Module 5: Pitch Competition
Additional Facts
After securing the IP and other concessions from BigTech in exchange for equity in NewCo, Baker and Carter interviewed and hired Delia to be the CEO of NewCo. Delia was given 20% equity as part of her compensation package. Each of the three of them need to make at least $60,000 per year for the forseeable future for their services (luckily they each have spouses with health insurance, so the company will not need to sponsor a health insurance package); they have agreed to forego cash compensation until the first funding round is closed. Each of them have also been moved to a vesting schedule; they will vest over the next four years with a 1-year cliff. NewCo has also established a qualified employee stock option pool comprising 15% of fully diluted equity.
As you may recall from Module 1, the initial $100,000 in cash and equipment should be sufficient to get them one year of runway. Of course, that was 3 months ago now, so they have 9 months of runway remaining.
Delia’s first job as CEO is to find them some money to get NewCo off the ground. Her first step was to get NewCo accepted into a top hardtech accelerator, Alchemist Accelerator conveniently based in Chicago. At the end of the 7-week program, she will pitch as part of the accelerator’s Demo Days. It will be cutting it close, but the program will end with approximately 3 months of runway remaining.
Exercise: Documents
In this part of the exercise you will create two documents:
- P&L Summary
- Sources and Uses of Funds
For each of these documents you may find that you need to take some creative license and each team representing NewCo here will likely have slightly different answers. The important part is that the results be thorough and reasonable. You should clearly set out your assumptions (will the team have an office or be entirely remote and what are the cost consequences of that decision, for example), and timelines for your projections. These documents, of course, not only form the basis of your pitch (see below), but inform how you talk about your company when speaking with potential investors.
P&L Summary
Throughout the facts and negotiations of this case study you have been given a lot of facts related to NewCo’s costs. You will likely need to do some additional research into these kinds of tech companies and the kinds and scale of costs that they tend to incur. When will those costs be incurred; when do you anticipate sales people coming online, maintenance, etc? How much will you budget for outside professional services (legal, accounting, marketing, etc.)? These all play an important role in the income and expenses of the business on a day-to-day basis.
You should think deeply about the sales cylces at issue here, too. Who is the target customer? Who, which people/titles, are actually responsible for making these kinds of purchasing decisions? How do they make purchasing decisions? How long does the decision-making process take? How long would the contract process take? What might maintenance and support agreements look like? Again, while you have been quite a few facts, there is a lot that has been left unsaid that you, as the executive team for NewCo can decide. For example, maybe there is a tiered pricing schedule where the lowest tiers have no support while the upper tiers have full(er) support. Such a decision would have both revenue and expense implications.
You need not prepare full P&L statements; but rather you might find it helpful to summarize by revenue and expense categories with explanations for the category rather than on a detailed line-item basis.
Sources and Uses of Funds
The second statement you will prepare is a Sources and Uses of Funds statement. This is important for showing how much money you will raise in the round and how that money will be spent. This is different from the P&L which looks at actual expenses on a month-by-month basis. In this document you would categorize the uses of funds in a summary fashion (e.g., sales salary, executive salary, travel, R&D, etc. etc.). You might also present options for under-selling and over-selling the round; in each case there is a cut-off - where is the cut-off for too little money to close the round, how much over the ask would you accept before closing the funding round (always leave them wanting more, eh)?
On the Sources side of the equation, you should indicate the instrument(s) used for the round - SAFE, Convertible Note, Series Seed, etc. If another round will follow-on within three years, you might even show estimates for that round, too? It is often helpful to prepare proposed capitalization tables for each scenario as well.
Investors will want to see a lot of information; the more information you can provide (within reason), the better prepared you look.
Exercise: Investor Pitch
Excercise: Often in the course of starting a business like NewCo’s the founders will participate in an accelerator of some sort (see above links to TechStars, Y Combinator, and gener8tor). For this exercise you will create a pitch deck and pitch NewCo in a mock “pitch day” for the end of the accelerator.
- Produce a Pitch Deck including Competitive Analysis
- Give a 10-15 minute presentation as NewCo
Key Concept: Accelerators
Startup Accelerators are now an accepted and almost mandatory piece of the startup ecosystem. There are three general types of accelerators: general accelerators, industry-specific accelerators, and education accelerators. There are, as you might expect, a million ways to run an accelerator. The first two models tend to share some common characteristics: they assume some level of competency in running your startup, the end result of the accelerator is an introduction to investors associated with the accelerator, and the accelerator itself takes an equity position in each cohort company. TechStars and Y Combinator are the two best known examples of general accelerators. gener8tor and Alchemist Accelerator are well-known for their industry-specific accelerators.
Education Accelerators tend not to take equity in cohort companies. They often work with earlier stage companies and, instead of introducing you investors (or at least investors who are interested in investing in you), they impart education about the startup process. Some specialize in a topic-area education (governance, online retail, compliance, etc.), others focus on introducing nascent/first-time entrepreneurs to basic entrepreneurship concepts.
Pitch Competition
Everybody does pitches a little differently. You can find a lot of pitches online to look at for inspiration. Typically, this case study is performed in a classroom setting. In prior modules groups have been divided into teams of 2-4 students. Ideally, that is the case here, though I will note that traditionally the pitch would be done by only one person on the team; while multi-person pitches are permitted and possible (and REALLY fun when done well), they can be REALLY hard to pull off well and are not recommended. Each team should pitch for 10-15 minutes.
While each team pitches, the remainder of the class are not static viewers. As each team pitches, the rest of the class instead turns into investors and after the pitch, will engage in 5-10 minutes of question and answer related to an investment decision.
For an extra level of engagement and pitch difficulty the “investors” are allowed to ask questions during the presentation. This might happen in a “private” pitch in front of angel investors, while the uninterrupted pitch with investor Q&A after is more typical of an accelerator pitch day.