How VC's Decide to Invest in DTC eCommerce Brands
DTC founders often come to Bainbridge to organize and prepare for their raise. It’s a high stakes time — a founder’s company and dream hang in the balance. It’s a period of uncertainty, self-doubt, and fear. During this time, we get asked a lot of questions about the process of raising capital.
This post is a guide to that process based on conversations with dozens of founders, interactions with well over a hundred funds, and extensive reading on the subject. It’s weighted toward the world of VC, but is also applicable to Private Equity and other forms of institutional capital.
1️⃣ Our number one piece of advice? Put yourself in the shoes of the investor.
Of course — we’re always learning! Please leave comments or send us an email at firstname.lastname@example.org if you have additional insights that our community would benefit from.
Background: Surviving the Gauntlet
Typically, the fundraising process will follow these steps:
- An investor decides to take a meeting
- A company pitches their business and the investor makes a decision to pass or invest
- An investment memo is built
- Term sheets are created
- Due diligence is completed
- The relationship is nurtured, with the potential for follow-on investments and activities
- The business comes to an eventual exit or end of the road
As you can see, each deal is a lot of work. So putting yourself behind the investor’s desk, you can imagine that one of the first questions they seek to answer is ‘should I spend my time on this potential deal?’ or maybe more accurately, ‘if I spend time on this deal, do I miss out on something better?
In a single year, a VC fund may consider a thousand potential deals spread across leads coming from multiple partners and members of the investing team. One investor might hear hundreds of pitches and go down the path to invest in dozens of companies, only to then deliver just a handful of term sheets. From there, some of those companies may not pass the due diligence and closing process. Even fewer will receive follow-on investments or get consistent, dedicated time and attention from the investor.
As you go down the funnel, the time commitment increases. So the investors are going to be wary of committing that time and missing out.
How Can I Convince an Investor to Meet with Me?
To increase your chances of booking a meeting with an investor, you have to do your research. Investors focus on specific types of businesses. Review the investor’s focus area, the typical stage at which they invest in a company, and the typical deal size (dollar amount) of the fund to ensure your company — and your ask — are right for them.
☝️ For example, if a fund only invests in SaaS companies, they won’t be interested in your DTC business. Similarly, a $1 billion dollar fund looking to deploy investments across 20 companies isn’t likely to write your business a $500K check. It’s just too much work and time. By researching these focus areas and financial trends, you can decide which investors to pass on and which to pursue.
Harder to research is the firm’s or a partner’s view on certain sub-industries or characteristics of an investment. As Kahneman explained in Prospect Theory, humans are more worried about avoiding loss than achieving gains. It’s a strange juxtaposition to place on a VC, as 80% of their investments end in failure. But we can’t ignore human nature — investors will naturally have some explicit or implicit rules for investments they avoid. Some may stay away from companies who aren’t based in Silicon Valley or New York City. Others may shy away from companies with co-CEOs or companies within a particular sub-segment. You can search for clues within the investment portfolio (e.g. one investment in a specific sub-segment that was a failure and no further investments in that space) or in the firm’s blogs and social media postings.
Once you’ve done your research it’s imperative that you nail your introduction. Find the best possible path to introduction. Investors often see the introduction as a signal so focus on quality.
Time and the Investment Memo
From the moment you begin your first meeting with an investor, the investor will be thinking of two things: time and the investment memo. Do I devote more time to this deal? What goes into the investment memo? An investment memo is the written rationale and analysis that justifies an investment to the Investment Committee. But it serves a broader purpose of explaining the rationale to other stakeholders such as the partnership, fund employees, GP’s and the all-important peer set (i.e. the people at the cocktail parties, bike rides and the broader community). Is that fund making smart bets or are they dumb money?
The memo is the framework around which the investment hypothesis is made and it memorializes it for better or worse. Investment memos include information about the competitive landscape, durability of profits, an analysis of the team behind the business, and much more. The more unproven the investor, the more weight the investment memo carries.
As a founder looking to raise capital, help the investor write that memo! Structure your conversations to hit on the main things that an investor would need to include in their memo to help convince their team that this is a worthwhile investment.
The major pieces of an investment memo — and tips to keep in mind — include:
- The size of the investment: It’s important to be clear and specific about how much money you are seeking and what exactly you plan to do with that money. Answering a question from an investor by saying “It depends, how much money do you want to give me?” will end the dialog quickly. Go in with a specific range.
- Market analysis: Investors think ahead. They want to know that the market is large enough to support an interesting exit — even if that is 8-10 years down the line. Be prepared to speak to comps and provide valuation metrics.
