Some insight into what information VCs are looking for from early stage companies, and why startups themselves should be gathering and focusing on this self-same information

1. What I would want to know if I
were you
How to pitch VCs, why investors look
for what they look for and what to do
about it.
Ben Wirz, Director Business Consulting, Knight Foundation
Twitter: @bthewirz

2. About Ben
• Russia/Journalism/Investment Banking
• VC/Private Equity (11 Years)
– Mgmt @ 2 start-up companies exited
at 15x and 2x (Energy, Manufacturing)
– Invested in 15+ companies
• At Knight Foundation since 2010
— Evaluate/consult startups & other grantees
— Identify opportunities for Knight Enterprise Fund
— Work with 10-20 startups at any given time.
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3. About Knight Foundation
"Thus we seek to bestir the people into an awareness of their own
condition, provide inspiration for their thoughts and rouse them
to pursue their true interests.“ -John Knight, 1969
The John S. and James L. Knight Foundation is the legacy of a
family who created the largest newspaper chain in the US.
– Journalism & Media Innovation: Since 2007, Knight has invested
$100M+ in new technologies & techniques, including 200+ community
news & information experiments
– Engaged Communities: Knight looks to develop in people a strong sense
of belonging, timely access to information, the ability to understand
information and skills to take action. Strong ties in 26 US cities.
– Fostering The Arts: Knight seeks to weave the arts into the fabric of the
eight Knight resident communities (Akron, Charlotte, Detroit, Macon,
Miami, Philadelphia, St. Paul and San Jose/Silicon Valley)
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4. About Knight Enterprise Fund
• Early stage investments Information & Engagement Platforms:
in mission-aligned media Dramatically improving users’ engagement with information and
their communities.
innovation companies
Marketing:
Providing innovative ways to build audience and brand.
• Not lead, co-invest &
help fill out rounds Distribution:
Offering cross-platform content delivery systems.
• $100-300k typical
investment Design:
Developing smart UX/UI that augments engagement.
• Value added investor
Social Media:
-26 communities Providing technology that lets content creators harness social
-23 universities media.
-Hundreds of media Media Operations:
relationships Creating tools that significantly simplify or lower costs for operations.
-Large network &
strong brand Sustainability:
Developing improved/scalable media revenue models.
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5. WHAT AN EARLY STAGE INVESTOR
WANTS TO KNOW

6. Investors Focus On 3 Things:
1. Problem/
Opportunity
2. Team
3. Product/
Solution

7. What Is The Problem You Are Solving?
Be sure to include:
• How big is it?
• How painful is it?
• How much is solving it worth?
• How do you know it’s a real problem?
(Hint: This information should be coming from potential or actual customers)

8. How Will You Solve The Problem?
Explain Your Value Hypothesis: Explain Your Growth Hypothesis:
How the product or service will How new customers will discover
deliver value to customers once your product or service
they are using it. Solve This First!
Sample Hypotheses: Sample Hypotheses:
+ Lower consumer cost/time + People will tell their friends (viral)
+ Better experience (increase willingness to pay) + We will advertise (paid)
+ Improve supply chain for customers (B2B) + We will market directly to enterprise customers
+ Increase volume for customers (B2B, B2C) + We will employ partners to distribute product.
Source: Value, Growth Hypothesis concepts come from Eric Ries, The Lean Startup

9. Why Do You Think You Can Solve It?
Pre-Minimum Viable Product: After Minimum Viable Product:
• Do customers recognize that Traction vs. $/Spent in terms of:
they have the problem you are • Engagement (Value)
trying to solve? (market) • Conversion/Activation (Value)
• If there was a solution would • Retention (Value)
they buy it? (market) • Churn (Value)
• Would they buy it from you? • User Growth (Growth)
(Team) • Marketing Effectiveness
• Can you build the solution you (Growth)
are proposing? (Team) • Payment (Value)
• Are you capable of iterating? • Customer Lifetime Value (Value)
(Team) • Cost of User Acquisition
• Will you be able to market the (Growth)
solution? (Team)

