What are the different kinds of startup pitches?

This article outlines a range seed or pre-seed fundraising pitches, depending upon the time available.  Series A and subsequent funding pitches are not addressed

The purpose of the pitch is to convince investors when you first meet them that they must learn more about you, and your company.  Investors will not write a check based just on the pitch.  Venture capitalists often invest in only 1 in 100 companies they encounter. The bulk of the information to the investor is provided by what you say during the pitch.  The pitch deck is not intended to be read as a standalone document.  Other documents, such as your executive summary, are be intended to be read as standalone documents.

There is a difference between a pitch (which is what the founder says) and the pitch deck (which are the slides)

The objectives of the pitch are:

  • Convince investors why the company must exist.
  • Be memorable – the investor must remember you the next day. Otherwise you won’t be called back.
  • Be professional – look and speak as if you already are the CEO of a successful company. This includes your body language, how you stand, and how you speak.
  • Create a trust, confidence, and emotional connection between the investor(s) and presenters.
  • Create the excitement and interest in the investors to learn more, while demonstrating your oral presentation skills and ability to have a Q&A dialogue.
  • Be able to communicate with an audience that has no previous information about you. Assume that the investors are not experts regarding your customers, your industry, or your technology.

The objectives of the pitch deck are to:

  • Support your presentation. The pitch deck is not intended to be read as a standalone document.
  • Help you tell your story and vision in simple human terms.

You need to answer the key investor questions:

  • Who are you?
  • Who is the customer, what is their problem, and what is your solution?
  • How will you make money?
  • How much cash do you need and what will you do with it?
  • How will you manage the risks?
  • How does the investor feel about you? Do they like you?  Do they think they might be able to trust you with their money?

Your approach is:

  • Engage the investors emotionally with the story about the startup.
  • Make a great first impression. The first few seconds can make or break you.

The following illustrate a range of pitches, depending upon the time available.  Pitches using slides are similar in terms of the slides used.  What varies is the amount of time the CEO/founder talks and goes into detail.

15 Word Positioning Statement

When someone asks you “what do you do”, you need to be able to answer in 15 words or less:

  • Who you target customer is.
  • The #1 benefit your target customer perceives from doing business from you.
  • The result of doing business with you.

I learned the concept of the 15 word positioning statement from Michael Hughes, Networking Guru.

Further information is available at: https://networkingforresults.com/

The 2 sentence Email Test

The Email Test”. Write up a two-sentence explanation of what your startup does then email it to a smart friend. Ask them to explain it back to you in different words. If they ask any clarifying questions, you need to revise your pitch. It’s important to revise your two sentence pitch because you can’t add explanations as you would in conversation.

Further information is available at:   https://blog.ycombinator.com/how-to-pitch-your-company/

 Your one-minute pitch

When you have only 60 seconds to make your pitch, the critical elements are:

  • Who are you? < 5 seconds. One sentence.
  • What’s the customer problem? < 20 seconds. 3-5 sentences.
  • What’s your solution? < 25 seconds. 2-3 sentences
  • What’s your ask? < 5 seconds. One sentence.
  • What’s the one sentence everyone in the audience needs to remember? < 5 seconds/

Further information is available at: https://www.techstars.com/content/community/rock-1-minute-pitch/

 Your two-minute pitch

When you have only two minutes to make your pitch, the critical elements are:

  • Describe the problem, using simple and easy to understand words. What is the customers’ need?
  • Describe how your solution will meet the customers’ need.
  • Describe the target customer (age, gender, lifestyle, etc.). Estimate the market size and the number of customers you can reach at each stage of your growth.  How are your differentiated from competitors?
  • What is your business plan to get, keep and grow customers? What will be your approach to marketing, distribution channels and partnerships? What will be your revenue model, and related costs. What will be your pricing model?

Further information is available at: (https://www.techstars.com/content/community/pitch-startup-idea/

 Three-minute pitch

When you have only three minutes to make your pitch, the critical elements are:

  • The introduction. What does your company do? Ideally in one sentence.
  • What’s the customer problem?
  • Who is the target customer and what is the solution?
  • What is the total addressable market, illustrated bottom up. g. each customer will provide $x in sales and we will have Y customers in Z months time? What has the customer traction been?
  • What are the relevant skills and experience of your team?
  • The conclusion. End with WOW!  List the 4 critical points you’d like the audience to remember: What are we building and for whom? Why hasn’t this been done before?  Why is it hard to do what we are doing? Why is this an opportunity not to be missed?

