A Pitching Lesson with Aspiring Entrepreneurs

I recently had the pleasure of visiting Professor Tom Kohn and his entrepreneurship class at the Kogod School of Business at American University in Washington, DC. The class is composed of around 25 college juniors who are in the process of creating pitches for new venture ideas they have come up with during the semester.

The day’s topic was fundraising, one of the most daunting prospects a young entrepreneur will face. While an enormous amount of capital is floating around, getting investors to commit is one of the hardest tasks in the startup world, especially for a young entrepreneur with no track record and a small network.

After Professor Kohn and I sat down for a one-on-one interview, we opened the floor for a Q&A session with the students. As with most students, they were looking for guidance on their final group projects but more generally on the fundraising process.  With the benefit of hindsight, I am going to take a second bite at the apple answering a few of their questions with a view toward when they are actually out in the world pitching their future companies. 

Q: Your LinkedIn says you have helped your companies raise more than $100MM. How do you go about finding investors?

A: Let me focus on angel funding as that’s where you will start, since getting VCs to fund your company at the beginning is virtually impossible unless you have an established track record. The only VCs who will step up at the earliest stage are those you have made money for in the past. If you’re a first-time founder, I wouldn’t spend resources chasing VCs unless you have already made some real progress in your company.

Seed funding will likely come from angel investors directly or indirectly in your personal network. That makes sense. They either know you or you come recommended. Very few angels I know will fund a random stranger unless they are introduced by someone they trust. Or unless they are part of an angel network or fund that vets deals for them. 

When I started my first company at the age of 29, I needed $500,000 to get off the ground and a deadline of four months to find it. I spent the next two months calling (yes calling as there was no email or LinkedIn back then!) everybody I knew. I had worked in management consulting for a few years and attended business school, so my professional network was fairly robust. But after a couple of months, even with that broad network, I was only able to secure direct commitments for $260K–woefully short of the goal. 

Fortunately, a former colleague from Bain offered to introduce me to two DC-area angels who had an informal network of fellow investors. Not coincidentally, one of them went on to start the Washington Dinner Club–one of the first formal angel investment funds in the region. They certainly wouldn’t have taken my call except for that warm introduction. But once they decided they liked what they saw, they opened doors to their circle of investor friends who filled out the rest of our offering.

As an aspiring entrepreneur, it is important to build out and cultivate your network as early as possible. Doing so will allow you to cast a wider net when the time comes to raise funds. Groups like ConnectPreneur offer regular networking opportunities for founders and investors to come together and connect on a regular basis. 

Many college and graduate business programs also have networks of alumni who come together formally and informally to promote entrepreneurship and even invest in ventures from fellow alums (such as Yard Ventures). Networking with these alumni groups is often easier than random outreach to investors with whom you have no affiliation. Many even have new venture contests that can not only provide the winning participants with seed capital but more importantly, significant exposure to active investors.

Beyond your own network, there is also a wide ecosystem of angel funds and networks that didn’t exist when I was starting out as a young entrepreneur. You would still benefit from networking your way into them rather than going in cold. And you have to come to the table with an exciting idea. But these groups are institutionally set up to connect founders with investors or invest directly and may consider your idea, even if you don’t have a warm intro.  You can find a list of more than 200 angel investment groups here:

Q: What do funders look for in a pitch deck?

A: There is no doubt that preparing good pitch materials is valuable. But it’s really the process of preparing the deck and thinking through the narrative that is important. The deck itself is a tool, a means to an end, not the end itself.  

The best pitch meetings are the ones where little time is spent going through slides. The goal is to spend most of the meeting sharing your vision, building trust among the prospective investors and your founding team, and understanding the investors’ goals and potential objections. The pitch deck should be mainly a door opener or a leave-behind. 

That said, the pitch deck should be a succinct distillation of your best thinking about the opportunity, the market, why your solution is uniquely suited to serve it, and why your team is the right team to deliver on the promise. The process of putting together the pitch deck should crystallize your pitch into a succinct story as to why your business is worth funding.

