This is the 4th in a series of posts illustrating how to pitch effectively to a Venture Capital Investor. The previous post in the series is here .
Tom Cruise couldn’t have uttered truer words – even if it took an angry client to get him to say them!
So far in the pitch, you’ve established how relevant the problem is and how your product solves the same. Now’s time to talk about how you make money. The only reason anyone will invest in you is if you can provide a large exit at some time in the future. And making money is pretty important along the way!
Do’s
Show me the value your business is creating and for whom
Value gets created in only 2 basic ways – increasing revenues or decreasing costs. An extension of both of these could be convenience. Make sure you are very clear on what value your business is creating and communicate it crisply.
Tell me who is paying
Clearly state who (or both) out of the consumer and the supplier is paying you. In other words, whose money are you taking to create your own revenues.
Tell me where is the money is coming from?
Generally, startups either pull a share of existing spend towards them or create a new wallet spend. Let me illustrate this a bit better:
- Pulling a share of existing spend
This usually happens when you create a new, efficient process to replace an existing one thereby creating more value for one or more players. You can then command a share of the latent value unlocked through process efficiency. In this case, it is critical to illustrate clearly the reason for the efficiency of the new process. Also, give me empirical evidence that you’ll be able to pull the share of wallet that you say you can – either by traction or by anecdotal examples of your personal conversations with stakeholders or, if nothing else, by existing comparable models. - Creating a new spend bucket
Usually, this happens when you increase someone’s net wallet size. Here you need to tell me why is there so much value in what you are doing that a stakeholder will create a new bucket of spend in his wallet. Tell me the increased wallet size that you have created – is it because of increased revenues or decreased costs? Also, show me early indicators of what percentage of this new wallet you’ll be able to command. Like in the previous case, this could be either by traction or by anecdotal examples of your personal conversations with stakeholders or, if nothing else, by existing comparable models.
Tell me how the money is coming to you?
Walk me through the money flow – who pays whom and how do you get paid. This is probably the most important yet under-rated part of the business model. Innumerable businesses have failed due to poor invoice collection or non-trusted payment channels. I need to understand how your payment process is so smooth that delinquencies won’t happen. Ideally, I want to hear how you will route payments electronically through your platform.
Don’t’s
Make blanket statements like “money here is a no-brainer” without adequate data back-up
If money were a no-brainer, starting up wouldn’t have been this tough. Even if you aren’t commanding revenues right now, acknowledge the importance of figuring them out – today or later.
- Put off the business model till the very end of the pitch
Remember this is probably the most critical part of your pitch. Don’t leave it for the last. VCs are bound to have questions for you around your business model. The only reason to leave it for the last is if you are very confident that the model is simple/already implemented in some company globally and hence the VCs will already know about it and you won’t be needing too much time for it. But if in doubt, err on the side of caution. - Tell me monetization will come with scale
While this is true for many businesses (including the $10 Bn valuation Pinterest), it’s important to have a path to monetization clearly laid out. Most VCs are fine with monetization kicking in later but need to have a visibility to the method early on.
Best Practice
Create an info-graph depicting the path of money from the payer to you/payee clearly showing why the payer is paying (value being generated for him/her). If you don’t have a monetization model figured out, acknowledge the risk of the same and duly state that you will work with the VC (post funding) on figuring out one ASAP but without compromising on growth of the business.
Recommended time
I would say spend 7-10 minutes on the business model. This seems less but if you have explained your problem statement and product well, this much time will be sufficient.
[Disclaimer: The thoughts and opinions expressed herein belong to the author and do not necessarily reflect those of Bessemer Venture Partners or any of its affiliates (“Bessemer”) or any other organization the author may be linked with. Specifically, the material here is written on the author’s own time for his own reasons and Bessemer has not reviewed or approved the information herein. Any discussion of topics related to Bessemer or its investment activities should not be construed as an official comment of Bessemer.]