Further information is available at: https://blog.ycombinator.com/guide-to-demo-day-pitches/

 20 minute pitch

Your 20 minute pitch has 10 slides:

  • Title page, with you name, title, and contact information.
  • What’s the problem?
  • What does the customer see as your solution and your value proposition?
  • What’s your business model? g. how you make money, who pays you through what distribution channels, with how much gross margin?
  • What’s your magic? What’s your secret sauce?
  • Marketing and sales – how will you reach you customers?
  • How do you compare to the competition? Where are you better or worse?
  • Who is on your team and what are their relevant skills?
  • What are your financial projections and assumptions?
  • What milestones have your achieved so far? What are you asking for and what milestones will that ask achieve?

Further information is available at:  https://www.marsdd.com/mars-library/how-to-create-a-pitch-deck-for-investors/

 

 

How can a private company sell securities in Ontario?

Overview

  • There are two ways for a private company to sell securities in Ontario: with or without a prospectus.
  • A prospectus is always required unless the company meets specific exemption conditions.
  • With these exemptions, the company has multiple potential sources of capital.
  • With a prospectus, the company can raise capital from any investor, either through a stock exchange or the over-the-counter market. This is the IPO (Initial Public Offering).

This article (supported by a one-page slide) is intended to enable discussion and action planning among owners/shareholders, boards of directors, CEOs, and advisory boards. The approach and action plan will be unique to the specific situation of each corporation.  There is no one-size-fits-all answer.

This article does not provide legal advice. If you decide to further explore selling securities, you must speak with a securities lawyer who understands the law, the regulations, and the process for selling securities.

There are two ways for a private company to sell securities in Ontario: with or without a prospectus.

A private company can raise capital via many sources, including:  the founders’ funds, bank financing, leasing, government loans, grants and tax credits, selling accounts receivable, selling securities.

All corporate securities sales in Ontario are regulated by the OSC (“Ontario Securities Commission”).

A private company going public via an IPO must have a prospectus and be compliant with securities laws and OSC regulations.  Typically, an investment bank is used to sell the securities to a broad range of individual and corporate investors.  There are no legal restrictions regarding who can buy, the amount that can be bought, and future sale of the securities.  The securities are liquid.

A prospectus is always required unless the company meets specific exemption conditions.

 The following provides a high-level overview of the 7 general exemption situations if a company is selling securities directly to investors.  You must consult a securities lawyer for advice, as the laws and regulations are far more detailed than this overview.

  • Private issuer: your corporation has fewer than 50 people holding securities. A company starting out with a handful of founding shareholders actually takes advantage of this exemption, often without being aware of it.
  • Employee, officer, or board director of the corporation, or consultant to the corporation.
  • Accredited investor: These are investors with assets and income which meet the OSC’s definition of a “accredited investor”. The OSC views these as sophisticated investors who do not require the detail contained in a prospectus in order to make an investment decision.
  • Minimum amount of $150,000: As long as the investor (who cannot be an individual) purchases at least $150,000 of securities.
  • Family, friends and business associates.
  • Offering memorandum: an offering memorandum is a simplified prospectus, which must follow OSC regulations and be filed with the OSC.
  • Crowdfunding: your corporation can sell simple securities (e.g. common shares and non-convertible debt) through a registered online funding portal.

If you are taking advantage of one of these exemptions, you must file a report with the OSC, unless you are utilizing the Private Issuer or Employee, Officer, Board Director, Consultant exemptions.

 By utilizing these exemptions, the corporation has multiple potential securities buyers.

Potential securities buyers may include:

  • Friends and family;
  • Angel investors;1
  • Individual investors;
  • Incubators2 or accelerators;3
  • Private equity;
  • Strategic investors;4 and
  • Institutions.

In addition to the above, the corporation may utilize an exempt market dealer, who is an intermediary between the corporation and accredited investors.

Any buyer of securities issued without a prospectus, must fall within the conditions of one or more exemptions.

The securities are not liquid, due to the many restrictions on an investor being able to sell the securities to another investor.

With a prospectus, the company can raise capital from any investor, either through a stock exchange or the over-the-counter market.  This is the IPO .

A registered IIROC5 dealer (e.g. investment bank) is needed to sell securities to the general public and corporations.  The dealer may sell stock directly to investors.  The stock may be listed for trading on one or more stock exchanges (each of which will have its own regulations) or be traded in the over-the-counter marketplace.

What do you do if you are a SME (Small Medium Enterprise)?6

Many small private companies raise small amounts of money.  In 2016, approximately 1,400 Canadian companies raised less than $1 million each, in Ontario, without a prospectus.  The median size of debt sold was $2.8 million and the median size of equity sold was $600,000. 7,8

 Conclusion

  • The decision to sell securities must be done in the context of the strategy and strategic plan.
  • Your company needs a variety of legal and financial skills in order to analyze options for raising funds and make the decision as to whether or not selling securities is appropriate.

Your next steps

To enable discussion with your shareholders, board of directors, CEO, and advisory board download the following one-page slide:

How can a private company sell securities?

Your shareholders, board of directors, CEO, advisory board, and C-Suite need to assemble facts and talk through what is driving the need for capital, the various options, and the implications associated with selling securities (especially selling equity).

