The 'request and use of funds' slide is an opportunity to shine as a founder. You don't have to waste it.
there is a slide The one where almost all founders get it wrong when they're putting together a pitch deck to raise money from venture capitalists. The slide is usually referred to as "the question" and is usually located towards the end of the launch pad.
It's meant to do something pretty simple: explain how much money a startup is raising and for what. It shouldn't be rocket science, but universally it's a struggle to get it right.
These are the most common errors:
- Forgetting to include the slide entirely.
- Not specifying a specific amount that you are raising.
- Do not include an assessment on the slide.
- Omit what the funds will be used for.
- Listing a specific track, i.e. "This will keep us going for 18 to 24 months."
Let's explore in detail why these mistakes are so detrimental to the fundraising process and how best to include these points.
include slide
Obviously, the easiest way to fail on this slide is to forget to include it entirely. That is a big mistake. The whole purpose of doing a fundraising process is to raise money, so you must participate with a clear request.
You have to name a specific amount.
Many founders I've worked with in my consulting practice as a pitch coach argue against including any amount. The logic, they argue, is that there are different ways to build the company. If they raise $3 million, they're on a road. If they can raise $5 million, they put another down. If the fundraiser doesn't go as well as they hoped and they can only raise $1.5 million, they'll make that work as well.
It's good to be feisty and adaptable as a founder, but you need a Plan A: What is, in your opinion, the right amount of money to raise to take the company to the next stage of growth and the next round of funding? Sure, your lead investor may want to push you to raise more or less than that, but you need to have a solid idea of how you're going to get from where you are today to where you want to go.
A range must not be included. It should not be mentioned that there are 28 different plans on how to make the company successful. Investors are going to want to see that you can be decisive and strategic. Build a Plan A, write down an amount, and put that amount on the "ask" slide.
In other words: if you're raising an early seed round, you need to think about what you need to prove to investors in order to raise a seed round. Serie A next. You have to map all that out and figure out what resources you need to get there. That is the amount of money you need if everything goes according to plan. Add 30% to 70% as a safety reserve (depending on how good your planning is and how predictable your business is), and that's the amount of money you need to raise.
Do not include a rating
Another common mistake is that founders include the terms of an investment, or valuation, on a slide. If you put “raise $5 million at a $20 million valuation” on the previous slide you must have a lead investor, or you are making a mistake. You can have an opinion on the valuation to be expected, of course, but that will come out as part of the negotiation later. The amount of money needed is fixed; what you are willing to give up to raise those funds is not.
At best, you find two or three leading investors having a bidding war for the privilege of investing. The levers available to them are not just the valuation of the company, of course, there are many other clauses that can be negotiated in a financing process.
The only exception to this is if you already have a lead investor and are just looking to close the round. In that case, your "ask" slide may include the name of the lead investor and the agreed terms. "Raise $5 million at a valuation of $20 million, and Investor X has committed $3 million of the round" can work. Having said that, if you're that far into the funding round, there's probably enough momentum to close the round; it is unlikely that this slide will need to be updated once a signed term sheet is available.
Explain what the funds will be used for.
You are running a startup and you are going to want to raise money to achieve something. Makes sense. What doesn't make any sense is how many founders may seem shy to share the details of the plan. Much of the due diligence process will focus on determining whether you are a competent and credible founder and demonstrating that you have a detailed plan and vision for what will happen in the next period of time.
Put another way: if I'm going to invest $2 million in your startup, I want to know what that money buys me, in terms of progress for the company.
Ideally, your business has an operating plan as part of the pitch deck, detailing what will happen between now and the next round of funding. However, on the "ask" slide, you have an opportunity to summarize in three or four bullet points what you are going to do with the money.
Typically, you'll want to include products, traction, market validation, and key engagement milestones.
- Product: What product milestones do you need to hit to raise the next tranche of money? In particular, this includes full or beta product releases, major feature sets in the product portfolio, or partner integrations.
- Traction: What business metrics do you need to achieve to raise more money? How many units do you have to sell, how many subscribers do you need, how many customers do you want? Other metrics can also be useful here: your Net Promoter Score (NPS), monthly active users, etc.
- Market validation: What can you do to show that there is a real market willing to pay for the product or service you are selling?
- Key Hires – To achieve the above goals, you probably need to hire. How many people do you need to hire? When?
Each of these goals should be SMART: specific, measurable, achievable, relevant, and time-based. Poor goals are vague: "Improve marketing," "Get more customers," or "Add features to our product."
Examples of big SMART goals:
- “By June 2023, we need 2000 paying customers on our recurring subscription model.”
- “In the next six months, we need to reduce our cost of customer acquisition by 20%.”
- “Our B2B sales need to improve, so by July our goal is to hire an experienced VP of Sales who can help shape our sales processes.”
be specific
No matter the timeline: you have to talk about the milestones.
As we hinted at earlier, it's important to list the milestones you think you need to hit to raise the next round of funding. Note that this is based on milestones; each objective unlocks the next part of the journey. But that does not mean that time is being talked about explicitly.
You are not raising money to get 18 months of runway. You are raising money to reach a certain set of milestones. If you can do it in 12 months, you'll get your next round of funding in a year. If you need 24 months, that's ok too. Don't get too hung up on the timeline; some things take longer than you might expect. That makes sense; in a startup: nothing goes as planned.
The corollary of this point is that enough room for maneuver needs to be included in the plans. If you expect something to take 18 months, but it takes 24, it looks really bad if you run out of money in month 19.
clarity is crucial
The “ask” slide is one of the most painful slides to get wrong because it shows that you are not a very good founder. Maybe he's a great technical co-founder, a brilliant salesperson, or an amazing marketer, and that's great, but the founder's job is to have a specific, actionable, and reasonable plan for navigating through choppy waters.
Having a bad “request and use of funds” slide is a huge red flag for many investors. After all, investors have a queue of smart and talented people walking through the door every day.
To stand out, you can't just be good at marketing, sales, development, or any of the other aspects of running a business. You also need to be good at the art of running the business, and this is one of the slides where you can show off and show that you know what you're doing. Don't waste that opportunity.
