How do you strategize fundraising?
For this month’s Insider, we welcome Tom Lazay, Co-founder & Managing Partner of Companyon Ventures to dive into financials. Before co-founding Companyon Ventures, Tom was a technology entrepreneur for most of his career who built and sold two startups in Boston. He backed two seed funds and became a venture partner at Converge Venture Partners and a limited partner at Project 11 Ventures.
Here, he lays out a few key questions to ask yourself (and your team) before you pitch to investors.
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Paving the Path to a Successful Investor Pitch
Guest post by Tom Lazy of Companyon Ventures
1. Do you have enough cash runway to reach a meaningful inflection point?
An Inflection point can be many things; the completion (or launch) of a product, getting regulatory approval, signing of a pilot customer, or something else significant.
Tom’s thoughts: “Raise enough cash so that you can reach your inflection point and be well positioned to raise your next round of capital. Build in enough buffer to account for unexpected delays.”
Takeaway: While 18 months of cash runway is often used as a “rule of thumb” for cash runway, the more important measurement is the milestone(s) you’ll reach. Be clear in articulating those milestones when communicating your use of proceeds.
2. Do you have a P&L (income statement) that shows the cash balance?
Unlike banks, venture investors at this stage don’t need a full set of financial projections (unless you’re pitching Warren Buffet or Bank of America, you can omit a traditional cash flow statement and balance sheet). They want a P&L (income statement) that clearly shows your expense and revenue assumptions and forecasts cash balance over time.
Tom’s thoughts: “Don’t obsess over complex GAAP financial forecasting. Keep your investor-facing forecasts clear and simple but be ready to dive into details if an investor asks.”
Takeaway: Cash runway is one of the most important financial metrics for pre-seed and seed stage startups. You can survive delays and unpredictable situations if you have enough cash and time to figure things out.
3. Are your cost and growth assumptions in line with the metrics of your peer companies?
When making cost and growth assumptions, do your research and base your assumptions on the metrics achieved by credible peer startups. Are your assumptions realistic or are you basing them on extreme outliers like Slack, Uber, and Airbnb? If you’re projecting 2x growth and 1/2 of the customer acquisition cost of startups in your industry, you’re probably wrong. If you have a secret weapon in your strategy that legitimizes those assumptions, make sure to explain them.
Tom’s thoughts: “If the operating history of the startup or the metrics and performance of peer startups supports the assumptions, then the plan holds a lot of credibility with me.”
Takeaway: Don’t be tempted to base your projections on best-case outlier assumptions to manufacture fictional “hockey stick” growth. If you can’t credibly defend your assumptions, potential investors will not have confidence in you or your projections.
4. How confident are you that 12 months from now, you will have met or exceeded your financial projections?
I ask for the company’s pitch deck and forecast that was used in their previous round of financing and I use that as a benchmark for the team’s execution and planning skills. Nobody's plan is perfect so if the company has underperformed slightly, that’s OK. If they were 2-3x off plan from their projections 12-18 months ago, that’s a huge red flag. It means the previous investors significantly overpaid.
Tom’s thoughts: “Fundraising often takes 6-12 months. If I meet with you during month one, and then again in month four and you’re already off-plan, then I know that your forecasting is flawed or your execution is weak. Be conservative with your near-term projections. Angel and pre-seed investors don’t pay attention to your 4th and 5th-year projections — we’re more worried about you staying alive into year two and finding the elusive product-market fit.”
Takeaway: Rather than toiling over your fictional 5th-year growth, you’re better served to articulate the customer pain point you’re addressing, the strength and uniqueness of your solution, along with a large and growing total addressable market (TAM). (A credible TAM is very important for this to hold true).
The bottom line on Financials: Be accurate for your 12-month projections to show that you’re a credible operator. Hitting your financial targets improves the likelihood of being a fundable company at the end of your cash runway.
We're grateful to Tom for sharing his wisdom with us. We hope it makes a difference when you’re preparing for your next pitch.
Tom Lazay is co-founder and managing partner of Companyon Ventures, a Boston based early stage venture capital firm that focuses on Seed2 and Pre-Series A technology startup investing.
See you next month!
PS. GETTING READY FOR AN INVESTOR PITCH?
Then you’ll want to read 9 Ways to Capture Your Audience in 10 Seconds or Less.