Duc Luu is an Edtech and Proptech Entrepreneur, Angel Investor, and Keynote Speaker who founded and sold an Edtech startup which then went public on Nasdaq in 2017. In his spare time, he indulges in travel, basketball, poker, chess, and fashion, not necessarily in that order.
"Thanks for the competitive analysis, can you walk us through your LTV/CAC?"
"Yup, that’s actually the next slide." I answer enthusiastically. A couple of slides and clearer storytelling later and the investors say the magic words every entrepreneur wants to hear…
"So how much are you looking to raise?"
I've had the pain and pleasure of raising capital and listening to teams pitch me their start-ups countless times in my career. My last raise was led by Softbank Ventures Asia and Gaw Capital for a Vietnamese proptech start-up which was eventually funded for $25 million. The pitch deck itself wasn't too different from my very first raise over a decade ago for a couple hundred thousand. Every year I support my alma mater by mentoring in the Chicago Booth GNVC Competition and you would be shocked how many MBA candidates, especially quant-heads, don't know about raising VC money! Thirty slides in and I'm deep into their unit economic weeds or tech features errata.
The silence from VCs can be deafening.
So how should you structure your pitch? Think like a Hollywood movie. Intro. Development (Climax!). Conclusion. Every deck should have the following items:
- Act 1:
- Act 2:
- Business Model
- Act 3:
- Founding Team
"You think that's air you're breathing now?"
In the first act, capture your audience's attention by defining the status quo or problem within your chosen industry. Where are the pain points? Is it a supply problem? A demand problem? Is it an execution or operations problem? Another way to think about it is where and what in the value chain are you attempting to solve.
In consumer proptech the problem is trust, transparency, and efficiency. No one trusts brokers. There’s no transparency of pricing. It takes weeks and months to DD and close a deal.
Then drop your solution like a bombshell.
It could be operational excellence. We hire, train, and retain top-notch real estate agents. Operational excellence. We have a CRM that tracks historical transactions and prices. Tech excellence. Which leads to superior contribution margins. Boom. Profit.
"There is no spoon."
In the second act, your story should be developed to build excitement about the business opportunity, by providing numbers that are almost too good to be true, but actually are. What's the market validation? Why now? What's the market size? Who are your competitors and where do you fit? What’s your business model? What are economics?
For example, investors want to see a TAM, SAM, and SOM. What do those terms mean? Let me explain:
TAM, SAM, and SOM are acronyms that represent different subsets of a market.
- TAM or Total Available Market is the total market demand for a product or service.
- SAM or Serviceable Available Market is the segment of the TAM targeted by your products and services which is within your geographical reach.
- SOM or Serviceable Obtainable Market is the portion of SAM that you can capture.
Still confused about TAM SAM SOM? Let's look at an example.
Let's say you are starting a fast-fashion chain. Your TAM would be the worldwide fashion market. Potentially, if you were in every country and had no competitors you would generate TAM as revenues. Yeah. Not happening.
Let's think smaller. You are starting your fast-fashion chain in one city where the demand for fast fashion can be estimated based on: the population, their fashion preferences, and the revenues generated by fast fashion brands in that city and other cities with similar demographics. That's your Serviceable Available Market: the demand for your type of products within your reach. Another way to think about it is if you were the only fast-fashion chain in town you would generate revenues of SAM.
Now you are probably not the only fast-fashion chain in the city. So realistically you can capture only a fraction of your SAM. Most likely you will attract fast fashion lovers living or working close to your stores and a fraction of the people located further away that are willing to give your store a try. This is your SOM.
Why does this matter? To an investor, TAM addresses his upside potential, while SAM and SOM represent how he would de-risk that opportunity. I can address TAM, SAM, SOM calculations in a later article.
Don’t forget the business model! I prefer to go back to the value chain analysis to really help the investor see where in the customer journey I am creating or have a competitive advantage. What aspect of fast fashion are you going to do better than your peers? Better design? Faster production? More relatable branding? Catering to an untapped niche? More efficient delivery? And you need to be able to explain the business model in under two minutes! Otherwise, your model is probably too complicated.
"I know kung fu."
The third act is where you make your point about why investing in you is such an incredible opportunity. Who are the founding team members? How much experience or talent do they have relative to the industry you’ve attacking? How much are you looking to raise for how much equity in the company? Are you asking for too much or too little?
Who are the founding members? Did you know that the most successful entrepreneurs are not 21-year-olds fresh out of college? That the highest ROIs came from industry vets turned entrepreneurs after 10 years of experience? Why is that? Because they understand the industry pain points and can clearly define and execute a solution. Think Marc Benioff of Salesforce. He was a senior executive of Oracle, and even got funding from his boss! Your team should complement one another and add value to the start-up. Three sales guys are going to struggle to do a fast fashion start-up. One sales guy, one marketing girl, and a great design girl will likely get funded a nice chunk of change.
How much are you raising for what equity? Time and again I see entrepreneurs ask for too little cash. You need 18-24 months of cash. Model out the financials, particularly the monthly burn rate. Be generous and honest. You're going to nearly run out of money a few times in your journey, model in some breathing room else you'll spend more time fundraising than running your start-up.
Other times, I see entrepreneurs give up too little equity. Investors should take between 10-30% of your seed start-up. If they take too little, they don't care and don't act like partners supporting your growth. Also, giving up too little equity means you’re valuing your company or yourself too highly. A pitch deck alone isn’t worth $20 million. That said, if they take too much equity, then you don't have enough to finance in other rounds and your team members and founders have too little equity left to fight for the business after you’ve raised necessary subsequent rounds.
What about that LTV/CAC? Unit Economics? Go-To-Market Plan? It depends on the industry and stage of fundraising, but they can either sit in Act 2 or get tossed into an Appendix which you can refer to during your Q&A ending section. Series A or beyond you’re likely going to be asked your contribution margin and unit economics before they jet fuel your business with marketing and tech development cash. Seed round while I appreciate the analysis, it is likely that it won’t be accurate and your team may need to pivot to a different or more scalable business model.
Final advice for the day: Don’t take rejection too seriously.
If you’ve put together a great pitch and rehearsed it to perfection, you can get rejected 15 times before one lead investor says yes. You guessed it. Raising funding for your start-up is like being at the hottest nightclub in town. It’s a numbers game. And you have to bring your A-game!
So take a shower, put on your best outfit, and don’t buy the first drink!
Only half kidding, you’re not going to have a social life after raising the money anyway. Gotta make those investors their IRR, baby!
Ping me with comments & questions!