Angels, venture capitalists, private equity firms and mutual funds all evaluate investments on the same four basic criteria. At the various stages of a company’s evolution from brilliant-insight baby to billion-dollar behemoth, those investors will weigh your attributes differently.
When you pitch your company for funding, focus on these four topics:
Our strategy is sustainably differentiated. Demonstrate what’s special about your company and how you’ll keep that strong position. Is your offering fresh and different with a unique solution for the customer? Are your costs structurally lower or your service super fast because you invented incredible algorithms? Show that you have something different from the pack, and that is what your target market wants. Some businesses grow and thrive with execution being their main differentiator: think high-volume selling or complex logistics businesses. If execution is your pitch for why you’re different, be sure your track record backs that up.
We are the right team for this endeavor. For early stage companies, the team is the most important aspect an investor considers, as your market and product may not exist yet. What unique combination of skills and experience makes your leaders the potential winners? As you scale your business, your execution will demonstrate why you’re right for the job.
Our business model will make money. Money — profits and cash flow — are ultimately what create value. On your way to profitability, your company may become strategically valuable, and might be acquired early or IPO when public investors believe you will become profitable soon. You have to show how your business model — the costs to acquire and serve customers — will be profitable. Understand the margin structure of comparable companies, and show how you will track versus their paths.
Later-stage companies and investors focus on the financials. Public investors might screen almost exclusively on your financials, looking for expanding margins and profit growth. For younger companies, your target model and cash needed to break even are foremost concerns.
Market size. Investors want to know that your company has plenty of room to grow. “You can’t make a big company in a small market,” was one of my first VC lessons. For the nascent markets startups try to create, there is no current market size, so focus on the total addressable market. TAM measures the potential annual revenue for your industry — it is NOT an estimate of your company’s potential.
Markets can be sized “bottoms up” or “tops down.” Try both methods to check if your assumptions are reasonable. Typically, tops down-sizing crudely estimates a market by analogy or relative sizing, e.g., “Product X is a management solution for customers using technology Y. Technology Y is a $1 billion annual market, and an add-on management solution deserves 20 percent of the core target spend, so the TAM for Product X is $200 million.”
Here’s how Scale Venture Partners created a bottom’s up TAM to assess our investment in online marketing company Omniture: We counted websites by traffic volume, assigned an annual revenue potential to each size category and added it all up to over $1 billion a year of annual addressable spend. This work was done when Omniture had only a few hundred customers, not the many thousands of potential clients we counted in our TAM.
As a long-time venture investor, and previously the head of investor relations for two public companies, these four factors are the pillars of successful pitches — and investment decisions. Clearly communicate your company’s market, strategy, model and people, and you’ll be speaking your investors’ language.