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What VCs want to see in a startup?

VCs prospection, at early stages, is like “Tinder hunting”: they look for the beautiful tall blondies, <25 years old, single, that attended good schools, successful, but not so independent to the point that they won’t need you… You can apply the same concept to men (tall, strong, 6-pack ab, successful, mysterious, excellent cook, help in the house chores, who want to have 3 kids…).

It’s sounds superficial and, to a certain point, it is. But, when you receive thousands of pitches, you need to establish more objective criteria so you can filter out the companies less likely to succeedYes, the first filters are not about finding good companies, but eliminating the potentially bad ones.

 

What’s the ideal startup profile for early stage VCs?

Understanding the ideal types VCs look for is crucial, so you can adjust your speech and tackle those initial weaknesses.

VCs tend to like the following characteristics:

Founding Team

  • 3-4 cofounders, < than 30 years old, with deep technical expertise and strong domain/ industry knowledge.
  • Founders should have worked before, in other projects, for at least 2 years, and must be 100% dedicated to the company.
  • Capital structure should be clear and formal, with balanced division of equity among founders. Any founder too diluted at early stage will end up with nothing down the road.
  • In terms of diversity, interesting enough, there’s a lot of movement to boost startups with female and minorities founders. That’s great, and you should take advantage of that if you can. Age-wise, though, I still see a lot of prejudice.
  • No freelances/ outsourced resources – if the company employs someone other than founders, make sure they are regular employees.

 

Market & Model

  • Product must tackle a consolidated market, with incremental evolution – deep innovation/ revolution is a harder sell.
  • If you’re not in a leading geography (US and, maybe, UK), VCs will prefer copycats. They usually don’t take geography and business model risks at the same time.
  • Scalability is the magic word: growing 10x shouldn’t require more than 2x more employees
  • Billion dollar markets: forget about small wins.
  • Exception is when a clear and shot term exit could be in sight – for example, your technology being acquired by a much bigger company.

 

Stage and Track Record

  • Startups should be less than 1 year old, and have raised some angel financing.
  • Product must be ready, at least its core. No buggy MVPs…
  • If makes sense, having some patents filed increase your value.
  • Company should be operating, generating (some) revenue, and growing at least 20%-30% MoM (month over month), no matter if you’re burning cash on each sale.
  • Actually, growth is the most important variable early stage VCs look at. Some companies even postpone launch, trying to to generate a “backlog” of users, so they can manage growth in batches. That’s the case, for example, with companies pursuing pre-registration or closed betas schemes.

 

What should I do if I don’t fit within the ideal profile?

As with our dating life, compromises need to be done. Some more than others… VCs know that, and are willing to make some trade-offs. But you got to help them out… There are some strategies you can follow, and I’ll write articles for each, but just as a teaser:

  • If you’re a single founder, get formal advisors who can challenge you. Also, have very explicit processes and back-up plans in case something happens to you
  • If your team lacks specific profiles (because you’re out of cash), you should interview and have the potential candidates lined up (including compensation), so when money comes you can just hire them.
  • If you don’t have technical background, hire someone who does. You should hire someone with deep technical expertise. If you cannot afford that, hire someone not so senior (and cheaper) and a technical lead part-time. Or have a very hands-on technical advisor.
  • If you don’t have a working product, make a prototype that people can navigate (you can do this even on Power Point or Excel). Invest on quality design from start!

 

The list goes on. Understanding what VCs want is crucial for you to understand what your company lacks, and how to compensate that. All in all,we all choose the perfect picture for our profiles, don’t we?

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Elevator Pitch: where did it all start?

For many people we should have started our blog with an article about the “famous and feared” Elevator Pitch… In my opinion, starting preparing your pitches with the elevator one is a mistake: if you haven’t put a broader plan/ explanation “on paper”, it might be tough to come one with a very concise (90 seconds) and winning pitch.

