When it comes to planning and pitching your startup there are four main documents that every founder will hear about:
1. Business Plan – What Grants and Universities ask for
The business plan is loosely defined as a 20-30 page word document detailing the entire business strategy. That includes product descriptions, marketing plans, competition analysis, and even basic financials.
It’s a great exercise for getting your head around your product or service definition. It overall helps to write things down to get more organized. But that’s about it.
In-fact investors almost never ask for a formal business plan to begin with. Such plans made in the early days never really come true and people don’t enjoy reading a lot of text anyways.
Hence we recommend skipping writing a formal business plan (unless required by anyone you are pitching to). Better directly start with a pitch deck. Its the first thing everybody will ask for, way less wordy and probably helps you outline your thoughts on your business just as well.
If you feel that a Pitch Deck is not thorough enough, or you just got too much material that you don’t want to burden your investors with, create a long form pitch deck or even an investor memorandum. Then you can pick and choose slides from it for your pitch deck.
2. Pitch Deck – What Angel Investors ask for
In 99% of cases the first thing investors will ask from you when you interested them is: “Do you have a deck I can look into?”. And by “deck” they mean of course “pitch deck”.
A pitch deck is a short 10-page (or 12, or 15, or 8… you get the point…short) PowerPoint presentation highlighting similar content as a business plan, but in a much more concise and visual way than a written business plan ever could.
Instead of being completely exhaustive, the pitch deck tries to grab attention and get you a longer follow-on meeting. What matters is that the reader understands and believes in your product or service, believes there is a market (ideally with a revenue model that can monetize that market) and that YOU actually can execute on this idea.
Its amazing how good of an idea you can get of a startup from just a short ten pages, especially when you sprinkle in a few numbers on the market and your track record. Makes you think why anybody would want to read a business plan in the first place!?
A great primer on how to write your first pitch deck is the book “Get Backed” by Baehr and Loomis. Just make sure to skip the Kindle version and go for the paper back as it contains a ton of pitch deck examples and graphs.
3. Investor Memorandum – What VCs and Strategics ask for
So you start pitching for your Series A – what’s changing? You will graduate from friends, family and angel investors to more formally organized investment funds: The Venture Capital investor. While this type of investor is specialized on high risk/high growth startups, they will require a lot more detail on your business than a common seed or angel round investor.
That means, after gaining an initial interest in your business, these types of investors will ask for something a little bit more substantial than a 10 page pitch deck: The Investor Memorandum.
An investor memorandum can be imagined as a 20-40 page pitch deck with more content on each page. Its not so much a deck for an actual presentation. It is intended to be read on your own time or flipped through in a meeting. You can create a pitch deck version of an investor memorandum. Pick the 10 most important pages, should you be faced with presenting your business in a formal presentation setting. Or just flip to the right pages that you want to emphasize. Most investor meetings end up being calls (often with cameras off) or meeting-type dialogs as opposed to formal presentations anyways.
4. Financial Model – Planning, Validation and Valuation
While it’s true that the future is naturally unpredictable, a good financial model can be a very powerful tool. It helps you to plan your investment need and consistently test a startup’s key underlying assumption. This will allow you to prove whether a business is working or not. This is critical information in many ways:
First and foremost, you yourself will learn whether your business could be viable. If planning out revenues, expenses and cash flows doesn’t even lead to profits in Excel, how do you expect to make profits in the real world?
Secondly, by making reasonable assumptions and consistently updating your model with your latest metrics, you will know how much money you need to raise, whether your current performance can actually lead to profitability and generally how big your business could be.
Also, by having a solid financial model that builds on your business’ key assumptions and economic drivers, your chances of raising investment will greatly improve. Your entire startup becomes more data-driven.
Finally, a thorough Financial Model is the ideal starting point for valuing your equity. If you build a complete cash flow model you can use the DCF method, but even if you just project revenues, you can produce more accurate (and often times higher) Revenue Multiples. This is because revenues are expected to grow rapidly in a startup. Using metrics like annualized revenues (= next twelve month’s expected revenues) or expected revenues in a year from now, will render higher valuations than by just looking into your accounting system and taking today’s revenues (= last twelve months).
By having a solid financial model that builds on your business’ key assumptions and economic drivers, your chances of raising investment will greatly improve. Your entire startup becomes more data-driven.
None of this iterative feedback will be provided by a business plan or pitch deck. While nobody can predict the future, a financial model can help you understand and pitch your startup better over time.
Much more on Financial Models can be found in our comprehensive overview to startup financial modelling.
While there is a time and place for all of the above tools, first start with a nice 10-page pitch deck. It will be a great, concise summary of your company and likely help you sort your thoughts. Usually having such a document will not just help you pitch, but also get feedback more efficiently.
The second most important pitching tool is a good financial model. You can start with a revenue model and a very basic cash budget. If you want to raise any sort of larger investment, you will need to demonstrate a viable business based on unit economics and cash flows through a full financial model.
Finally, the investor memorandum provides more detail for later funding rounds and a written (Word-based) business plan are usually only used for grants and university pitch competitions.
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