- An assessment of how a company can meet a potential exit valuation: An investor will want to think ahead about any additional capital you may need in the future, and how the business will need to perform in order to support an exit valuation.
- Why this company is special / different: In your pitch, you need to go for those a-ha moments where an investor lights up about the opportunity and potential of your business.
- Key things that have to go right for an investment to pan out well & variables to that success: An investor will want to know if your company can acquire customers efficiently, grow revenue, improve margins, and more. All of these questions track back to the end game — the investor wants to know if a company will be able to reach an exit.
- Competitive assessment: Be prepared to offer information about where else your customers are spending money on similar products and why your company is better.
- Assessment of profit durability: You may not be profitable, but someday you will need to be. When that day comes, will you have built a company that can generate growing and durable profits? Read this blog post on achieving Durable Profits to learn more.
- Predicted capital needs in the future: An investor will be thinking about how much more capital the company needs, the availability of that capital, and how a current investment will get the company to the next, highly fundable stage. Be prepared to show a financial model that clearly articulates how this investment will get you to the next fundable stage of growth.
- An assessment of risks: COVID taught us an important lesson about dealing with supply chain disruptions. Take some time to discuss risks to your business (for example: if your products are all made by a single vendor, what happens if that vendor cuts you off?) and alleviate any concerns an investor might have.
- An assessment of the team: An investor will want to know what types of experiences the members of your team have, who you’re looking to hire in the near future and for what purpose, and how each team member will contribute to growth of the business.
It’s important to understand that the process of answering all these questions takes time — and many, many meetings. You can’t possibly answer all this in one meeting. Your goal in the first five minutes is to convince them to want to pay attention for another 20 minutes. Your goal of the first meeting, is to get the next meeting. In other words, you are always giving the investor enough to make them want to commit more time.
Bringing it All Together
The process of connecting with investors and helping an investor think through the viability of an investment memo is a lot like sales — you need to navigate through objections to move the process forward.
Start by focusing on preparation. Before you even start pitching, make sure you’re able to speak to all of the topics listed above. Get your financial model in place so it's easier to summarize information about your business and project into the future.
Once you have all of those items in place, develop a good target list of potential investors using the tips above and prepare your intro materials. Have your email blurb, your elevator pitch, and your deck ready to send. As you start talking to people, they will offer to introduce you to others. Being ready to take advantage of those introductions immediately helps move the process quickly.
Once you begin meeting with investors, your goal during each conversation is to make it to the next stage. First, summarize the pitch to get the meeting. Then present the deck to get to the next meeting. Requests for more information, analysis, and references are all good signs. You will also have multiple calls and meetings with an expanding group. As new people enter the process, be ready to summarize again at a high level before diving into the new level of depth they want to explore.
Make every interaction valuable. You don’t want to waste investors’ time and you also don’t want to waste yours. Don’t be afraid to ask for feedback about your pitch and deck or ask questions about particular areas of projected growth, scalability, and more. Investors have heard hundreds if not thousands of pitches and while they are not infallible, they will provide valuable information that you can use to adjust your pitch and even your strategy and execution.
How Bainbridge Can Help
Streamlining your data to get a clear picture of your business is key throughout this process. That’s where Bainbridge comes in. Using Bainbridge, founders can tell a cohesive story to investors with data. We help you make sense of all your data from multiple platforms and then combine that with a PE-quality financial model. With Bainbridge, you get investor-ready pro-formas and analyses to enable you to handle any due diligence questions. We also provide the frameworks to understand your true CAC, plan successful customer acquisition campaigns, and plan and execute to maximum profitability.
The best part? You can get started with Bainbridge in 3 easy steps. Get started now
There’s a ton of great content about the process of pitching to investors. Below are some that I have found to be particularly valuable:
- Secrets of Sand Hill Road: Venture Capital and How to Get It by Scott Kupor (a partner at Andreessen Horowitz)
- 16 Rookie Errors Founders Make Pitching to VCs — And Passing the “20 Minute” Test by Jason Lemkin
- Step-by-Step Fundraising Tactics from the NYC Legend Who Raised $750M
- This is how a CEO tells a great story
- How to present to investors by Aaref Hilaly partner at Bain Capital Ventures
- The non-obvious guide to fundraising by Gigi Levi-Weiss at NfX
- The 23 Rules of Storytelling for Fundraising by James Currier at NfX
- The Ladder of Proof: Uncovering How VC’s See Your Startup by James Currier at NfX