10. What do you do if VC says no?
Ask them whether its because:
– Wrong Problem?
• One they are not interested in solving
• One they do not believe exists
– Wrong Approach?
• Do not believe in value/growth hypothesis
– Don’t believe you can solve it?
• Wrong team
• Not enough traction

11. WHY VC’S ASK THESE QUESTIONS AND
WHY THESE ARE THE SAME ONES YOU
SHOULD BE ASKING YOURSELVES

12. Imagine you are a VC
From Experience You Know:
• Business plans are wrong, all startups are built on
untested flawed assumptions (risks).
• 70-90% of startups fail
• Key risk is scaling too quickly
• i.e. spending money based on assumptions
instead of knowledge
Conclusion (as a VC):
Best way to analyze a startup (as a VC) is to:
(1) Determine what has been proven, and what is still being assumed
(2) Determine if team is capable of learning from and improving on inevitable mistakes.
(3) Invest when reward for testing remaining assumptions outweighs risks.
Conclusion (as a Startup):
• Think about productivity not in terms of how much stuff you are building, but how
much stuff you are learning, make sure you are learning as quickly as possible.

13. In other words, what do you do when:
Most startups say they are
here…
…but are actually here
1. Discovery 2. Validation 3. Efficiency 4. Scale
(avg 5-7 months) (avg 3-5 months) (avg 5-6 months) (avg 7-9 months)
Riskiest time to invest Best time to invest
Answer: Move up the curve with
minimal amount of $

14. Discovery Phase (T+ 5-7 months)
Purpose: Key VC Considerations:
Validate whether startup is solving a 1. Team
meaningful problem and whether 2. Problem
anybody would hypothetically be
interested in their solution Key Graduation Milestone:
-Customer Validation of Problem
Events: -Complete Minimum Viable Product
• Founding team formed
• Many customer interviews conducted Key Stats (Avg):
• Minimum viable product # of employees: 1
• Team joins accelerator # of $ raised: $200k
• Friends and family round Monthly User Growth: 6%
• Mentors & advisors
Source: Startup Genome Project

15. Think of yourself as Plato
1. Accept that you don’t know what customer wants.
2. Set out explicitly to figure it out.
3. When you get significant agreement on problem, build
MVP.
4. Stay lean.
A startup is an
organization formed to
search for a repeatable
and scalable business
model.
-Steve Blank.
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16. Expect to Solve Challenges through
Testing & Iteration (like Aristotle)
Today Launch
Current Funding Horizon
Alpha 1st Iteration 2nd Iteration etc
Current Funding Horizon
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17. What is Minimum Viable Product (MVP)?
MVP = F(Customer, Problem, Time or $$$)
• Primarily, MVP is a way to test your value hypothesis
• Focus on CUSTOMER
– Qualitative Discovery, Quantitative Validation
• Get to know habits, problems, desires (FUN MATTERS)
– what causes pain? what causes pleasure?
• Define 1-5 TESTABLE Conversion Metrics of Value
– Attention/Usage (session time, clicks)
– Customer Data (email, connect, profile)
- Revenue (direct or indirect)
- Retention (visits over time, cohort behavior)
- Referral (users evangelize to other users)
• Note: Paid Solutions drive FOCUS (& pay rent)
SOURCE: DAVE MCCLURE, 500 Startups, Metrics4Pirates Presentation, June 2011

18. Lean Startup Canvas = System to
Chronicle Learning
Also Check Out: Lean Launch Lab

19. Validation Phase (T+ 8-12 months)
Purpose: Key VC Considerations:
Get early validation that people are 1. Team
interested in product through 2. Solution
exchange of $ or attention. 3. Problem
Events: Key Milestone:
• Core features refined -Product market fit
• Initial user growth
• Metrics & analytics Key Stats (Avg at end of Phase):
implementation # of employees: 4
• Seed funding # of $ raised: $800k
• 1st key hires Monthly User Growth: 21%
• 1st paying customers
• Product/Market Fit
Source: Startup Genome Project

