Craft Your Pitch

Crafting your pitch is an art form, and just like any true mastery of the arts, it requires a ton of time and focus.

Your pitch isn’t about a Steve Jobs-esque delivery and Macy’s Day Parade pageantry. It’s not about optics. It’s about doing a phenomenal job of thinking deeply about how your business will operate and then taking all that information and summarizing into as few words as possible.

In this Phase we’re going to go into a bunch of detail about how to craft every element of your pitch, as well as how those elements come together in presentation form such as a pitch deck and a business plan.

We’ll approach this in two big parts:

There’s no version where you knock all of this out in a week. A startup can work on their pitch documents for months, although that doesn’t mean you have to wait months to begin fundraising. Even while you’re in the process of pitching investors you’ll be constantly updating your docs as you get real world feedback from investors.

Our goal in this section is to give you portions of the business plan to work on so that you can start the process of refining your approach.

There’s two ways to think about your pitch – the short version and the long version.

The short version is a very well crafted, bite-sized description of the problem you solve, why your solution is amazing, and perhaps how big the market for that opportunity would be. It’s also called your “elevator pitch”.

The long version is all the details that back up your grandiose claims. That comes in a few form factors such as a business plan, a pitch deck and an executive summary. We cover those elements in “Part 2: Key Pitch Assets”.

Each of these elements draws from the same 10 aspects of a modern startup’s business plan. In this section we’re going to walk through each element, one at a time, to give you the best way to truly understand the full anatomy of a business plan, and by way of that, every other type of investor document you will need.

The 10 sections of a pitch include:

• Problem, Solution & Market Size
• Product (How it Works)
• Revenue Model
• Operating Model
• Competitive Analysis
• Customer Definition
• Customer Acquisition
• Traction
• Funding
• Financials

Bear in mind – this is a ton of work! You don’t need to complete all of these in a single sitting and many of these will evolve over weeks and months. Right now, just get a good feel for what each of the pitch elements look like so you can pick a comfortable place to start.

Most people start with the Problem, Solution & Market Size and build from there – so let’s begin with that.

The heart of every startup pitch involves 3 elements - Problem, Solution and Market Size.

The best startups solve painful problems in huge markets.  Long before they become all the apps on your phone or your favorite restaurant chain, they spent countless cycles refining how they would communicate this problem to investors, employees and customers.  

These three elements also form the basis for your Elevator Pitch.  In its shortest form, if you were pitching your business to a potential investor, they would want to know these three critical pieces of information before they would listen to (or care about) the rest of your plan.

Simple, right?  Well, not so much.

A seasoned Founder may iterate on this pitch hundreds of times until they get it right. It's not just words, but an understanding of the business itself that comes with lots of cycles and experience.  The constant revision until you get it right is what makes this so hard.

Before you do anything else - create financial projections, detail the competitive analysis, or put a funding plan in place - you need to nail this part.

Every great company starts by solving an important problem. The more accurately you articulate the Problem, the more valuable the Solution will be.

In many ways, the Problem is the heart of your concept.  It’s what intrigues people about the rest of your business and ultimately becomes the focal point for everything you build.  Building a great case for your problem isn’t just about stating the problem, it’s about building an engaging story around that problem that people can empathize with personally.

Let’s use the example of Netflix who initially solved the problem (back in the days of yore) people had while having to travel to the video store to rent a movie.  Netflix sought to avoid video stores altogether and instead deliver movies in an envelope to your mailbox, allowing you to keep the movie as long as you’d like.

At the time, the Netflix problem statement would probably look like this:

That’s a pretty simple problem statement, and it’s accurate.  Notice that it doesn’t include any reference to the solution.  We’ll get to that later.  A good problem statement focuses entirely on the problem so that the audience can build a powerful case for that problem and ideally connect to it personally.

A great problem statement has a lot more character to it.  It tells more of a story and provides an emotional connection to the solution.  Building a better story takes more effort, but the payoff is real because you can draw your audience into your world and get them excited about your journey.

There’s a good chance that your product solves multiple problems, and that’s wonderful.  Right now, however, it’s time to lead with just one of them – the biggest problem you solve.

There are two important reasons for this.

In the example of Netflix, we know that movie delivery solves lots of problems – convenience, movie selection, and cost effectiveness – among others.  Yet some are more important than others.  If Netflix was far cheaper than its rivals but less convenient you could argue that it could fail.  Therefore, Netflix needs to be cheaper, but more importantly it must be more convenient.  We then realize that “convenience” will be our lead problem.

This doesn’t mean we will ignore the other problems.  We can certainly cite those as well, but we want to tighten our focus initially so that we can talk about this problem first, build a story around it, and then expand into related problems to solve later.

Not all problems are created equal.  The value of a problem is proportionate to how painful that problem is.  The more painful the problem, the more powerful the solution.

You don’t have to be addressing a life-threatening problem to make it powerful.  You need to focus on the detail of the pain in your problem.  Even “convenience” can be presented very differently if it isn’t given enough character.

Compare these two versions of the same problem:

Both statements have the same intent, but the second one details the pain.  You don’t want to hope your audience will remember what fighting traffic was like – you want to tell them.  You want to remind them of the nuances that make “going to the video store” such a miserable experience.

As emotional beings, we attach to things we can relate to personally.  The vision for your product is no different.  The more your audience can relate to your story the better they will understand it and want to connect to it.

There are a handful of ways that Founders tend to build a relatable story:

Any of these approaches can be used to create a story around your problem if they naturally work.  If there’s nothing particularly relatable about your product or story (it may just be too specific) don’t torture it.  These techniques can help communicate your problem more effectively, but they aren’t an absolute requirement.

Now that you have a sense for how to pick your problem, to focus the pain, and build a story around it, we can construct our problem statement in a very deliberate manner:

• Biggest Problem
  We determined that convenience was the biggest problem we were going to solve.  While other problems like cost and selection were interesting, if consumers didn’t think Netflix was more convenient, they just wouldn’t use it.
• Pump up the PainIt’s not just going to the video store that’s a pain, it’s all the frustration that involves making that journey.  We expanded upon just how painful the convenience problem is.
• Tell a Story
  We then began to build a story around who feels that pain and how it was something our audience could relate to.

Even though you know the elements of a good problem statement, it’s still possible to articulate this poorly.  Just assume the first 20 times you pitch this problem (maybe a lot more!) you’re going to refine it.  Don’t try to get the definitive version right out of the gates.  It’s nearly impossible.

Here's a horrible way to articulate the problem:

The video rental industry has a categorically broken distribution model when delivery video-based content to consumers.