Rather than what investors look for in a pitch deck, I prefer to think about the question “What do investors look for in a pitch?” I often recall two questions Pascal Luck, one of our early VCs in Fugue, asked us–”Do you know what you are doing?” and  “Is it going to work?”

The first question speaks to the capability of the team, the most important element in any startup. Investors back teams first and ideas second. As Professor Kohn reminded the students during class, “you are better off with an A team and a B idea than an A idea and a B team.” 

The second question captures the totality of issues the startup will face. 

• Is there a market for what you’re building? 

• Can you tailor what you are building to meet that market need? 

• What resources do you need and how do you plan to shepherd those resources effectively to ensure that you meet your key milestones?

• How will you attract customers?

• Do you have a viable business model that will be sustainable over time?

• What does the competition look like and how will you create and sustain your differentiation?

If you can convince investors that you know what you’re doing and there’s a good chance it will work, your pitch will have accomplished its objective.

Q: What’s the most important aspect of a pro forma that investors look at?

A: As anyone who has been involved in multiple businesses can attest, projections are specific to the type of business you are building. While a basic template incorporating revenue and cost projections are part of any pro forma, those categories merely provide the scaffolding and the specifics vary widely. In terms of the specific dynamics among those numbers, there’s not really a cookie-cutter approach you can take. 

Going the through the process of building projections is valuable, but recognize that investors will put little stock in any financial projections you create. They understand (and you should too) that as soon as you commit projections to the page, they will be wrong, often by a lot. 

Like creating the pitch deck, building projections is a forcing function for considering the nature of the business, how resources will be deployed, and how that investment will lead to customer traction in the form of revenue.  The main question when building projections is not whether you can accurately predict your future financial results, but how well you have considered the dynamics of the business you are trying to build.

That means doing your homework on the market demand, pricing, customer acquisition costs, and the costs of delivering your product or service. You need to convince investors that there's a big enough market for your offering and that you have a well-thought-out business model to go after it. 

Your projections will also reflect whether you are trying to build a business that will scale and achieve sustainable positive cash flow and profitability or will rely on continued funding until the company is bought. Many tech and biotech companies never achieve profitability and yet exit at attractive prices to larger companies who see value in new innovative products that they can sell through their distribution channels.

Whether you are building toward a sale or a sustainably profitable business, investors want to know that you are going to use their capital efficiently. That means a sharp focus on the use of proceeds to bring on key hires, build out your product, and test the market while keeping overhead as lean as possible. The main thing you have direct control over in a startup is how you spend your investors’ money.  Directly connecting money raised to money spent and target milestones is critical.

What you have little clarity on, especially starting out, is how that spending will translate into top-line results. Your projections should reflect your best hypothesis as to how go-to-market activities will drive leads and convert through the stages of the funnel and translate into sales. But prospective investors will realize that it’s just a hypothesis that will have to be tested and refined over time.

Your projections are a window into how you think about the business. Investors want to know you have the ability to structure an approach and be flexible in evaluating what’s working and can adapt your allocation of resources to meet changing realities in your market. It’s hard to capture all of that in a set of projections.  

As the saying goes, “no plan survives first contact with the enemy”. Honing the model is something that happens after you launch your company.  Once you start to understand the dynamics in your market, your projections will turn into operating plans and budgets that your investors will hold you accountable for delivering on. But starting out, the pro forma in your pitch, like the pitch deck overall, is mainly a conversation piece.

The Bottom Line

Fundraising is like any form of sales. You can target the right audience, cross your T’s and dot your I’s in the pitch deck, put together a beautiful set of projections, and still fail to motivate investors. Your materials alone won't close the deal.

Of course, you want to put your best foot forward with your materials. But in the end, the most important thing you are selling is yourself and your vision.  An A team and idea with a B pitch deck and projections are far more likely to get investors interested than an A set of pitch materials without the team and vision to back it up.