Apart from my opinion (unrelated to this article!), people always ask me where does the term “Elevator Pitch” come from… Well, there are 2 theories:

 

The Hollywood urban legend theory

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First theory is also kind of an urban legend, and puts the born of the elevator pitch decades ago in Hollywood. It was the golden days of movie making, and people from all different backgrounds and geographies went to Hollywood, with their scripts in hands, hoping to get rich in a blink. Side note: any resemblance to Silicon Valley?

Back to the story, screenwriters would then chase producers wherever they could to sell their ideas… even on elevators! The time between floors (60 to 90 seconds) was all the got to convince producers to invite them to a follow up meeting.

They had to come out with a very concise, but exciting, pitch structure. It had to be clear enough so they could just talk through it (no Power Point, folks!), in front of other people, ambient noise etc…

That’s the cool version of how the Elevator Pitch was born.

 

Version 2: the actual elevator demonstration

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The second theory is much less glamorous. According to the Tom Tunguz  (if you’re an entrepreneur, you should subscribe to his awesome blog) on an article called “To sell is human”, the origin of the term dates back 1852, with the demonstration of elevators themselves:

The term elevator pitch originates from the very first demonstration of an elevator with a safety brake. At the time, elevators were hazardous, routinely plummeting down shafts when their hoisting ropes fell, destroying their payloads. In 1852, Elisha Otis invented a locking system that would catch and secure plunging elevator. Unable to drive much interest in his innovation, Otis organized a demonstration in New York City. He stood in the elevator as an assistant severed the hoisting ropes and the safety brake engaged. Otis’ innovation paved the way for humans to ride in elevators. Today, the Otis company’s products transport 7B people every three days.

To Sell is Human, Tom Tunguz

 

To me, attributing the creation of elevator pitch to a single moment or person is too much of a stretch. Sales Pitches have been around for a long long time, and if you know salespeople (especially the desperate ones) you know they will take every opportunity they have to sell.

It’s more likely that people started delivering shorter and shorter pitches, and started to package and spread the concept/ theory until  the term “elevator” sticked. Had this concept been created by a single entity, believe me, we would all be seeing trademarks and requests for royalties!

Having said that, understanding the history behind the concept, no matter the theory you believe in, is, to me, soothing: people have been struggling with this for a very long time, so I’m not the first one!

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500 Startups 14 awesome pitch tips

500 Startups  is one of the largest Accelerators in the Valley and have a feet on the ground approach.

On a recent article Pitch, Please: 14 Must-Read Pitch Lessons Every Startup Founder Should Know they go through some very interesting tips o about how to better explain your business.

One of the most interesting points, is how to position your company in terms of which story to tell. Below is an excerpt:

Traction, Team, Tech, Vision – in general, most startups will fall into one of these categories. If you have (impressive) traction, you have a Traction Story. If you have a great team with a previous exit or serious domain chops, you have a Team Story. If you’ve built interesting technology (read: not a mobile or web app), you have a Tech Story. The problem? Most people choose the wrong story, try to tell all the stories…

 

Another point, we usually forget, os to avoid saying the obvious:

Don’t waste time explaining what everyone already knows, especially the problem. If you are a logistics company, don’t go on and on about how big the logistics industry is after you say it’s $4T. We get it. If you are a food delivery startup, don’t talk about the problem of not knowing what you’re eating for dinner. Everybody knows. In reality, a) that’s probably not the problem you’re actually solving, and b) we probably already agree it’s a problem — we’re just not convinced your solution is solving it. The more niche, international, or underground your problem/market, the more time you should spend educating.

 

Ok, enough pigbacking! Go there and read their article: 14 Must-Read Pitch Lessons Every Startup Founder Should Know

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Q&A: turning a good question into a great one!

The best Q&A (questions & answers) tip I got came from a friend who works at a top VC fund in the valley: she asked me if I knew the difference between a good and a great question. A “good” question is very intelligent; touches on a critical point about your business… but that you don’t know exactly how to answer on the spot. A “great” question, on the other hand, is also very intelligent… but not only have the answer for (on the spot), but also have supporting slides! When someone asks you a “great question”, you need to control your smile, because you know you’re going to score some points.