Is that true?  Yes.  Is it relatable?  Not at all!  Remember that facts alone are not a compelling narrative.  A good problem statement isn’t just correct - it’s compelling.  It pulls the audience in and gets them fired up.

Compare this to the version we developed earlier where we detailed the pain more acutely:

Going to the video store requires fighting traffic, wandering the aisles and waiting in long lines just to get a single movie.

If we really wanted to get creative, we could try to build a story behind who is frustrated by using a character or a relatable scenario as well.  This is helpful but not a requirement.  If it doesn’t feel like adding a character tells the story better, leave it out.  Less is always more if it gets the job done.

The goal of the problem statement is not only to garner the attention of your audience, it also serves to make the solution look amazing.  Next, we are going to dig into the Solution, but mind you we’ll be tweaking each element – problem, solution and market size – as we go.  Iteration is our friend here!

Once you've articulated the Problem your next step is to think about how your Solution fixes that Problem beautifully.  This requires just as much effort to keep the answer short and punchy as the problem statement. If we’ve done a good job of constructing the problem statement, our Solution should be quite obvious.

Your Problem Statement should set the stage for your Solution to shine.  In the case of Netflix, we did a respectable job of explaining how painfully inconvenient going to a video store is.

We want our solution statement to connect directly to that problem – before we get into any other part of the Solution.  In the case of Netflix, our solution involves allowing anyone to watch movies streamed directly to their home or delivered to their mailbox (in case you forgot, Netflix also delivers DVDs!)

Voila!  In just two sentences we’ve given a potential investor an easy-to-digest problem/solution statement.

What’s important here is what we’re not including.  We’re not talking about the cost savings or the ability to get streamed content on multiple devices.  We will certainly discuss those benefits as dig into our pitch, but we want to hook the audience in with our strongest value proposition from the start.

Now that we’ve lured the audience in with a well-articulated problem and solution it’s time to expand our use case a bit.  This is where we can start to expand upon additional problems that our solution can address.

The cadence is essentially the same – starting off with the problem and then citing the solution.

Typical Pitch Cadence:

• Primary Problem / Solution
• Market Size
• Secondary Problem / Solution
• Tertiary Problem / Solution

Later on in the presentation you will dig into How it Works and perhaps a demo.  For now, just make sure that your audience is compelled enough by the business case to care about how it works. Remember that you don’t need to include every last problem or solution you’ve come up with.  If the Primary and Secondary problem/solution propositions are compelling that’s really all you need!

Solving the Problem beautifully is nice and all, but if the Market Size of the Problem isn't big enough, you're not likely to get investors very excited.

The Market Size explains just how much potential for growth your startup has.  Investors want to know you're solving a painful problem in a giant market. If you can combine those two factors, you'll generate a lot more interest.

The problem starts when people don’t realize they are using different terms interchangeably.  Are you being asked how many people could potentially use your product or how many people will use your product?  Nearly every person on the planet may have the ability to watch Netflix, but that doesn’t mean the total market for Netflix is the entire population of Earth!

There are some nerdy things you can skip when it comes to presenting your business plan, but unfortunately this isn’t one of them.  You really do need to understand the difference, so let’s make sure you understand the differences.

Your Market Size is broken into three pies from big to small:

• Total Addressable Market (TAM)
  Addresses the question: “How many people could potentially use this product?”  It doesn’t mean how many people will use your product.  This is the question you’ll get asked the most, and the answers are often the most wrong. We’ll get to that later.
• Served Addressable Market (SAM)
  Filters the whole TAM by how many of those customers you can actually acquire.  Remember you can only serve as many customers as your sales and marketing channels will acquire.  You can’t serve customers who have never heard of you!
• Target Market
  Determines who are your most likely customers.  Imagine you ran a banner ad online and presented it to 100 people.  They all watch movies.  Which of those 100 is most likely to click and buy?  That’s your target market.

Companies start from an initial Target Market then grow as their Served Available Market expands, usually as they have more financial resources to expand sales and marketing.  In most cases, they never grow to their Total Addressable Market because they face competition, changing buying behaviors and product obsolescence.

Getting to an accurate Market Size is hard.  You’re probably going to get it wrong, and that’s mostly OK.  In a perfect world, you could simply Google “Market Size for the Product I invented 9 seconds ago” and you’d get stats, charts and graphs that would make the nerdiest MBA swoon.  Chances are, you won’t find any of that.

You may not have access to the right research or you may be inventing in a space that does not yet exist.  In each case, you’ll still need to draw from available sources of information that could give you some baseline for sizing your market.

We will explore how to derive your market size later in the section entitled “Customer Definition”. For now, just recognize that having an accurate estimation of your Total Addressable Market will be important.  For our purposes, we’re going to build our pitch around the largest pie – Total Addressable Market – and you will most likely do the same for your startup.

Once you’ve figured out how to build a reasonable TAM you can then get back to the business of constructing your pitch using this new key ingredient.

How you apply this key ingredient makes all the difference in the world.  Watch what happens when we reduce the size of Netflix's TAM by just modifying the Problem statement to make it a waaaay too specific using a bizarre 1980’s movie:

“For fans of Fletch, going to the video store requires fighting traffic, wandering the aisles and waiting in long lines just to get see Fletch.”

We haven't even explained the Solution yet and already you're probably thinking "How big of a business could you build on helping people rent Fletch? I mean hey, it's a good movie, and probably a seminal work by Chevy Chase, but c'mon!"

You’d be right.  Unless we want to build a company around a single movie, we haven’t applied the problem to a big enough market.  If we want to make the market size matter, we have to point the problem to where the biggest addressable audience is.

Now let's try that again, only this time we'll use a much larger Market Size:

“For over 90 million Americans going to the video store requires fighting traffic, wandering the aisles and waiting in long lines just to get a single movie.”

Notice how with just a small modification we gave you have a real good indication of how big this Problem really is. 90 million Americans represent a lot of dollars spent. Even if you don't entirely understand the problem, you can certainly understand that 90 million people probably add up to a pretty big market opportunity.

You don't need to have the world's largest market, but be mindful of going after a market that is obviously too small (like the people renting Fletch) for fear of turning people away before they even have the opportunity to hear you out.

Now we've got a nice understanding of the Problem, Solution and Market Size. The next step is to distill that explanation down to an easy-to-remember bite-sized sound bite that still covers all the bases.  This is also known as the “Elevator Pitch”, a quick way you can explain your business to someone in 60 seconds or less.

