How To Demonstrate Market Traction And Financial Forecasts To Investors
If your startup has reached the point that you'll need venture capital funding to take it to the next level, congrats—it sounds like your dream is about to become a viable business! The downside is that we're currently in a global recession, and the investor landscape is now set to 'Hard' mode.
To help our fellow founders and product people tackle this challenge, we have created a four-part series called The Next Round that explores the process of getting funding through the lens of our current post-pandemic reality.
This is the second part, which will focus on dialing in the financials of your pitch. Before diving in, I recommend reading the first part of the series, which can help you vet your product idea by understanding investor sentiment post-pandemic.
What Does A Great Startup Pitch Deck Template Look Like?
Let me start with a disclaimer: there's no "recipe" for a perfect startup pitch deck.
It all depends on your product, the investors you are presenting to, the funding round, the macroeconomic situation (like the post-COVID recession we have now), and a multitude of other factors.
For instance, the current economic situation demands that you focus on proving the viability of your business model as well as your ability to become profitable fairly quickly.
In real life, you will arrive at your "perfect pitch deck" through a long series of trials, errors, and iterative improvements. Therefore, please look at this template as a general suggestion and a tool for making it easy for you to visualize how market traction and financial projections fit in the pitch deck.
Pitch decks have come a long way since the early 2000s—both in terms of their size (some of them used to be 40+ slides long), the content (a ton of technical jargon), as well as the design. Have a look at LinkedIn's original pitch deck—it's not exactly a thing of beauty.
Despite not being particularly majestic, it was a massive success—we all know LinkedIn today as the go-to social network for everything business-related.
Fortunately (and unfortunately), the standards for pitch decks are much higher now, and sometimes companies even ask their design teams to work on it to create pleasing visuals and a proper UX (yes, pitch decks should have good UX, too!).
Modern pitch decks are usually 10-15 slides long and convey a lot of information using very few words, as investors expect you to present the entire thing within only 2-3 minutes(!).
So, how do you choose what information should fill those 10-15 slides? From my experience, this is what I recommend.
Anatomy of a Perfect Pitch Deck
Slide 1 - The Title
There’s no need to add anything interesting here as you don’t want to stay on this slide during the pitch. It’s useful to have it up while people are taking their seats and you have not started your pitch yet.
You traditionally include your logo and a good tagline that can summarize your value prop (e.g. “Book rooms with locals, rather than hotels”,
-AirBnb).
Slide 2 - The Problem
This is where you talk about the user pain point or the problem that currently exists in the market. It's extremely important that the problem is clear and evident to your investors, as well as how significant the problem is. Hundreds of failed Shark Tank contestants can tell you from experience—if you can't persuade investors that there's a real problem, you have already lost.
Slide 3 - Solution
This is the moment to demonstrate how your product can solve the problem that your target market is experiencing. Use this slide to showcase your unique value proposition as well as the innovations behind your solution.
Slide 4 - Market Situation
At this point in the presentation, it's a great time to show the market size that you are entering (total addressable market), any gaps that exist there (and how you are able to fill them), as well as the growth potential of this market.
Slide 5 - Business Model
Your business model is the combination of the channels from which you'll bring in customers, your customer acquisition costs, your pricing strategy, your expected profit margins, and the eventual gross profit you expect to gain.
(If you want, you can jump to my detailed instructions for creating a business model or filling out your business model slide.)
Slide 6 - Demonstration of Market Traction
Being able to earn money is easy in theory, but you need to be able to show that you can do it in practice, too. By market traction, what you're trying to convey is how much traffic you're currently earning and how many of your existing users have started to pay for your product.
(Jump to my instructions for filling out the market traction slide.)
Slide 7 - Competition
Unless you are a brilliant category creator, you are almost certainly not alone in the market. Therefore, you must demonstrate your product's advantages and ability to survive and thrive in the competitive market.