After this tip, I defined as a personal goal to make sure that whenever I went through a Q&A session all questions should be great! That definitely stepped up my game.

 

Q&A session is part of the pitch… and needs as much preparation

When people prepare their pitches, they’re usually thinking about the 7 minutes they will be on the stage presenting, and end up forgetting about the Q&A session… that’s a big mistake!

The Q&A session is the time judges/ investors have to explore the weaker points of your business, trying to extract from you an “unsanitized” answer. That’s exactly why I recommend you to surprise them, with a perfect preparation.

On the pitch I gave for the 43North competition semifinals, I had 24 slides on my pitch, including the “cover”, contact, pictures, and another 60 just for Q&A! I got to admit that it was awesome when they asked me a “great question”, and I opened the slide and answered on the spot! When we finished the meeting, they told me they really liked that level of preparation!

 

But how do I prepare for it?

First, you learn what people ask by experience; you take every single opportunity to pitch your business and every time someone asks you something you weren’t prepared for, you go back to the office and add it to your Q&A slides.

Second, you watch as many pitch competitions as you can, and write down the questions they make. You’ll notice a pattern… questions are pretty similar, especially on comparable business models (marketplace, Saas, content…). Write down the questions, and make sure you’re addressing them, either on the presentation part or on the Q&A.

Finally, you can induce judges to ask what you want; that’s a very clever pitch hack! The topics you should cover in your pitch are pretty much standard (I recommend reading our article about a pitch table of contents). So I select a topic that I’ll intentionally not cover on the pitch. It’s got be something that won’t spoil the presentation by leaving out, but that you can explore a clever insight you had.

In AgendaPet‘s  case, for example, I do this with GTM – go to market -(how I acquire customers). In Uber-like models, like ours, it’s usually pretty straightforward (online advertising + repeat business). However, in AgendaPet we have a sizable organic traffic as a result of a growth hack strategy we apply: on cities we don’t cover yet, we have a free service directory listing, so users can find professionals. It also attracts prospective professionals. This way, when we decide to migrate a city, we already have a very good starting point! I like leaving GTM out of “main pitch” so I can surprise judges with my answer… and, by experience, they usually ask that question!

Inducing the judges what to ask has also a side benefit: you avoid judges “curve balls”! Usually there’s as much time allotted for Q&A time as for the presentation itself. Judged have to ask questions, period. So, if you don’t leave room for easier questions, they’ll dig for something trickier… make both of your lives easier!

A perfect pitch won’t make a bad business look good; but it can make a good business be seen as it should. When it comes to the pitch, it’s always a matter of taking it one step further; everything counts! Surprising the audience with a “great answer” will not only guarantee a better understanding about your business, but also will show the type of leader/ manager you are!

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Pitch Review: Jukedeck

Jukedeck is a platform that creates, through artificial intelligence, unique music/ soundtracks so you can use on your own videos. They won The startup Battlefield on TechCrunch Disrupt London 2015.

Jukedeck (8.2):

 

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What I like the most?

  • Wow factor. Awesome demo, including rap in the end
  • Storytelling using real life examples, with seamless transition to the solution (demo)
  • Clean slides

 

What I like the least?

  • They could have added more substance to the pitch, especially the bio and structure of the team
  • 2 presenters: always hard to pull out. Though it was not an issue in their presentation, it impacts a bit on the pace/ flow
  •  Q&A: lacked some preparation and objectiveness. They hesitated on some questions, showing they hadn’t anticipated them.

 

What about you, how would you rate this pitch?

Want to suggest a pitch for us to review? send it here:

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Speaking in public: 10 golden tips to dominate the stage

Fact: speaking in public sucks! All the preparation seems to go down through the drain when you pitch to a large audience. Some say it’s a gift… for those lucky 1%, they can just put their natural abilities to use. For the rest of us, mortals, we need to turn it into science!

