The Winning Pitch: The Pitch and What Investors are looking for

The Pitch and the Pitch Deck

So, you’ve figured out who you want to pitch to, what should you actually say to them? (Suppose that you actually got to meet them… we’ll cover that in a bit)

You have to remember that when pitching to a VC, the ultimate question they are trying to answer is if you and your team will make them any money, which in turn is answered by figuring out if your company will be successful. To this end, VCs generally try to use several indicators to gauge their chances:

– What problem are you solving?

– What is the size of the market for the problem you’re solving

• You need to distinguish between the complete market size (how far you can go) and addressable market (what you can tackle out of the gate). This gives them an idea on how quickly they will see a return on investment.

– Competition in the same space, and how you differentiate

– The product / service

– Any traction you can show currently. This can be in the form of performance metrics such as sign-on numbers, etc.

– Bios on your team

• Remember, they are not investing in just you; they are investing in your team. A lone wolf is too high of a risk!

– Financial projections

• In the seed stage, this is generally limited to just revenue, expenditure, and profits.

• It is completely expected that what you put here is nothing but pure fiction. What they are looking for here is not an attempt to test how well you can tell the future, but an indication on what kind of assumptions you’re making about your performances.

• For this reason, it is prudent to be conservative in your estimates, and flexible in your modeling so you can respond to changes.

The Winning Pitch: What are Investors looking for?

When investors look at your slide deck, they will be looking for some fairly specific things:

Strong Traction

Of all the factors that are out there, this is the most critical one of all. The more you have to show for it, the better. So what is traction? To borrow the definition from the Neighborhood Entrepreneur blog

“Traction indirectly refers to how well a startup is getting general market validation of its business proposition and proving out its business concept. Put another way, we could merely say that traction is a measure of how well your startup is progressing. Refining this a little further and honing in on a working definition, we could say more specifically that traction is a measure of how well a startup is delivering its business model and how well its target demographic is accepting that business model. Traction is also a line of demarcation — it marks the transition point from idea discovery or ideation to customer acquisition and validation.”

~The Neighborhood Entrepreneur

This definition seems awfully vague in some places, and that is intentional. Traction is a very general concept because it can differ from business to business. The critical factor here is that you’re showing that the market is indeed interested in what you’re selling.

Now having said that, there are a certain number of things that are fairly common when it comes to showing traction:

• Revenue

• Sales Volume

• High Profile Customer (especially if you’re a B2B)

• Number of views

• Number of players / users

• Customer engagement

• Recurring users

You will notice that all of them will allow you to draw financial implications in some way. Again, this is deliberate. Eyeball views, while valuable, does not always directly convert over into revenue. (Facebook can attest to that) Obviously, in certain cases this is not feasible, especially when your product requires more development time before monetization. In these cases, you need to show indicators of future growth.

Traditionally, a lot of startups use IP or patents to show how defensible their market is. In today’s world, both of those mean really very little (unless you have a huge legal team to go with it). In today’s world, traction is the new IP.

So, what specifically, would serve as suitable traction in the gaming industry? With content creators (who are, by the way, generally not suitable candidates for investors), the only metric that matters to investors other than actual revenue is user base size, and some ability to convert players into paying users. This, by the way, does not have to be on a single game / product. In fact, in the eyes of the investor, a gaming company with a portfolio will be a safer bet than a single product company every single time. While it is entirely possible to achieve critical success on just a single game (certainly CCP games of EVE Online has done it), in general the risk profile for a single game is way too high for most investor appetite.

Indication of a strong team

Your business vision will change over time. Maybe your game genre is no longer profitable; maybe you’ve discovered a competency within your company that can serve the gaming community in a different way (i.e. Tapjoy went from content maker to cross marketer); or maybe you just don’t like the way your company is moving. Change is an inevitability that you can’t avoid. A bad team will not survive the pivot while a good team will find a way to make the reality work with their vision no matter what. It is for this reason that a strong team is critical.