Here’s our Elevator Pitch:

“For over 90 million Americans (Market Size), going to the video store requires fighting traffic, wandering

the aisles and waiting in long lines just to get a single movie (Problem).  Netflix allows anyone to enjoy

thousands of titles streamed directly to their home or delivered to their mailbox. (Solution)”

Over time we are going to work on paring that down more and more.  Maybe after talking to enough people we notice they don’t react to the part about standing in line, so we nix that.  Or perhaps they ask about how much it costs, so we modify our pitch to include the pricing.

The structure we used to get here is just a way to frame your thinking, not an absolute requirement for what you can or cannot say.

Your pitch may be one of the single most important tools you use to communicate your brilliant idea to the world. Most great pitches you hear, like famous advertising slogans, are the result of countless hours spent refining, gathering input and refining some more.

The key to getting it right is to test it often. Give the pitch to anyone who will listen. The changes you’ll need to make will quickly become obvious when you keep getting asked the same questions.

A well-rehearsed and smooth pitch will open all kinds of doors for you. It’s well worth the investment.

Explaining your product is a delicate balance between providing enough excitement around how amazing the product is and not droning on about every last detail.

Your goal here is to get your audience excited about why the product is special - not necessarily offer every painstaking detail about how it works.  Think of it like being at a car dealer showroom and having the salesman explain to you why some shiny sports car is so awesome.

As a customer, you want the big highlights - what special features does it have that make it amazing.  Maybe it's got a state of the art sounds system (and you're a music lover). Or maybe it's got a 500 horsepower engine which makes it crazy fast (because if you're not first, you're last!).  Or perhaps the styling and color make you dream of having it in your garage.

That's really all you need to know to get your checkbook out in most cases.

Now maybe that's not enough for you.  Maybe you're a total gearhead and you want to know the cubic inch size of the engine block, the braking power from full speed and the specific type of transmission it uses with gear ratios.  But there's probably a 99% chance you're not that person.

In a similar fashion, chances are your audience (most likely an investor) doesn't want to know the super specific details.  They want to know why the product is special.  You can of course provide both, just extract the overview from the detail so you don't overwhelm most of your audience but don't come up short with special use cases.

Packaging your product offer into something beautiful comes down to a fairly simple exercise that you can use to make sure you're limiting your pitch to only the best elements.

The exercise starts by listing out all the benefits that your product has.  There may be many, but the list doesn't have to be every last detail - it just has to be comprehensive enough so that you can pick the best features.

A common mistake is to try to cover every possible feature.  This leads to a really unwieldy approach.  Imagine I was pitching the idea of a word processor (a la Microsoft Word) in the 80's.

A terrible pitch would look like this:

“Our new product, Microsoft Word, will allow users to instantly make changes visually, offer spell check in

real time, a broad array of formatting options, add tables, insert charts, add images, display a print preview,

change fonts, adjust headers and footers, save to multiple formats, and automatically show pagination."

The second exercise is to take all of those features and ask yourself "Which of these is really what makes the product the most special?"

In this case, being able to avoid using a typewriter or crappy word processing machine at all is the big win.  Therefore, all of the features that don't center around replacing the incumbent solutions can get punted to the detail description.

When you strip away only the best features you start to get a more accurate feel for what really makes this product special:

"Our new product, Microsoft Word, will allow users to visually compose their document on a PC and make infinite changes in real time, making the need for typewriters and clunky word processors obsolete."

Once you've lead with the heart of why this new product is so special, then you can get into the details.  But before you do that, you have to be able to frame the use case of the product.

The best way to support an explanation of how your product works is to first give people a relatable sense for how your customer would use it.  To do that well you will need to start by helping your audience understand exactly what frustration your customer has.

You've seen this technique a million times even if you've never realized it.

Remember those awful "As Seen on TV" spots that ran late night which start out the same "Do you have this awful problem? (cue overly-frustrated person shot in black and white trying to do some every day task with a massive amount of frustration!)

They are trying to frame the problem in a way that is relatable to the most number of people.  While the technique comes across fairly cheesy in this instance, the goal is quite simple - put your audience in a position that they absolutely can relate to the issue.  This is the same technique you would have used when framing the "Problem" and comparing it to the Solution.

Here's how we'd do it for our world-changing Microsoft Word pitch:

“Jim works at BigCo and he's responsible for creating and sharing dozens of TPS reports every week.  The reports are fairly similar yet he's stuck with a blank sheet of paper every week slowly typing each out on his 1960's era typewriter.  No matter how efficient he gets with putting together his information, he still spends 15-20 hours per week actually typing up the information to share.  If he makes mistakes such as spelling or formatting errors, he has to start all over from scratch."

Boy, that sounds miserable. Poor Jim.  We can easily envision how awful it would be to have to repeat these tasks over and over.  What's more, we can easily imagine there are lots of people working in big corporations that have to go through the same headache.

Once you've established the Use Case Scenario, now you're in a great position to dig into the details of your product in the "Winner Walkthrough".

The Winner Walkthrough is where you slow things down a touch so that you can highlight each and every feature as it relates to the problems that your customers so dearly face.

Now you get to dig into the product details, but only in context for how it affects Jim so that the points are more relevant.  If it feels like the "Jim" Use Case is too narrow, you can expand the Use Case to be more encompassing or you can provide a few different Use Cases that then highlight the features that apply more specifically.  This is often done when you have multi-sided marketplaces that involve benefits for both Buyers and Sellers.

Let's do a walkthrough for Jim:

We've just covered some of the biggest features, but instead of isolating that presentation to just the features, we've directly woven them into a narrative that people can relate to.  You can see why people like Jim would be wildly excited about these features because you understand exactly what was wrong before.

This isn't to say that you can't list the features themselves or provide standalone explanations.  It's to say that if you can frame context you put the story that's in your head into other people's heads.  People remember stories, not bullet points.

At this point you may also want to get into the "Secret Sauce" of what makes this product work.  However, you don't always have to.  Many Founders like you get nervous about sharing the secret sauce for fear that it will be stolen.  While this almost never happens, it's still a prevalent concern for many.

If investors like what the product can do, they will ask about the Secret Sauce. You can make that a separate document that you only share with people who express that deliberate of an interest.

How you present the secret sauce will vary wildly from product to product, whether it's your famous recipe for BBQ sauce or the source code to software.  It could also be less product related, such as how you acquire customers or how you manage costs.

Once you've established the big benefit, the use case, and the walk through, don't ignore the wrap up.