Good news is that pitches are not public speaking competitions. There are tons of people like us, who get a bit shaken in front of a large audience, and that’s ok. There are a few tricks you can do that will make you sound like a pro:

1) Preparation is the biggest confidence booster you can have

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There’s no silver bullet when it comes to delivering your pitch… The closest thing, though, is preparation! Practicing your pitch to exhaustion will not only help you shape it, but also will bring you a lot of confidence!

I recommend you to record (video) yourself, always. When you start, you’ll probably be taking twice as much time as you have; don’t worry, that’s normal! Keep recording yourself and fixing/ adjusting your speech every time.

When you watch your recording, make a technical analysis of your presentation. The analogy I make is that you should manage time as if you were managing investments. Write down how much each segment is consuming of it and check if you’re investing time wisely. For example, Problem + Solution is the most important part of a pitch; if you’re taking more time to talk about business model than problem/solution, you have a yellow flag.

Once you have trimmed down your pitch to the needed time frame, it’s time to record yourself “in action”; standing up and simulating a real life presentation. If you’ll be using a microphone, hold something pretending to be one. Even walk the “stage”, so your training is as close to reality as possible.

One word of caution, though: do not expect to feel 100% ready; feeling 100% prepared is an illusion.

 

2) Redundancy will feel much safer!

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You should replicate your obsession about your company’s product to your pitch. Having backups and redundancy will make you feel much safer and will eliminate fears you don’t need to feel.

I remember 2 years ago when I was going to pitch at a competition organized by UKTI, UK’s trade and investment department. The event was happening in Campinas, a 1.5 hour drive from where I live (São Paulo, Brazil). I planned to get there 1 hour earlier, so I had plenty of time to check the projector, microphone etc. Travel took 2 hours, and I spent more 30 minutes trying to find the auditorium. No one I asked knew the place, the mobile stopped working… To make matter worse, I was supposed to be the first to pitch. Luckily I found the place and got there 5 minutes before it started. However, damage had been made: I was stressed, tired and didn’t have time to concentrate. It was a nightmare! Somehow, against the odds, I managed to deliver a perfect pitch, but I learned an important lesson: preparation in loco, backups and redundancies will remove the unknowns from your presentation.

Since that time I’m obsessed with checking everything, in loco, one day before. Since I use a Mac + Prezi, those tests usually find issues… but I’m always prepared, and that doesn’t affect me anymore.

More than this, I carry another laptop and have all the files in both computers, on the cloud and on a thumb drive. Oh, and I have a PDF version of my presentation as well.

Having so many redundancies allow me to not spend a single second worrying about what to do if something goes wrong; no matter the scenario, I’m covered! That makes me feel much safer!

 

3) Charisma is a powerful tool

Charisma is a gift, most people think… well, I kind of disagree. While some people are naturally charismatic, others, like myself, can shape their speech to sound more charismatic.

You need to position yourself at the same level of your audience. Let them put themselves in your shoes. People, however, tend go the other way, trying to show a more powerful/ stronger profile when pitching…

I always mention a real life case of a young group I was advising for an university-backed competition. One of the founders (an 18 years old student) was really confident and felt comfortable speaking in public. However, his presentation was too strong; so strong that he looked like to be on cocaine! He was trying to appear something he was not, and that was evident; excess confidence played against him!

On the other end, I like to mention the example of StayFilm‘s pitch at U-Start Brazil Conference (below). It was the company’s first public pitch, and the cofounder (Douglas Almeida) wasn’t a fluent English speaker. He started off by breaking the ice, sharing how hard this pitch was to him, in a very humble and funny way. That instant he won the audience! His presentation, after that, was tough… he was reading the text, had a poor accent… Truth to be told, it was awful! However, those first 30 seconds made sure everyone went an extra mile to understand him. He captivated the audience to a level we all were rooting for him!

 

Here are a few tips on exploring your charisma:

  • Put yourself at the same level of the audience;
  • Demonstrate energy and passion, but watch out to not be seen as arrogant;
  • Make jokes about yourself – a bit of self-depreciation is the easiest way to level out with the audience;
  • If you’re nervous, tell people about it and ask them for their patience and help;
  • Don’t call yourself CEO, CFO, CTO… odds are you work in a 5 people startup, so, at most, you’re the “janitor in chief”;
  • Share personal experiences and stories;
  • Don’t take yourself too serious and laugh!