Slide 8 - Team
Probably the #1 success factor of any startup is the team behind it. Make sure to highlight the achievements and expertise of the people behind the product.
Slide 9 - Financials
This is where your projections and calculation results go. You want your potential investors to see strong potential for your product to earn money in the future.
(Jump to detailed instructions for filling out your financial projections slide.)
Slide 10 - Ask and Plans to Use the Funds
The penultimate slide is the big moment: stating how much money you are requesting from investors, the equity you are offering them in exchange for these funds, and how you are planning to use these funds to reach your financial projections.
Slide 11 - Closing Words & Next Steps
This is just a "thank you" slide—the main value to extract from here is your contact information, which investors can write down and use to reach out to you.
With the structure of a solid pitch deck fresh in mind, we can move on to the meaty stuff—calculating and demonstrating your traction and forecasts.
Formulating Your Business And Financial Models
One of the key characteristics of seeking funding during the post-pandemic recession is that investors have started paying much more attention to the strength and viability of your business model.
Therefore, more than ever before, it's important to show a stunning business model to your investors.
We will talk about the “showing” part next. For now, I would like us to focus on actually formulating and creating a viable business model—as no matter how well you demonstrate it, a bad business model will most certainly scare off investors.
There are a million ways to formulate business models, but the one I like the most is Lean Canvas by Ash Maurya. The reason I love it is that it's super lightweight (a single page instead of a 40-page paper), and it heavily relies on the Lean philosophy, which is a great fit for startups. Here’s what it would theoretically look like for AirBnb.
Creating your business model using this tool is easy and hard at the same time.
The easy part is using the tool itself; you simply need to fill in the nine sections in there with the corresponding information.
The hard part is figuring out which parts of the information in each section are correct and which are not. After all, whatever you write on this document is based on your assumptions, and you'll need to test them.
(I've written a previous article with more details on testing and validating startup ideas, if you want more details on that. But I digress.)
How to Create a Business Model
Next, let’s focus on the key elements you'll want to display on your “Business Model” slide and understand what they are about.
Revenue Streams
What are the sources of money for your product? SaaS products traditionally have one revenue stream—paid subscriptions. However, it is quite common to earn revenue from multiple sources. For instance, you can have a noise cancellation technology that you can offer in three revenue streams:
- App with paid subscription for individuals who work from home and want to remove their kids’ and pets’ noises from their Zoom calls.
- Enterprise app for call centers that will install on agent computers and remove the background noise of the call center hall.
- SDK for other SaaS products that want to have noise cancellation in their applications and do not want to build that technology from scratch.
Pricing Strategy
What is the price (or the pricing tiers) of your product, and what exactly do you sell? Again, for SaaS products, this usually comes down to a couple of pricing plans for monthly subscriptions. However, you might choose to charge per transaction (like Uber) or per usage (like AWS).
We covered the topic of product pricing with Dan Balcauski on our product management podcast a little while ago—it's pretty nuanced stuff!
Cost Structure
Finally, you will need to understand how much it will cost you to provide the product or service to your customers, as well as where those costs are coming from. Post-COVID investors really value profitability (no surprise there) which is a function of Revenue minus Costs (a.k.a gross margin). So, having a robust and low-cost structure is just as important as getting sales. Your largest costs will typically include the following:
- Infrastructure (e.g. servers, data centers, etc.)
- Salaries
- 3rd-party service costs (e.g. ChatGPT fee if you are using it in your product)
- Marketing and advertising
Presenting Your Business Model and Market Traction In the Pitch Deck
If you have done your homework, gone through numerous iterations to test your assumptions about your business model, and formulated something you know works in real life, then it is time to fill in the relevant slides in the pitch deck with the information you have gathered.
We will be filling in slide 5 (Business Model) and slide 6 (Demonstration of Market Traction) from the template above. Let’s tackle them one by one.