The Wrap Up is where you reiterate how the product works, but also incorporate the established Use Case as well as hint toward the size of the opportunity this product can provide. For example:

“Microsoft Word will fundamentally transform how documents are created.  Within businesses alone, there are over 100 million people like Jim globally facing the same problem, with tens of millions more entering the workforce every year.  We envision that within a decade every typewriter and existing dedicated word processor will be replaced by a copy of Microsoft Word."

Make the ending your own.  Draw your conclusion and frame it accordingly.  Do not leave the big conclusion a big mystery, and don't assume your audience will have your same conclusion.  You've been working on this for years, they've been listening for 20 minutes.  It's your job to paint the exciting future, not theirs.

If you zoom out you can start to see a fairly specific cadence and structure that you can use for your Product pitch:

If you can stick to this formula you should be able to convey a story that's both digestible and memorable.

Your Revenue Model is simple - how are you going to make money?  More importantly, how are you going to be profitable some day. Don’t let the Silicon Valley myth of “valuable companies don’t need a revenue model” become part of your pitch.  All companies need a real revenue model that can be reasonably explained and agreed upon by everyone.  Well, not by everyone.  By Investors.  Let’s be real.

You don’t want to be this Founder:

Many businesses lose money before they make money - it takes time to build a profitable business.  So your revenue model doesn't need to be an instant ATM of profits.  In the near term you're charting the path to profitability, not a reflection of current profitability.  

Your revenue model can be broken down into two areas - how you will make money and how that plan will scale.  Your Financial Projections are the detailed view of this model that you'll tackle later.  At this point you’re going to talk about the mechanism of how your revenue model works.

Describing how to make money tends to get more complex with businesses in new markets.  If you're opening a restaurant, everyone knows you're going to sell food.  You don't need to waste too much time here.  But if you're creating a pioneering mobile app for senior dating, you'll want to spend serious time digging into the mechanics of how you will convert visitors into customers.

The first portion of your explanation should detail each Revenue Channel.  

How you make money isn’t just about the mechanism (advertising or subscription) but it’s also about the amount of revenue that channel accounts for (30% in advertising, 70% in subscriptions).  This helps investors understand how reliant you are on each revenue channel.  You don’t have to be 100% accurate with how you split your revenue channels, but more relatively accurate so that investors can see how much you are relying on those channels specifically.
The second part of that explanation is how much money you intend on generating per that channel. This is most often reflected as the “price point” of each sale.  Some products with a high Cost of Goods Sold may require that you explain both items in the Revenue Model for them to make sense.  (We’ll tackle this later).  

The goal here is to easily explain how you intend on making money in a short, concise manner.  In most cases you can focus on how you will drive revenue first, and then dig into how you will manage costs associated with that revenue.

Once you've established that someone will pay something for your products, the next step is to explain why more than two people in the world care enough to part with their hard-earned dough.  This is called “Scaling Revenue” and it’s about as important as explaining how you’re going to make revenue at all.

The finite details will be presented later in your Financial Projections, but you want to be able to add some narrative context to the numbers so investors can understand how you’re thinking about scale.

Revenue generation tends to fall into two phases - Discovery and Scale.  

Discovery Goals are a good way to isolate the tests you’re planning on running and the assumptions you want to validate.  They give you some time in a sandbox to adjust your forecasts to reality while explaining to investors how you plan on getting to more accurate estimates.

That’s a much healthier explanation of how you intend to adjust price points based on testing than just assuming everyone is going to pay $20 per month forever with little to no testing.

Don’t paint yourself into a corner by blindly making assumptions you can’t possibly prove.  It makes you look silly when you present the data because you’re making huge projections on hollow premises.  Think of “Discovery” as the place you put all the answers you don’t know.  It’s a safe, happy place.  When an investor challenges you on your assumptions simply say “We don’t know that yet, but here is how we plan on validating our assumption.”

Once you’ve proven your basic assumptions for how revenue works, you’ll want to explain how you envision those numbers scaling into billions.  Or millions.  Or tens.  Whatever numbers are wildly impressive to whom you’re trying to convince.

Your ability to show that your model can scale is directly tied to how much value the business can create to investors.  If you can scale to the size of Google, you can raise billions of dollars in capital.  If you can scale to the size of the largest lemonade stand in your cul-de-sac, you can raise ones of dollars in capital.  (Unless it’s a really, really big cul-de-sac.)

The degree to which your revenue model will scale will require two friends who are inextricably linked:

1. Total Addressable Market - The maximum number of customers who would ever buy your product.
2. Customer Acquisition Plan - The plan to acquire as many of those customers as possible.

You can’t scale the business to be bigger than your Total Addressable Market and you can’t scale beyond the number of customers you can acquire in that market.  Those are super important factors which is why they have an entire section dedicated to them.  

If you were giving this pitch sequentially, you would have mentioned how big the market is early in the pitch (or in the business plan itself).  You’ll likely explain your Customer Acquisition Plan after the Revenue Model, so you’ll be hinting to how many customers you can acquire and then explaining that in detail later.  You’ll introduce your plan to scale something like this:

Think of it like building a skyscraper and every floor requires a foundation that the next floor can be supported by.  This plan, this pitch, this idea is all supported by a series of assumptions that build toward your financial projections.

This all sounds well and good, but you’re sitting there asking:

“How could I possibly know how many customers I can acquire in Year Four or what how many times my customers will recur after a single purchase?!”

You don’t.  You have no idea.  And nor does anyone else - and that’s OK.

Your goal right now isn’t to have exact numbers, it’s to have a model in place that allows you to plug in assumptions to help determine how big or small this opportunity might be as you discover more.  No one in the history of startups has presented a plan that was accurate at this stage.  But smart Founders can articulate what factors could cause the outcomes they are trying to get to.  That’s what this is really about.  

Revenue is only half of the larger equation when it comes to how your business operates.  There’s also the cost side, which for many businesses can have more impact and apply more innovation than the Revenue Model.

We’ll tackle that in another section - the Operating Model - which digs into what aspects of your costs and operations should be meaningfully considered.  

The reason we tackle these separately, and the Revenue Model first, is because if you can’t articulate that you can generate revenue, convincing folks that you have a way to manage expenses is a fruitless exercise.  

If the Revenue Model is all about the clever ways you’re going to make money, the Operating Model is all about the clever ways you’re going to manage costs and efficiencies to earn it.

Often the Operating Model gets the least amount of love.  That’s because we’re so worked up about solving a problem and creating a path to revenue that the idea of isolating critical cost factors and driving operational efficiencies seems so far away.