 

4) Don’t read or memorize the exact words

If you follow our tips, you will be repeating your pitch dozens of times. Naturally, you’ll tend to repeat the exact same words. I recommend you not to try to memorize the exact sentences; instead, you should remember the topics and ideas.

When you’re pitching, you’ll probably get a nervous; we all do. That’s when mental blackouts happen. When you memorize sentences and you forget a part of it, even a small sentence, odds are it you won’t be able to recover. That happens because when you memorize sentences, they only make sense together.

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Instead, if you focus on remembering topics and ideas, you won’t feel that lost. You’ll be able to adjust your speech, even if you forget part of it.

If you’re afraid of forgetting things, you can have cue cards, with bullets for each topic, as most TV hosts do. Do not write sentences, but only keywords. They are all you need to remind the ideas.

 

5) Hacking time control

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Managing time is the biggest issue in pitches. If you finish it too early, it will look like you don’t have much to say. If you delay, part of your presentation will be cut off (yes, people turn off microphones on pitch competitions).

But you can hack time management so those issues never happen to you:

a) Know how your pace changes on live pitches

Some people tend to go faster, when compared to their training. Others, tend to add sentences, making the pitch slower. You need to know which of the 2 you are, so you try to control this deviation when the time comes.

 

b) Define 2 milestones/ time checks in your pitch

I usually define 2 time checks in my presentation: one half way through, and one on the last minute. I ask someone in the audience to raise a small banner to let me know when I reach those marks.

I know in which slide I should be at each time check, and that allows me to adjust my pace. The first one will give you the chance to speed up/ slow down. If that doesn’t work, the second time check, will tell you to go for “plan B”.

Do not use a smartphone or tablet with large timer in front of you. It will get you distracted. Go old school, and just ask someone to raise a piece of paper.

 

c) Have a “Plan B” in case your timing is off

I always prepare myself for both scenarios in case I’m running out of time, or if I have too much time left, after the last minute time check.

If I’m running out of time, I already know what information/ slide to skip. If I have more time than I expected, I know what to add there. By planning ahead, people will never notice when your pace is wrong.

The worse you can do is try to speak faster, in order to cover all slides if you’re going late. People just won’t understand what you’re saying and you will look like unprepared. Unfortunately, that happens every time. If you plan ahead, and know what to skip, it won’t damage your presentation.

 

 

6) Choose 4-5 people to look at, and rotate clockwise

This sounds silly, but those who’ve pitched in front of a large audience knows what I’m talking about: you never know who to look at. Sometimes you end up trying to look at everyone, which makes you look like someone with a deep mental disorder. Other times, you end up staring at a single person, making everyone uncomfortable.

You shouldn’t have to think about this! But solution is easy:

  1. Pick 4-5 people in the audience, spread geographically;
  2. You will only look at those people;
  3. At every 20-30 seconds you switch, rotating clockwise.

This way, you won’t need to think about it and won’t look weird.

Combine this rotation with 3-4 stage crossing (side by side), and people will think you’re a pro!

 

7) Made a mistake? Don’t mention it!

No matter how many times you revise your presentation; sometimes you will end up leaving an error behind, just to realize in front of everyone. But don’t worry; odds are no one will notice it! So just pretend everything is ok and move forward.

 

8) Water bottle: your best ally

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When you’re presenting, every second seems to last 10x more. The adrenalin released in your body makes you more alert, in such a way things seem to be in slow motion. Thus, any pause you take will look like eternity, for good or for bad.

You can use that to your advantage. If you’re too nervous and feel your voice shaking a bit, I recommend you to take a small pause, and there’s no better excuse than drinking some water. Those 3-5 seconds will feel like a minute, and will help you get back on track. That’s why I always carry a plastic bottle of water when pitching.

