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How to value and pitch your business to venture capitalists
If you’re an entrepreneur or startup founder, you need to know how to pitch your business. Even if you’re not planning to pursue funding, having a solid elevator pitch ensures that you know your business inside and out.
Which comes in handy if or when you eventually decide to seek out investment.
But then, what are best practices to attract investors?
Get an advisor
The first thing you should do is seek out an advisor, mentor, or even an accountant, someone you can ask technical questions. An advisor can be a former lecturer, a senior professional, etc. Do not go into any negotiations blind. Always have a lawyer and accountant review any financial document before your sign. Don’t say, “I can’t afford a lawyer.”
Next step; incorporate and issue shares
Every business is financed by debt and equity. The startup, registered and incorporated as a company, creates equity shares offered to investors in exchange for their capital infusion in your startup.
Be clear on what sort of finance you are seeking. The type of financing you require is dependent on many factors. For example, how long do you need the cash for? One year, three years? Suppose your business idea has a long gestation period from concept to roll-out, in that case, it is advisable to seek equity finance. Equity finance is known as “patient capital” because equity investors share the profits with you and the losses.
Investors look at your company Memorandum and Articles of Association that spell out who owns the company and how much paid-up shares they own. The incorporation documents indicate to them the amount of cash you have invested and even the amount you have raised from your family and friends. Family and Friends should be the first place to raise “patient capital.” If you can’t raise money from those that know you, then investors will wonder if they should really part with their funds. This is not a deal-breaker; it lays out a narrative to investors.
Figure 1. Capital Structure of a Business
How to determine the value of your startup
As your startup achieves milestones, it adds value. See a hypothetical progression below, but remember this is just educational.
- Your idea; worth N0.00
- You incorporate a company; worth N1.00
- You file for a patent; N5,000.00
- You get a patent approved; N100,000
- You sign a distribution deal with Amazon; value up to N10,000,000
- Your product test fails; value down N50,000
Your company’s value is how much you can sell it for. The more positive milestones you achieve, the more the intrinsic value of your company rises. The market determines the value. You may indeed get a patent, and the market says “so what?” and assigns no value.
Don’t just apportion a number, have “milestones” to defend your valuation estimate. These milestones should lead to your startup generating earnings in the future. The value of your startup is essentially all those future earnings, brought back to today’s value by applying a discount rate to the future amounts. You will need an analyst to help you determine this valuation.
Assume you incorporate a company with 100,000 shares and need N1million. If you offer 10% or 10,000 shares for N1 million, you say that the company is worth N10 million (N10 million for all 100,000 shares). The question is, why? What milestones have been achieved? Why is a startup on paper worth N10 million? Have you secured a distribution channel outlet? The valuation of your company reflects the work you are doing. Angel or Venture Capitalists will naturally seek a return on their investment by buying your shares at a discount. Thus, they can offer you less money for the 10,000 shares or more money for more shares if they are interested. Your role is to pitch a story of the future, explain the vision, and how the investment today will generate earning in the future and grow market share.
How to determine how much of your company to sell to investors
Remember that you will need more and more financing in the future to grow and expand. You will have Series A, B, and C rounds which are essentially capital raising exercises. Selling more shares today limits your options tomorrow, but not selling means your dream will lack the cash to grow. Overall, is it better to have 41% of a $1 billion company or 90% of a $100,000.00 company? Always look for non-debt methods to pay for services, including swap.
Have a long-term (5 years) growth plan and only raise capital because you need to fund your long-term growth; equity is forever. Also, remain flexible. If Eurodollar’s debt is cheaper, like today, you may also consider debt financing.
You Pitch Deck
A pitch deck is essentially a presentation to investors. It is simple but tells a detailed story of vision, unique solutions, competition, and numbers.
Invest in a nice pitch design; think of it like your letterhead; It does not have to be expensive but should communicate competence. A pitch is an emotional but quantitative exercise, it is not a business plan. A pitch should be clear and must ask for a decision. You must understand your numbers or get someone who does to do the pitch.
What should be in your pitch
- State the problem you want to solve or the process you want to improve
What is the problem? Be direct. E.g, I want to rent but I can’t find flats to rent in the big city.
- Explain how your product solves that problem
Is your offering new or an improvement? Are you building the internet or just a better Google?
- Is there a market for your solution?
What’s the potential size of your solution? Investors want to know if this can be a growth sector. If you’re going to make better black and white televisions, that’s nice; it will sell as a novelty but will it get enough sales to justify the investment you are seeking?
- Describe your product or service
Overview of what you are offering to the marketplace, tie this into (1), explain the benefits, not the features. Don’t sell an electric car; instead, sell “no more spending on expensive petrol.” Talk about regulatory approvals and copyrights, if any.
- Please show me the numbers
Numbers don’t lie; show your numbers, Sales, Traction, Income Statement, Balance Sheet, Cash Flow. If you need cash to grow manufacturing, what have you spent so far in manufacturing? If you are committed 100% to growth, why are you taking out cash from operations for a holiday?
Investors want to see the business growing; it does not need to make a profit today, but what about sales and adoption? How are you deploying cash? Where will the cash you are requesting be deployed to?
- Who are you and who will deliver this product you have described
Who is on your team? Why are they on your team? Industry experience? Investors? Is any family member on your team? Any corporate governance, who is responsible for spending? Controls
- Competition
Is anyone offering this service today? Tie competition back to the product. You should describe the competitors and explain how your offering is better. What unique attributes does your offering have?
- Your call to action
How much do you want? How many shares are you offering? At what price? To do what? Expand distribution?
- Exit Plan For Investors
Do you plan to go public via IPO? When?
Appendix
This is where you include the detailed business plan, regulatory approvals, etc. Your pitch deck should have as few slides but tell a consistent story.
Keep in contact after pitching
Even when you get a NO, stay in contact and send emails updating the VC of your progress. Don’t burn any bridge. Join an angel network (Lagos Angel Network is recommended), be in the community; keep building your brand. Referrals are king.
Most startups fail to raise capital not because their ideas are bad, but they are not organized, or their numbers tell a different story from their vision.
Keep it, know your numbers, communicates visually, and highlight successes.