In other cases, the Operating Model actually is the business.  Think of a young (but still bald) Jeff Bezos creating Amazon.com for the first time.  He thought deeply about how the supply chain for products using e-commerce could fundamentally change pricing.  Selling books wasn’t a new industry - but changing the methodology for selling books (e-commerce vs. physical stores, centralizing inventory into massive distribution centers) was revolutionary for its time.

Your Operating Model may not be that revolutionary - it may be downright boring.  However, showing that you’ve thought carefully about how you will manage critical costs and streamline operations shows you’ve combed through every problem and opportunity in your cost model.

You’ve got a ton of costs that will go into your business, from buying inventory to leasing a questionably suitable office space.  When presenting your costs to investors, they don’t care about all of your costs - they care about your Critical Costs.  These are the costs that will make or break the business if you can’t manage them appropriately.

When you’re talking about Costs you want to distinctly separate Critical Costs from every other expense.  Critical Costs are those that prevent you from ever growing the business or becoming profitable. They aren’t your biggest line items that just happen to be on your P&L.
Your office rent may be the biggest expense today, but as you grow it will become exponentially smaller compared to other costs.  It’s an important cost, but not a critical cost that will determine the future of the business.
You want to center the conversation among investors to just the Critical Costs.  That way you can say:

“Hey, if we can manage these costs, the rest of the expenses will either be insignificant or fall in line with scale.  But.. if we don’t manage these costs, it’s game over!”

Often your Critical Costs mature over time, growing or shrinking.  

While it only cost you $10 to acquire your first 1,000 users, it may cost you $20 to get the next 10,000 and so on.  Conversely you may have to pay a vendor $200 to manufacture your first 100 units, but $100 to manufacture a run of 500.

You’ll want to isolate these thresholds and their milestones very clearly so that an investor can understand exactly where things will get better, or in some cases, more scary!

If you’re an investor you’re thinking “Aha!  So this business is a gold mine if this team can get to 200 pizzas per day.  Let’s dig into that Customer Acquisition Plan to see what it’s going to take to get to 200 pizzas.”

Chances are if you’re building a business, you’re going to have some significant “Investment Costs”.  Investment costs are strategic uses of capital that will have a big Return on Investment (ROI) later.  It’s not the “whole cost of the business”, it’s a specific use of capital that is crazy expensive now but could be a huge win later.

The first step is to isolate what those investment costs are.  The second step is to explain how you expect those investments to pay off.

In just a few short sentences you’ve given an investor not only a good sense for where the balance of your funding is going, but also what kind of big ROI that investment could generate.  The more specific you can be about the ROI the better, such as the impact it would have on unit costs.

You may or may not have Investment Costs, so don’t get too hung up on trying to force this concept into your plan if it’s not a game changer.  You simply don’t want to list huge outlays of capital in your Operating Model and Financial Plan if you don’t have a strong position as to why those specific costs are going to greatly benefit the company.

Once you’ve isolated the Critical Costs, you then want to dig into what Operating Efficiencies you’re going to put into place to give your business a sweet advantage over your soon-to-be-vanquished competition.

Operating Efficiencies come in all forms.  It could be the way you recruit new talent, how you manage customer support costs, or the increasing value your product provides as more users sign up.

Similar to separating your critical costs from every other cost, you’ll want to separate your critical Operating Efficiencies from just general efficiency.  A great way to think about the difference is this - what can you do from an efficiency standpoint that no one else can?

Think of how obvious this would be to “Jazzy Jeff” Bezos when pitching Amazon back in the day.

If you were an investor listening to Jeff’s pitch, you would have thought “I can definitely see how getting books quickly and saving inventory costs would be a huge advantage at scale.”

Sometimes you don’t even realize you’re building Operating Efficiencies until you zoom out and think critically about what you’re doing.  For example, you may not think your upstart ad agency has any Operating Efficiencies - it’s just a bunch of creative people in a room!  

But if you look closely you’ll see that every client you serve gives your company an internal operating knowledge that can be used to acquire and service the next client much faster and more successfully.  

You don’t need to be Jeff Bezos to showcase clever efficiencies in your business.  But let’s face it - if Jeff offers to help, you should probably take him up on that!

Knowing your competition is as important as knowing your product and your customer.  Market gaps tell you where to develop your product and internal weaknesses tell you where you're vulnerable to losing customers

A solid Competitive Analysis is your way of showing that you know exactly where you stand among your fiercest competitors and that you have a way to outmaneuver them.  The best way to think of the argument you're trying to articulate is:

Here is where we can gain the most customers (offense) and here’s where we could potentially lose them (defense).

Your Competitive Analysis should start with your SWOT Analysis - Strengths, Opportunities, Weaknesses and Threats - to borrow a grad school MBA's favorite acronym. After that you can compare the competitors specifically, but until you have a firm grip on what you do well and where you fall short or the value of who your competitors are lacks a premise.

Lead with your strengths. Talk about what aspects of your product are the best in class and why your customers will fall in love.  Companies win based on their ability to win over customers.  

You don’t eat at Wendy’s because it’s less terrible than McDonald’s.  You eat there because you like their food a lot more.  You also eat there because the Baconator cheeseburger is sooo good!

Talk about why customers love your Baconator.  Talk about what you offer that just blows people's minds.  Be very descriptive and dig into how those strengths really stand out.  Don’t assume for a moment that because you understand the strengths that anyone else does.  

Examples:

• Customers dine at Ruth's Chris Steakhouse primarily because it is considered the most upscale dining experience in their city.  This lends itself well to special events that command a higher price point.
• Our customers use Tinder over traditional dating sites because they get immediate responses from potential matches and the interface is so simple it’s fun.
• Customers shop in our local boutique because they want the experience of interacting with our staff and the enjoyment of trying clothes on first hand.

The best way to present your Strengths are to start in order of your greatest strengths.  If investors don’t think your greatest strength is interesting, you can be assured that your third greatest strength isn’t going to make up for that!

In each of these sections of the SWOT Analysis, begin with a few introductory sentences like the examples above, and then offer a longer narrative explanation below.  If the investor understands the point you’re making in just a couple sentences you don’t want to belabor their attention with a crazy novel of an explanation!

Your Opportunities are all about expansion.  You realize your competition is sleeping on the job and you’re ready to pounce on that opportunity to eat up some delicious market share.  (Hm, all this Baconator talk…)

Your opportunities typically come in three flavors:

• Areas your competition is currently weak
• Expansion of your customer’s current needs
• Untapped markets

Ideally you can tap into all three opportunity categories or you have some special flavors of your own.  Your goal here isn’t to list every last opportunity, it’s to show that the market has obvious room for expansion that some viable startup like you could build a real business in.