Having said that, avoid plastic cups! If you’re really nervous, your hands will be trembling you will probably end up spilling water all over you!

 

9) Say no to laser pointers

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On the shaking matter, laser pointers are “no-go’s”: if you try to point at something, they will show everyone you’re trembling. If you need to use it, the best tip is to never try pointing at an specific point; rather, make circles around it, never leaving the pointer stopped.

That said, pitches and pointers don’t match. If you have 7 minutes, each slide (15-20 seconds) should be self explanatory; each slide must carry only one information. As such, you shouldn’t need to use a laser pointer. If you do, odds are your slide is not right…

 

10) What to wear?

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You’re not alone: those who haven’t been to pitch events always have that sort of doubt. Rules here are: blend in and don’t pretend to be someone else. Ok, I know I haven’t helped much, so I’ll explore those points.

Each business circle has its own dress code. If you’re an investment banker, you will always be wearing tight suits and expensive ties. Luckily, on “startupland” you’ll only need to wear jeans and t-shirts.

Don’t mistake this dress code and as a “lazy pass”; no one want to watch the “Unabomber” present. You’re still expected to shower, shave, comb your hair… You cannot use that 1997 t-shirt and, of course, no flip-flops and shorts. Believe me, I’ve seen people wearing flip-flops on pitch events… more than once!

You should maintain your personality, though. If you’re 60 years old, wearing a mad Einstein t-shirt will just make you look ridiculous.

Here I can share my own experience. I’m 36 and had an executive career before; so I had a more formal wardrobe. My networking was used to see me like that. However, in startup events I’m older than average. In one hand I don’t want to look like the dinosaur in the room; on the other, I just don’t want to look ridiculous. To me, jeans + shirt + blaser combination is the perfect solution. It won’t shock anyone and it feels like myself!

Use some common sense: don’t overdress; don’t look like a beggar; don’t pretend to be someone else!

 

Public speaking is part of your job, so suck it up and work on it. With a bit of science and the “street” tips above, I bet you’ll nail it!

Traction: what to show when you’re still an early stage startup

Startups are 70% execution, 15% sweat, 10% luck and 5% the idea. As such, traction is one of the most important aspects of a pitch. It shows everyone that your company is more than a nice Power Point and that you actually can deliver what you plan. It’s a mandatory piece.

 

Ideally, use real results!

 

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Source: AgendaPet‘s Pitch Jan’14

Perfect scenario: use top line (revenue) evolution. A growing graphic, doubling revenues every couple months, is all you could dream of. It shows your business has potential and is in a good momentum. More than the actual amount, investors are concerned with the growth pace. I don’t remember who said it, but: “growth solves everything if you’re a startup”.

If revenue evolution doesn’t make sense for your company, you can replace it by your must crucial variable, such as customer base, visitors, sessions, quotes, calls…

Word of caution: if the base is too low, do not try to trick your audience; even though going from USD 10 to USD 20 is a 100% growth, it’s still only 10 bucks… just don’t do it!

 

If you’re not there yet, focus on conversions!

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Source: AgendaPet‘s Pitch Jan’14

If you don’t have growing results to show yet, you should focus on conversions. Conversions tell how good is your execution and give a good sense of potential results. If you’re still in the test phase, or don’t have a history yet, using the conversion you’re achieving will do the trick.

I also recommend showing the conversion differences form paid/ organic acquisition channels, so your audience can analyze how healthy is your go to market strategy.

If churn and/ or repeat rate is important for your business, I suggest you to include that as well, so the audience has a complete vision of customer acquisition and maintenance flow.

All in all, when you focus on conversions, you’ll be providing the audience the means to calculate the lifetime value of your customers.

 

If you don’t even have conversions to show… go with milestones!

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Source: AgendaPet‘s Pitch Aug’14

Every time I give a pitch workshop I get approached by an early stage entrepreneur, super worried because he/ she doesn’t have real results to show yet. Well, I won’t lie to you… it’s not ideal, but there’s a way out.