Filling in your Business Model slide
In this slide, you want to talk about your business model in theory. Here, you'll show the three key components we discussed before (your prices, how you earn money, and your operating expenses).
Basically, you want to tell your potential investors that you have invented a money-making machine and you need their investments to crank on the engine.
The main challenge is that you only have a single slide and maybe 10-20 seconds to tell them about it. So, you need to be creative and lightweight with your presentation.
I love AirBnb’s business slide from one of their pitch decks and suggest you make something like this:
They don’t have any information about their costs, as the nature of their product does not assume massive unit costs (unlike YouTube, for instance, which burns huge sums on hosting alone).
Filling in your Demonstration of Market Traction
Although you can design this slide however you want, I can suggest you use something that Ash Maurya calls the “Traction Roadmap.” It is a single view of your acquisition, retention, and revenue generation. Here’s what it looks like:
Of course, you can (and probably should) design it to look better, but this is essentially all the information your investors want to see regarding your market traction, including everything from your actual traction numbers to conversion and retention rates.
Calculating and Presenting Financial Forecasts
Investors, as you know, are not in the business of doing favors. The main reason that investors would ever want to fund your endeavor is your startup's potential to grow exponentially so they might exit at a valuation that is 100x or 1000x what you have now.
I'm talking about revenue growth. You will need to calculate your current financial situation and give them realistic projections about your monetary future.
For this, there are a couple of key metrics that you need to figure out for your product, namely:
- CAC: Customer Acquisition Cost is one of the first things that investors ask you to show. It is really hard to acquire new customers nowadays, in the wake of the recession and with ever-growing competition. Your CAC is the amount you spend on marketing and sales to bring in customers divided by the number of customers acquired.
- LTV: Customer Lifetime Value represents the total revenue you are earning from a customer before they churn. It is your average monthly revenue per user multiplied by average retention in months.
- LTV/CAC: This is probably the single most important metric for investors. It shows whether you earn more money from customers than you spend bringing them in. The gold-standard ratio here is 4x more LTV than CAC.
- Unit Cost: To determine your profitability, investors need to know if the cost of serving a single customer for a month is less than the monthly revenue you get from them. For tech startups, good profitability is around 80% (costs are 20% of the revenue).
- Financial Forecast: This is essentially your cash flow—costs laid down on a chart over time, along with your revenue (average revenue per user multiplied by growth rate).
These are the bare-bones essentials of calculating your financial forecast. The actual thing is a bit more complex, but you don’t really need to get into it, as the VCs you're engaging with will most likely give you a spreadsheet with formulas in place that will do the forecasting for you as well as help you fill in your balance sheet, financial plan, and the income statement.
Filling in your Financial Projections Slide
The investor pitch deck slide that we want to focus on here is the 9th one in the template I provided in the beginning.
Just like with the business model slide, you need to squeeze in a lot of information here, too. And, just like the business model slide, I recommend you do something super simple. I really like the projection slide that Villaway.com had for their deck.
It is not as simple as the theoretically perfect projections slide should be. However, I really like the way they have presented the data, both visually (the line gets bigger over time), and content-wise. In particular, I like the phrase “scaling the business model” as this is exactly what your investment ask should be about (remember the 'money-making machine' I mentioned?).
I also like that it speaks to the financial milestones for the next five years. However, it's missing an important financial tidbit—the break-even point, which is important to show during fundraising.
Presenting your pitch is easy, the hard part is working it out.
To ace your pitch, all you need is good presenting skills (along with a solid business model and promising financials grounded in reality.) However, pitching is the easiest feat that you are going to face on your funding journey. The much harder task is the onslaught of trial and error that awaits you before you validate your business model and get people to sign up for your product.
Read the Other Articles in the Series
In Part One of The Next Round, we explain how VC funding has changed in the wake of the pandemic.
Part Three dives into calculating your market valuation and negotiating equity with investors.
Part Four is all about how to pass due diligence and move on to the next stage of your business's lifecycle.
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