This is one of the few times in life where it’s OK to pick on someone else!  If you’ve made it this far into the plan it’s because you’ve found a good reason that your would-be competition is dropping the ball.

When sizing up your competition it’s important to have a balanced assessment while being extra cautious not to resort to painting your competition as a weak, one-dimensional entity. Not only does this come across as desperate or negative, it says to investors that you haven’t really taken the time to do your due diligence and that you have a limited understanding of your competition.

Here’s an example of a poorly constructed competitor weakness statement:

Remember, just because a company lacks a specific feature now doesn’t mean they won’t offer it later (case in point: Instagram introduced its stories feature five years after Snapchat, and Facebook cloned the same feature shortly after Instagram). Instead, focus on how well you know the weakness exists. Show that you have done your homework and that you have a real inside track on why this weakness is legitimate.
Now let’s imagine if this were your competitor weakness statement:

The more convincing your research on competitor weakness the more excited investors will get.  Don’t skimp here.

It’s your job to not only paint a picture of what your customer needs now, but also of what your customer needs next.  These needs may not be something you can fulfill now, and that’s fine.  What’s important here is that you’re showing that you’re thinking further down the road.

Your expansion of current needs should start with obvious extensions of need and then include a few bigger picture potential areas that you may not even get to.  It’s good to show what’s more probable and then what’s possible.

If you’re not expanding into current markets then you’re moving into the great unknown - untapped markets.

Untapped markets are equally exciting and terrifying to investors.  On the one hand it get everyone pumped to think about a ton of low-hanging fruit that can be gobbled up easily.  On the other hand that fruit is often sitting in a grove that may or may not even exist.  

Your challenge is to show that these untapped markets do in fact exist (read: show your research) and that you can tackle them quickly and efficiently before your competition does.

Don’t let the idea of untapped markets be a golden ticket to make wild claims.  Untapped markets only exist if you can build a cogent case around them.  The quality of your case is the difference between an investor nodding their head and shaking it.

Demonstrating your weaknesses isn’t the same as saying “we’re so painfully vulnerable we’re not even viable!”  Every business has weaknesses, especially in the startup phase.  You can bet anyone leaning into your plan is going to jump on these immediately.

Your goal here isn't to sugar coat the nature of your weaknesses - it's to articulate them in exact detail to show that you know precisely where to build a defensible position.  Articulating your weaknesses well allows you to talk about what you're going to do about them.

In this example we aren't sugar-coating the concern.  We are highlighting the fact that Amazon will lose customers to Best Buy but are working toward a strategy to curb that customer loss with a lower price.  An investor reading that narrative would feel this is a balanced assessment of a weakness coupled with a viable counter-strategy.

Similar to the Strengths section, a great way to present this is with a few declarative scenarios of where you're most concerned so that your readers get the gist.  Thereafter, craft a more detailed description of why and how those weaknesses and threats are important.

Sooner or later (hopefully later) your competition is going to pose some serious threats to your business.  In some cases, it may not even be your competition directly, it could be looming legal issues or governance that you’ll have to contend with.

Similar to weaknesses, Founders get nervous about being bold about threats.  They think “That will scare investors away!” when in fact being up front about how you identify and mitigate threats is the best way to make investors confident about potential issues.

Your best bet is to get in front of your threats first.  Similar to your strengths, list the most painful threats first, then explain how you plan on using some Judo-style moves to take them down.

In this example we’re pointing out (before our investors can) that an increase in delivery costs for a business that relies on delivery is a big deal.  But we’re immediately supporting that concern by providing a credible mechanism to offset the threat.  

Investors may still have concerns around what the mechanics of the deals with delivery providers may be, but at least now the conversation is about deal mechanics, not whether delivery as a whole will destroy Amazon.

Think of your presentation of threats in two columns - Threat and Mitigation.  List your threat in detail, then list your mitigation strategy.  In the best case scenario you can show investors that you’ve thought of threats they haven’t even considered and already have a plan of attack waiting.  It’s that type of presentation that builds much-needed trust during the formative stages of that relationship.

Your competition can be represented as both "categories of competition” as well as "actual competition".  

In each case the goal is to be very clear about why each competitor has strengths and weakness that you're concerned about.  You're better off listing fewer competitors that are a more direct threat and showing that you know how to compete than creating a giant list of every person that has a Website that's tangentially related to you.

Defining your customer helps everyone understand who your audience really is - and who it's not.  The better you define your customer and tie that to the Problem you solve, the better everyone will understand your plan, from Customer Acquisition to your Revenue Model.

The problem most Startups run into is either being way too broad “Our audience is anyone with ears!” or way too narrow “Our audience is anyone who likes Alt Goth Punk Metal Classical Music from Saskatchewan!”

When developing your Customer Definition you’re trying to articulate a solid understanding of who is most likely to use and buy your product.  It should start fairly broad and then refine down to more specific segments.

Not every customer is your core customer.  Think of it like your favorite musical artist.  You have people that are die hard groupies.  That's your absolute core audience.  Then you have people who really enjoy the music and probably attend a concert when the band is in town. Those are fans.  And then you have people who don't change the station when their song comes on, but probably don't own a full album.  Those are listeners.

Segmenting your customer into specific audiences helps you provide a lot more clarity to Investors as to who you care about - and why.  

Imagine we were building a business plan for our new Indie band, “Rage Against Mozart” - a defining pioneer of the Rage Metal Classical genre.  Perhaps the only one.  But whatever.

We could begin to split our customers (the people who listen to our music) into three basic tiers - Groupies, Fans, and Listeners.

Examples:

• Groupies - Roughly 20% of our audience but they buy absolutely everything we produce, from bonus tracks to merchandise.  Very high lifetime value and great opportunity to convert others.
• Fans - Roughly 30% of our audience.  They are likely to attend a concert, buy some merchandise and purchase our next album.  Reasonable purchase behavior but have a fairly finite cutoff point where they will not longer spend.
• Listeners - Roughly 50% of our audience.  They will likely listen to our music but will only do so as part of a larger listening behavior (radio, Spotify, Pandora) versus seeking us out directly.  Not likely to attend conferences or buy merchandise, representing a low to no yield.

Each of those represent a level of customer, and with that, a particular buying behavior.  You don't want to lump everyone together, because this makes targeting really hard.  It'll also make it easier for you to explain how each group will likely react differently to your product and perhaps how some may represent a larger percentage of your revenue than others.

Startup Founders rarely do this very well.  Usually because it’s not obvious why it matters so much.  If you don’t break out your customers into segments or tiers, your investors may get an impression that you only have one audience and that audience may sound too broad or to narrow.  You want to create more clarity so that you can view the opportunity in multiple lenses, providing a better sense for how real it is.