20. To test MVP, First Make Assumptions
Explicit
Revenue Sources %
Online Donations 10%
How many monthly uniques/page views will you have
Wealthy Individuals 30 What % of readers will donate?
Advertisement 25 What % of registered readers will donate?
How many registered users will you need?
Foundations 30 Is this realistic?
What % of target audience does this
Events 5% imply?
What growth rate will that require in registered
TOTAL 100% users
What % of non registered readers will donate
How many non registered readers will you need
What growth rate will that require
What will average donation size be
Registered vs. Unregistered
Monthly/Annual/One-time
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21. Boil down assumptions to 5-7 key
Metrics that you can measure
Seven metrics that matter:
1. Acquisition: (rate of gaining new users)
2. Engagement: (how deeply are you engaging users)
3. Virality: (new customers coming from existing customers)
4. Monetization: (% of total users participating in the business)
5. Churn: (loss of existing users)
6. Lifetime customer value (projected monetization returns by class of customers)
7. Program Productive (Yield on promotional activities, both paid and viral)
Source: Escape Velocity, Geoffrey Moore (2011)

22. Look for Product/Market Fit
PMF = F(Customer, Solution, Alternatives*)
• Product / Market Fit occurs when value hypothesis is validated:
– Customers like your stuff better than other options
– Not static, Not optimal – just Local Max 4 F(customers, solution, time)
– make sure you’re moving in optimal direction 2 local max
• Q: what competitive solutions are available?
– … that your customers know about?
– how are you diff/same?
– in ways that people care about? (will pay for)
• KILL a FEATURE regularly (or rotate 1% tests)
– Q: what is MOST $ cust pay 4 LEAST func MVP relative 2 BEST alt?
• NICHE 2 WIN: RE-define cust + DIFFerentiated features
SOURCE: DAVE MCCLURE, 500 Startups, Metrics4Pirates Presentation, June 2011

23. Efficiency Phase (T+ 13-18 months)
Purpose: Refine business model Key VC Considerations:
and improve efficiency of 1. Solution
customer acquisition process to 2. Team
avoid scaling with a leaky 3. Problem (for Scale)
bucket.
Key Milestone:
Events: -Conversion Funnel Optimization
• Value proposition refined -Growth Theory Validated
• UX Overhauled
Key Stats (Avg at end of Phase):
• Conversion Funnel Optimized
# of employees: 4
• Viral growth achieved
# of $ raised: $900k
• Repeatable sales process &/or
Monthly User Growth: 29%
customer acquisition channel
Source: Startup Genome Project

24. Develop a marketing strategy based on
what customers are doing
Q: What channels? Which users? Why?
A: High Volume (#), Low Cost ($), High Conv (%)
• Design & Test Multiple Marketing Channels + Campaigns
• Select & Focus on Best-Performing Channels & Themes
• Optimize for conversion to target CTAs, not just site/landing page
• Match/Drive channel cost to/below revenue potentialPurpose: Step on the gas!
Drive growth aggressively.
• Low-Hanging Fruit: Events:
– Blogs • Core features refined
• Initial user growth
– SEO/SEM • Metrics & analytics
– Landing Pages implementation
• Seed funding
– Automated Emails • 1st key hires
• 1st paying customers
• Product/Market Fit
SOURCE: DAVE MCCLURE, 500 Startups, Metrics4Pirates Presentation, June 2011

25. Conversion Funnel vs. Cohort Analysis

26. Scale Phase (T +20-27 months)
Purpose: Step on the gas! Drive Key VC Considerations:
growth aggressively. 1. Team
2. Solution
Events:
Key Milestone:
• Large A Round
-VC Financing
• Massive Customer Acquisition
-Real Revenue (Breakeven?)
• Back End Scalability
Improvements Key Stats (Avg during Phase):
• 1st Executive Hires # of employees: 17
• Process Implementation # of $ raised: $3M
• Establish Departments Monthly User Growth: 43%
Source: Startup Genome Project

27. Outcomes (from Best to Worst)
1.Success
2.Failure (allows for better
resource allocation)
3.??? Not Sure
Be sure you know what success & failure look like!
This is more difficult in a nonprofit context.
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