. As Ally has grown its marketing organization, it has invested in SEO (search engine optimization) to generate more leads that it can then utilize to pursue large account opportunities.

If you are targeting mid-size to large enterprise customers, you should show your current pipeline of customers at different stages of the sale as well as logos of prominent enterprise customers you have secured. This will provide the VCs greater comfort that you have an active sales effort and that you are having good success transitioning customers at different stages of the sales cycle.

Business Model

You should outline how you expect to generate revenues with your offering. If your basic offering is free, discuss whether you expect to make money through advertising or a paid version that has additional features. If you are planning to make money through advertising, you should discuss who you expect your advertisers to be, what is the value proposition for them to advertise on your site, what ad networks you plan to use, what you expect to charge advertisers, and whether it is a CPM (cost per mille), CPC (cost per click), or sponsorship model. You should provide proof points for what other, similar sites have charged for advertising on their sites.

If you have a freemium model, you should discuss what your experience has been in converting free customers to paid customers and the churn rate you are experiencing if it is a subscription offering. Your churn rate will have a big impact on the LTV (life-time value) of your customer. Ideally, you should be converting 5 to 10 percent of your free customers to paid customers, and your churn rate should be less than 2 percent a month.

If you are using distribution channels to reach your customer, you should share the distribution fee or revenue share you have to pay to your distribution channel partner. It is not uncommon to have to pay 25 to 50 percent of your revenue as a distribution fee.

Finally, you should discuss your CAC (customer acquisition cost). The cost of customer acquisition that you should be measuring is the cost of acquiring your paid users, not just acquiring registered users. To calculate your CAC, you should only factor in the paid users whom you acquire through a paid acquisition program. Don’t include organic customers who discover your solution on their own. Typically, VCs like to see a ratio of a minimum of 3:1 for LTV to CAC. Ideally, this ratio should be more like 5:1.

Team

In this section, you should outline the key members of the management team and their past experience. You should specifically outline if they have any prior expertise in the space you are targeting as well as any prior startup experience and success. Describe any major accomplishments — for example, successful exits, prior patents, successful product introductions, and so on. VCs also want to understand how you know the other cofounders and members of the management team and whether you have a history of working with one another.

It is not a requirement that the advisors invest in the company; however, your story becomes a lot stronger if they are investors as well.

If you have advisors who bring specific industry expertise or connections, list them as well, but only if they are actively involved in advising your startup. VCs will often ask if any of the advisors are investors in the company as that would further validate that your idea has merit. It is not a requirement that the advisors invest in the company; however, your story becomes a lot stronger if they are investors as well.

Financials

Most people make the mistake of developing detailed, five-year P&L (profit and loss statement) projections. The reality is that most VCs will not spend time understanding your long-term projections because they don’t believe it’s possible to project long-term revenues with any accuracy. I, therefore, recommend sharing the P&L projections only up until the next fundraising milestone, which is typically 12 to 24 months, as you are likely to have better visibility on these projections.

Chris Janz, partner at Point Nine Capital, offers an excellent SaaS model that you can use to develop your business model. It has excellent charts that you can include in your business plan.

In sharing P&L projections, discuss the key assumptions that went into developing the revenue projections. These assumptions should ideally be backed up by your current experience in marketing and selling your product.

Most people make the mistake of developing detailed, five-year P&L (profit and loss statement) projections.

For example, if you are generating leads from an SEM campaign, discuss your CPC rate, your conversion to free trial, your conversion from free trial to paid customers, and so on. Similarly, discuss the key expense projections such as headcount and marketing spend.

Note that, in the early years, VCs like to see revenue growth that is at least 200 to 300 percent a year. If you are raising seed funding, your investors want to make sure that you can achieve a $1 million ARR (annual recurring revenue) run rate by the time you are ready to raise your Series A funding round.

Ask

For this slide, you should provide your prior funding history and outline how much you want to raise for your next round. Ideally, you should propose a single number for the amount of money that you would like to raise as opposed to a range. This will convey that you have your act together as opposed to looking wishy-washy in terms of your requirements.

You should outline the use of funds — how much will go into product development, how much into marketing and sales, and so on. This should be consistent with the P&L that you have put together.

Unless it is purely an angel raise, don’t outline the terms that you are seeking for the raise. You may be unnecessarily short changing yourself as competing term sheets may result in a higher valuation for your company. In any case, the size of your raise will give the VC an approximate idea of the valuation you are expecting for your company.

Appendix

As mentioned earlier, you should plan on having no more than 12 to 15 slides in your pitch deck. This obviously does not allow you to provide the level of detail that might be needed to address any questions that come up. You should, therefore, include another five to seven slides in your appendix that you can pull up as needed.

However, in the interest of maintaining the flow of the conversation during the meeting, make sure not to spend too much time on any specific detail. Suggest deferring an in-depth discussion to a follow-up meeting if the VC is interested in pursuing the discussion further.

The areas where you might want to create additional slides include detailed features, screenshots, and architecture for the product. Also consider having additional slides regarding the key metrics that you are tracking for your product, specifically cohort analysis displaying engagement and retention. Finally, you should be prepared to provide additional details around your competitors and how you stack up against them.

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Taken from From Startup to Exit by Shirish Nadkarni. Copyright © 2021 by Shirish Nadkarni. Used by permission of HarperCollins Leadership.

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