So what makes a strong team? Previous experience either in the industry you’re operating in, or as a previous entrepreneur helps. (It is good to have both in your team) If you’re the CEO, past experience in bringing a company from no revenue to a successful IPO is a huge boon. If you’re the technology guy, previous experience actually developing and deploying whatever it is you’re building is critical. The important thing here is your profile needs to match and complement each other. (As opposed to overlapping)

The key here is that you need to show that your team gives you all the skill sets you need to successfully grow the company. So, for example, if you’re making a freemium game, you BETTER have someone on your team who knows how to do customer conversion like a champ. If you’re making a tool for game devs, then you better have someone who is intimately involved in the game dev community. And of course, all teams will need a good production guy. (Hey, I said don’t over focus on production, not ignore it)

Team chemistry is also incredibly important. This is why teammates who have worked together prior are viewed more favorably as the team structure is a proven variable.

Size is also important. The more team members you have, the more you can do but also the harder it is for a company to move quickly and the more your overhead will be. In general, a team of 2-3 are the most common configuration. The exact optimal point is really dependent upon the team’s chemistry.

Another element that is also quite important but often overlooked is your coachability. Coachability, in this case, is an indication of how receptive you are to advice and how well you can integrate the knowledge/resources of your advisory board. Someone who is stubborn or arrogant will be less likely to correct the course of the company when it goes off track and it is often not uncommon for investors to feel that the entrepreneur has become his own greatest enemy. A little bit of humility can go a long way.

Caveat to the above: if you’re Steve Jobs’ zombie or Larry Page, feel free to be the stubborn visionary all you want.

Big growth potential

The ultimate goal of every VC is to fund the next Google / Microsoft, and in order to do that, they need to know what the limits for your company’s growth are. This is why they ask you the size of the entire market. For content producers, just pointing to the total gamer market is not very helpful, as anyone who knows anything about this market will know that there is no conceivable way you can hit every segment.

Warning: do not purposely over estimate the market size! First of all, if you blow it too much out of proportion, the investors will know and that will hurt your credibility. More importantly, it will impact how you run your business. Nothing sucks more than finding out that you can’t fit into your britches. When estimating your market size, always be mindful of what configuration your company will take on, and what your actual value proposition is.

Viable Addressable Market

So we know how big the whole pie can look, but before you get there, you need to first conquer one market segment at a time. Pie in the sky is great to shape vision, but your first goal is surviving out of the gate, so be realistic about what you can get out of the gate, and have a plan on how you tackle those out of the gate. Focus on the low hanging fruits: how easy is it for you to get up and running? How many players will you be sharing the market with in this initial space? You want it to be as few as possible. Chances are, if the market you’re looking at is viable at all, you WILL have competition, however many that might be. Show us how you can beat them or skirt around them.

However, if you cannot come up with a single competitor, that’s not good either. If you have no competition what so ever, it means that it is an unproven market. That is not necessarily mean you’ll fail, but it does beg the question why no one else has done it yet. If you can’t find a SINGLE competitor in your space, chances are that you’re not looking wide enough or your market is too small / esoteric to begin with. Don’t get me wrong, it is entirely possible that you actually managed to identify a blue ocean, but the odds tend to be stacked against you there. If you have indeed discovered a blue ocean market, proving it will be critical to getting investors on board.

Again, within the gaming world, content producers are at a severe disadvantage

Resource / Competency Fit

Not all investors are a good fit. You want someone who can sign a check, but also someone who can help find good strategic partners, put you in front of potential customers, and can help you access more funds. The most valuable thing an investor can give you (other than money) is their knowledge and their rolodex.

So what happens if I’m missing some of these components?

Let’s be clear here. You are human, and so you won’t be able to do everything. The investors understand this. You don’t need to be perfect, but you need to know what your limitations are, and what kinds of things you can do to help manage them! Obviously, the more ground your team can cover the better. However if you’re missing one or two things in the equation, it is not the end of the world. The VCs, in some cases, can actually help you with these shortcomings. This is one of the important reasons why they do diligence in the first place. The key though, is to make sure that the VCs have the capacity to fill that gap if you can’t.