  • Assemble the facts regarding your current situation: your corporation’s strategy, strategic plan, and financial forecast. The financial forecast will detail the future capital requirements.
  • Founders and major shareholders must also consider their personal and family financial plans.
  • What is driving the need to raise capital at this point? (e.g. Funding growth?) What are the options for raising capital?
  • Why is the best option to sell securities? g. other financing options not available.  There are various costs associated with selling securities, depending upon the approach you take.
  • What stage is your corporation at? g. Seeking angel investors/seed capital or A,B,C series funding?  An established corporation that has been in business for many years? Founders seeking to sell their interest or sell the company?

Does your corporate leadership9 have the necessary legal and financial knowledge to layout a plan for raising capital, including selling of securities?

Does your advisory board or advisory network have the experience and skills to help your corporate leadership think through the decision and action plan?  (e.g. someone who has raised capital, someone who has successfully sold securities, someone who has sold their company, securities lawyer, potential securities buyers, etc.)

If you are a SME wishing to sell your company and have less than $3 million/year EBITDA, consider how to grow the company to the range of $3 million per year, at which point your sale will be easier and your multiple will be higher.

Your final decision and action plan may result in an update to your strategy and strategic plan.

Footnotes

1 Angel investor: an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity.

2 Incubator: an incubator helps take a start-up to the point where there is a MVP (Minimum Viable Product).

The characteristics of an incubator are: Co-located office space with other start-ups; Links to investors; Access to lawyers; Provides coaching and mentoring, via successful start-up executives and consultants.

3 Accelerator: an Accelerator is a company or organization that puts a start-up company (which already has a Minimum Viable Product) through a very structured 3-4 month process.  This process has the goal of quickly growing the size and value of the start-up to enable future funding. The accelerator puts company’s through a vetting process so that higher likelihood of success companies are made available to investors.  This reduces investors’ due diligence time and costs. The Accelerator may take a small financial interest in the company in return for its assistance. Mentorship is provided by experienced start-up executives and investors.

4 Strategic investor: an investor (typically a company) that invests primarily for strategic rather than financial (return) purposes. e.g. in order to gain future access to a key new technology or product. (By contrast, financial investors make investment decisions primarily based on the prospect of a strong financial return.)

5 IIROC: Investment Industry Regulatory Organization of Canada

6 SME: Industry Canada definitions: Small business: < $5 million in revenue, < 100 employees; Medium business: between $5 million and $20 million in revenue, 100 to 499 employees.

7 2017 Ontario Exempt Market Report, Ontario Securities Commission Notice 45-715

8 This understates the number of SMEs raising capital.  For example, if a company has fewer than 50 investors (excluding current and former employees), there is no requirement to file a report to the OSC regarding securities sales.

9 Corporate leadership: board of directors, CEO, advisory board, C-Suite.

Further reading

How do you invest in a private company?

You are considering investing in a private company or you’re already a private company investor.

The investor must think about their own personal situation and future before thinking about the business. e.g. When might they need to exit?  What happens if the investor suddenly dies or is incapacitated?  How much time and effort for how many years does the investor want to devote to their investment? Etc.

There are 7 sets of questions to consider, starting with questions regarding the future (and the potential for value growth), which are the foundation for the questions regarding short term actions.  It’s better to think through these questions BEFORE you invest your money.

#1 What will be the needs of the future customers?

  • Who are the target customers?
  • What problem or need do they have?
  • How will the company sell to them?
  • What will be the customer experience?
  • How will the customer perceive the competitively differentiated value proposition?
  • How will the company’s internal operations be competitively differentiated?
  • What are the potential sales and profits?

#2 How will you get value for your investment?

  • Eventual equity sale?
  • Management salaries?
  • Dividends?

Products or services provided by the company?

#3 Will you leave your equity in the company indefinitely, or do you plan to exit? Even if you have no intent to exit, there is one exit situation to think through – your death or incapacitation.

Let’s assume there is an eventual equity sale.

#4 Who will buy the company in the future (5-10 years time)?

  • Strategic buyer?
  • Financial buyer?
  • Owner/operator?
  • Employees?
  • IPO?

#5 Why will they buy the company?

  • Leading and defensible market position?
  • Non-concentrated distribution?
  • Proven management team with successors?
  • Sustainable margins?
  • Growth potential for the future buyer?

#6 What might they pay for the equity?

  • Multiple of free cash flow or EBITDA?
  • Terms and conditions?

#7 How will decisions be made by the shareholders?

  • What decisions will be reserved for the shareholders rather than management?
  • What veto power will individual shareholders have?
  • What % of equity and % of shareholders will be required for a decision?
  • What decisions, if any, will be made by the board of directors

To enable discussion with your colleagues, download the following slide:

How do you invest in a private company?