Typically when people think about demographics they immediately jump into Age, Location and Household Income or some the tried and true basics.  There's nothing wrong with that, and this data can provide some useful parameters that help shape the perception of your audience.

Yet what tends to be more impactful at this stage are Customer Personas.  Personas help tell a story about what a person cares about, versus what their binary stats are.

Personas are incredibly helpful in communicating who your customer is because they humanize the person to your audience, allowing them to build a much more recognizable person that they can connect to.

All of that may be true - but it tells you very little.  This could describe any of a billion products on the market today.  It’s correct, it’s just not visceral.

Let’s view the same audience in a different light - as a persona.

Technically both of those descriptions are true.  But the latter provides a real narrative that the audience can connect with.  If you’re doing a great job developing a persona your audience will be able to start visualizing that person, those behaviors and why that persona matches your product very well.

If you can paint an elegant picture of what your customer looks like, you can then take it a step further by exposing their motivations.  Customer Motivations are the different problems and scenarios that your audience is faced with when they look to your product.  They include emotions and thought processes that lead to the search.

Ideally you would have touched on some of this in your Problem Statement at the beginning of your pitch, but this is a great place to start digging into a handful of real world scenarios that an investor can see in their mind's eye.

OK we’re just messing with you.  That’s the opening lyric to Skid Row’s 1989 hit “18 and Life”.  But it’s actually not bad as a customer persona, so let’s stick with “Ricky” and see how he relates to Rage Against Mozart.

Ah, thats gives me some more color.  I can picture “Ricky” because either I was him, I knew a version of him, or maybe he was a character in an after-school TV special I watched.  No matter what the connection, I can start to connect with his motivations because I understand his world.
You don’t have to create a Stephen King character backstory, but at least try to develop some scenarios that people can understand.  Don’t just explain the frustration, provide some story around how that frustration manifested itself.  Problems start with root causes.

The backstory builds up to the problem here.  You knew Ricky was going through some tough times personally, so the manifestation of his problem (anger, frustration) becomes pretty obvious.  That’s called a motivation, and when it’s well articulated, it can tell an incredibly powerful story about your idea or product.

Don’t think we’ve forgotten about the old tried and true demographic data.  Personas and motivations provide a nice introduction to your Customer Definition, but before you can move to the next step (Market Size), you need to determine what critical parameters delimit your audience.

Demographics tend to be most useful when trying to determine the size of your audience or where to find them.  You will certainly make good use of Demographic Profiles in your Customer Acquisition section as it relates to targeting your marketing efforts.

You can go super overboard with citing every demographic possible.  You don’t lose points for being thorough, but for the sake of presentation, try to put more emphasis on your “Top 3 Most Defining Characteristics”.

In most cases this helps you determine how “findable” your audience will be with your marketing efforts. Your needs may vary, but for most startups you can work backward from where you might find your customers.

The Top 3 Critical Demographic Indicators for Rage Against Mozart’s audience:

Notice what’s missing here - Income, Gender, Education, etc. - the staples of most demographic charts gracing the conference rooms of would-be investors.  

This isn’t to say those can’t be accounted for - it’s to say they should be presented in order of what’s most salient to finding your audience.  Similar to how you presented personas, it helps to present the most defining demographics that allow an investor to say “Oh, yeah, I can see how you would be able to find people like that!”

Once you have a good handle on your Customer Definition the obvious question becomes - how many are there? You'll touch on this in summary with your Market Size information so consider this to be the more detailed view of that.

Sizing an audience isn't easy, particularly for products entering new markets without a lot of data.  Investors rarely expect you to be dead on with your numbers, they are looking for a fairly good argument for why the audience isn't too niche if they are involved.  

Whether you’re pitching for millions of dollars to venture capitalists or plundering your own savings to fund your startup, your Market Size really does matter.  It just matters for slightly different reasons depending on who cares about it.

If investors are looking at your deal, they will use the potential Market Size to determine how big this company can get.  More specifically, they will be looking to see if there is a fairly low ceiling that would prevent the business from growing any further.  A small market size is always a huge red flag for a potential investment because it limits how big a company can be, which limits its potential value - something investors don’t love.

Even if you're not interested in the needs of investors, it still helps to have a sense for the size of your audience so you can get a sense for how big the business can become and where some of your Customer Acquisition efforts may tap out if the audience is small (like a local business).

It’s difficult to size a market, however you do want to be able to find at least one source that can help substantiate your market size claims.  You may not have access to official industry-sourced information about your market (like a market report from a major consulting firm who covers your industry) but you may be able to find other market size indicators based on who else plays in your space.

In the case of our new favorite band, we may find that the there are telling numbers about our genre versus others when we dig into the popular music service Spotify.

This example shows real numbers that correlate to known success in the Rock/Metal music genre, however you'd still want to dig into how successful those artists are in each tier.  What's important with this example is that you've provided real numbers that show both the size and goals that you'd need to achieve to get market traction.

Remember, in this case you want a defensible number that you can explain your position (how you got there) versus an absolute number that's unquestionable (which likely doesn't exist).

At the beginning of this long diatribe about Customer Definition we talked about Customer Segments, or the different “tiers” of customers.  In this case it helps to talk about how each of the potential size of each of these segments.

The reason you really want to create segments from small to large is to show how your core audience can grow into a much larger audience.  Most products start by attracting a small, loyal core audience and then grow into a larger audience over time.  Facebook started by connecting co-eds on Harvard’s campus before connecting a billion humans.  We all have to start somewhere.

There’s no absolute rule here, but if you were to at least present a Primary and Secondary segment it may help show where you see your core audience trailing off and where your larger audience starts to grow.  Think of it like a local coffee shop.  Your primary audience is within 3 blocks of you.  Your secondary audience is anyone in your town.  

The other benefit of having segments is that it can help you focus your Customer Acquisition efforts on your initial audience and therefore use the smaller initial market as a better use for capital and testing critical assumptions.

Once you've explained your Customer Definition (we covered this earlier in case you missed it), it's time to explain exactly what strategies and tactics you will employ to acquire those customers.

Customer Acquisition is a somewhat newer term to really define what a "marketing plan" was called in the past.  To be clear, there's nothing wrong with calling this a Marketing Plan and using some of the same templates and structure you'll find on the Web today.  We use Customer Acquisition to denote a little more granularity in the metrics we're looking to achieve, not just the strategies and tactics we'll employ.

