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Pitching Your Business: How to Close the Deal on VC Funding

It’s the moment of truth for the CFO of a young company with billion-dollar dreams: The pitch to a venture capital firm. You have your flashy PowerPoint at the ready plus the hopes and dreams of the CEO and your employees as you try to win over these investors with big pockets. Success will depend not only on the numbers you’ve put into that presentation and the business plan you have worked so hard on, but timing plays a big role as well.

Fortunately, it’s a relatively good time to try. In 2013, venture capitalists invested $29.4 billion, 7 percent more than the previous year, according to a January report put out by PricewaterhouseCoopers LLP and the National Venture Capital Association. Nearly 4,000 companies got a piece of that pie.

If you’re looking to get your own share this year, there are several points to keep in mind. You’ll have more luck if you’re in the software industry – $11 billion worth of VC funding went toward 1,523 deals with software companies last year, the highest amount since 2000. Such investments made up more than one-third of all VC investing in 2013, according to Mark McCaffrey, global software leader and technology partner at PwC.

Also know that venture capitalists are very interested these days in Internet-specific companies and biotech firms (investment dollars for biotechnology increased 8 percent in 2013), according to assessments of end-of-year deals by the NVCA. And they have upped their investments in networking and equipment companies, financial services firms, and companies that sell business products and services.

How to Win Them Over
For the pitch to VCs, make sure the company’s financials are front and center. VCs are particularly keen on figures, notes Sharon Wienbar, a partner at Scale Venture Partners, which invests in tech companies. “I think it’s really important to get some baseline numbers on the table relatively early in the meeting,” she says. “If you don’t, we’re going to be sitting there antsy or flipping to the back of the deck.”

What numbers are key? Wienbar says you need to really prove that your company is ready to grow. Scale Venture Partners invests in companies that are bringing in $3 million or $4 million a year, with the idea that the firm can help them grow to $100 million in seven to nine years. That means the first thing a presentation needs to demonstrate is the size of the target market.

“You have to be going after a billion-dollar addressable market,” Wienbar says. “You can’t make a big company in a small market, so if a team comes in and they’re very ‘hand-wavy’ on that, it’s very hard to engage in an interesting way.”

Indeed, in a report about obtaining venture capital, PwC says VCs will want details about the target market, its current and future growth projections, and the portion of the market your company is after.

And you need to show evidence that this market will be interested in what you have to offer. If you don’t have current proof – like revenue – you may have to be more patient with your funding. Scale Venture doesn’t invest in companies that aren’t earning revenues yet or that aren’t growing. And that criteria is pretty typical in the VC world. Less than $1 billion of the total $29.4 billion VC investment in 2013 went to seed stage companies, according to PwC data, and most was invested on businesses that were already commercially viable.

“For all but the very hottest founder teams, having more proof points is better when you raise capital,” Wienbar says. That’s particularly true for information technology companies, now that cloud computing has reduced the startup costs of technology resources. “You can build your first products and get your customers, get into revenue on relatively little capital,” she adds.

Still, she notes, companies could get funding from firms like hers despite relatively small revenues if they’ve been growing fast for even just a few months. “You can think about it as the smaller the absolute number, the steeper the slope has to be,” she says.

To test companies’ readiness to grow, Scale Venture calculates a “magic number.” It’s the value of sales and services sold in a year divided by sales and marketing spend. “If the ratio is around one, so you’re making as much in value as you spent, then that’s definitely really good,” Wienbar says.

What a number like that tells VCs is that your company will likely be able to put whatever new money it gets to good use. Another metric Wienbar likes is the number of new sales reps a company has hired and how quickly they’re able to make quota. That suggests you’ve developed a product the market wants and a predictable system to get it to buyers.

Wear Their Shoes
Coming up with reliable numbers isn’t just about getting VC money in your hands. Paul Benedetto, CFO and director of finance with consulting firm iTrellis and a Proformative advisor, says management teams need to be interviewing the venture capitalists right back. Each firm has a different set of goals, he says, and some will be a better fit in terms of the amount of money they have to spend, and how quickly they’re looking for an exit.

You should also consider how many investments a VC already has, Benedetto says. If your company will make up a big chunk of a firm’s total investments, you may be in for a more pressure-filled relationship. Six months down the road, if growth isn’t as fast as you projected, things can get pretty uncomfortable. VCs usually expect an annual rate of return of 30 percent to 40 percent, according to PwC, and they will likely expect a seat on your board as well. If they’re not happy with what the company is bringing in, their arm’s-length advisory role may become much more involved.

“These guys and gals see however many pitches on a daily basis, and I think they know if you’re blowing smoke,” Benedetto says. “I do come back to the homework side of things, making sure you have a sound financial model.”

Of course, that’s where the finance chief comes in. VCs listen not only to what CFOs say but how they say it. They want to find companies and executives they can work with as partners for years, so any sign that an executive is not worth his salt or is not trustworthy can be fatal. Cherry-picking statistics that tell a positive story or leaving out any numbers that would show a truer picture of sales figures will raise suspicions.

“People show you financials that are only forward looking and they all go up and to the right,” Wienbar says. “Tell me what’s happened in the last years or quarters.”’

Get your company’s story – and its numbers – straight, and you’ll be well-prepared for the big pitch.

Livia Gershon is a freelance writer in Nashua, N.H.