You need to show evolution; how better off you are today compared to 4 weeks ago. People need to see that “you’re on fire”; that your company is evolving steady and fast.

In some cases, specially B2B businesses, it may be the close of a big contract; being granted a patent, getting a much needed approval from an agency, closing a partnership, reaching a development milestone, are other options.

One rule here, though, is not to show what I call “almost results”; for example, you’re almost closing a contract, but haven’t yet. Another: you’re almost done with development… Think about it: you have no results to show and what you show is not 100%. It sounds bad; too bad! So, go only with the 100% done milestones.

Also, I recommend showing the milestones from the near future, so people understand the importance of current achievements and what’s next.

 

Showing traction separates the “talkers from doers” and is the perfect closure for a pitch, even if you’re early down the road. Be smart, be concrete and, most importantly, don’t BS! Result should speak for itself!

 

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Pitch Review: Pagecloud

What a better way to improve your pitch than establishing benchmarks? With that in mind, we’ll start to post review of some pitches (send yours below), with our scorecard and notes on best/ worst points.

Pagecloud (8.3)

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What I like the most?

Perfect example of what a Demo should look like. Notice that he takes the problem his target customer has (need to make quick adjustments to a page, without a tech guy) and reproduces the experience this typical user could have. Flawless!

 

What I like the least?

Poor content. Though there’s a lot to be said with the demo, I feel like many of crucial aspects (team, market, differentials…) were left aside.

 

How would you rate this pitch?

 

Would you like to suggest a pitch for us to review?

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What’s addressable market anyways?

An important part of a pitch is describing your market. Audience needs to know how big of a problem you are solving; how common it is, and to what extent of population it is appealing.

“The bigger the better” you might think… well, think again! On the urge of making the opportunity look bigger, we tend to generalize the target audience; that’s a mistake.

What really matters (specially to VCs) is to know your addressable market; what portion of the entire vertical/ industry you’re addressing is really your target.

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Source: Wikipedia

 

Real life example

I’ll take AgendaPet‘s pitch again as an example. As you know, AgendaPet is a pet services marketplace, so people can book the best professionals for their loved animals. Yes, we’re that cool!

In that sense, our overall market are the 1 billion pets all over the world. However, we believe AgendaPet’s focus will be on the #1 and #2 markets, US and Brazil respectively. That’s the served market. More than this, we understand our target (addressable market) will really be those people who are responsible enough to visit a veterinarian regularly; they will be the ones to whom our service will be more appealing. We could even take it one step further, and drill it down again to only the urban areas we plan to service roughly 50% of the market).

Instead of 1 billion pets we would be addressing “only” 30 million dogs and cats, or 3%. But hey, that’s still a shitload of potential customers!

Side note: if after making the math behind the addressable market you are left with an irrelevant ($) potential, well, that’s a perfect time to rethink your business.

addressable mkt

AgendaPet’s Pitch excerpt

 

Why bother all the trouble?

Well, simply put, the addressable market numbers are the only ones you should (certainly VCs will) use to make your projections; at least you should use those numbers to check what portion of overall market you plan to dominate. That will give a reality check on your predictions.

 

The fallacy of the “1% of the market”

You probably heard that before: “if we get only 1% of the market… we would be rich”.  To me, when I hear that, it triggers a mental response: “if I dated only 1% of the Victoria Secrets Angels I would definitely be a very happy man”.

The fallacy of the 1% of the market is a huge red flag in pitches. It means that you either haven’t done your homework on market analysis, or that you’re incredibly naive.

Getting to your expected market share should be a result of your business levers (conversion, CPA, investment…), not the starting point. The result could even be higher than the 1% (of the addressable market). Take Uber, as an example: if you were the entrepreneur behind it, would you have ever guessed you would reach 40% of NYC’s individual transportation market? I bet you wouldn’t.

 

To conclude, let’s all repeat out loud, in cult like unison:  “addressable market is the only market number it matters; it shows the market you’re really competing for.” Or keep thinking about 1% of Victoria Secrets Angels…