Your Customer Acquisition section targets four critical areas:

• Acquisition Channels you will use
• Cost Assumptions of Each Channel
• Conversion Metrics
• Proposed Acquisition costs (your assumptions)

This area of your plan doesn't have to be limited to these four categories but should at a minimum cover these areas to show you've been thorough when evaluating your customer acquisition strategy.

You can begin by explaining which channels you'll use to acquire customers.  The most popular channels tend to be:

• Direct Sales
• Online Acquisition (Paid Ads, Organic SEO, Social, Email)
• Offline Acquisition (Newspaper, TV, Radio, Mail)
• Channel Partners (Retailers, Resellers)
• Word of Mouth
• Affiliates

Of course you may have other channels you incorporate to find customers and by all means discuss those in detail.

Your goal here isn't to list every possible channel that you could employ.  Not including a channel isn't the same as saying "We could acquire customers using Radio ads, but we're not mentioning that, so that must mean we'd never run a radio ad!"

Your goal is to highlight the handful of channels you believe will be the most viable and get into detail about how you could leverage those channels.  If you're still nervous about leaving anything out, for the sake of brevity just append a small section that lists the other channels you'll also explore after you've tackled the most salient ones!

Within each channel it would help to provide some color as to why you think those channels are a good fit and how you could envision actually using them.  It's not enough to say "We're going to run Facebook ads."  You need to provide more detail.

You want to spend as much time talking about why you chose to use a channel as how you plan on using it.  At this stage you have lots of potential bets to make so it helps to determine which feel the like the best for you.

Now things get interesting.  Let's say you suggested you were going to use Social Media as a primary tactic to find customers.  You now need to begin identifying what your costs would be for leveraging that channel so that you can start to distill how much each acquired customers will cost (we'll do that in a moment).

"But social media is free! So my cost is 'zero' right?"

Not exactly.

While the Interwebz may offer what seems like a free channel platform, there are almost always real costs to using it well.  Your social media likely going to require you to author lots of content to be shared with prospective customers.  That costs money.  You will likely need to pay to promote some of your content on Facebook and Twitter until you've built up a following.  That costs money.  You may not be able to manage the campaigns yourself and have to outsource the work to a consultant.  Yes, you got it - money.

Your job here is to forecast and compile all of the associated costs with a particular channel so that you can arrive at a preliminary budget for what it would cost to use this channel.  If you're not sure of what your budget should be, ask yourself what the least amount of capital would be to get started and then start figuring out which costs would escalate over time.

This should leave you with a nice little "cost per channel" which scales based on activity. In order to know how you can scale those costs, though, you'll need to have an idea of how effective those channels will be.

You can easily assign a budget for what you want to spend on a marketing channel, but until you know how effective that channel might be, the budget is just a big guess.

What you really want to determine is the Conversion Rate of your marketing spend to actual customers.

Marketers can get pretty complex with how many conversion rates they track and other metrics. You can be as complex as you'd like, but you're going to at least need to provide some basic metrics for things like acquiring a lead (which can mean someone submitting their email address) or acquiring a sale.

Your conversion metrics will typically drive your budgets accordingly.  You will spend a small amount of money to begin learning how your metrics work and then as you learn more and are able to make your metrics work profitably (your cost of acquiring a paid customer is less than what they pay you) you can begin scaling the budget accordingly.

Early on you're likely going to be making educated estimates around what your conversion metrics will be.

A good rule is to assume your spend will be modest initially and likely won't have positive outcomes until you start to figure out what channels work.  Testing could take a few months to a year.  It's sometimes a little difficult to show "negative metrics" in your forecasts without having a little narrative description of why these are what they are.  You can solve for this by putting small comments in the cells of the spreadsheet where your economics change as well as providing some narrative descriptions with your forecasts to explain where and how your numbers change over time.

No one expects you to have all the answers immediately, so focus on explaining your approach to finding the answers.  Recognize that spending time and money to calibrate your marketing spend is a very reasonable approach that investors should definitely appreciate.

Any remotely savvy investor who is interested in the solution you've created is going to "lean in" when it comes time talk about customer acquisition.   That's because great products with horrible customer acquisition strategies often die on the vine.  Even an inferior product that has a powerful customer acquisition strategy (read: any product you see on late night TV) can be turned into a big business.

You may not have many of the exact answers at this stage of your business, but it's certainly your job to explore each of the major customer acquisition channels and provide some insights as to which ones you think will be the most effective and why.  Once again, you're being evaluated on your ability to assess opportunists and think about them rationally.  Your approach to customer acquisition is a reflection of this assessment.

Traction is your opportunity to tell investors how far you've taken the business up until this point.  Just having a great idea is wonderful, but having Traction is what truly differentiates you from the pack.

Differentiating yourself from the pack, especially if you’re pitching investors, is incredibly important.  

Recognize that investors look at hundreds of deals, but the ones that stand out are the ones with meaningful traction.  Once you recognize that pitching investors is a highly competitive game, you’ll start to understand why investors have many choices in who to hand a check to.  You want to be the most promising choice by virtue of what you have done versus what you might do.

Take a look at how an investor might compare two companies with good ideas, but very different traction:

In both cases the idea can be exactly the same - but the traction the first team showed is what sets them apart.  The investor knows that Startup Team 1 shows the kind of initiative that makes giving them money feel better than Startup Team 2.

You want to demonstrate that you are Startup Team 1.  In order to do that, you need to be able to show you’ve made meaningful progress in the critical startup areas - Customers, Revenue, Team and Product.  You may have other areas that you’ve made progress and by all means strut your stuff.  But those are the four that tend to make startups stand out the most.

Customers are one of the strongest measures of Traction, however explaining how committed those customers are is what really matters.  You want to articulate how you are getting customers and what friction they had to overcome to use your product (money, signup path, time invested, etc).

Your Customers are the ultimate validation tool.  Anyone can argue the value of your idea, but that argument stops with customers.  You want to put your idea and product in front of customers as fast as you can so you can show that real customers have an interest in the product.  Aside from demonstrating traction, it also gives you a sense for whether your product is the right fit.

When articulating customer traction, be very specific about how you acquired those customers, who they are, and how they reacted to the product.  Investors are going to use those cues to build a case in their head for how more of that activity can scale.

One mistake that is often made is calling “customers” by a single action, such as just those who have paid for the product.  That’s typically too myopic of a view to use since customer interest exists at many levels prior to a sale.  

You’ll want to provide some numbers and narrative about how each of these Customer Stages have performed for you.  All of that is Traction and often it tells an important part of your story that simply showing Revenue can’t tell.  

All of these stages helps an investor understand where and how people have engaged the product, but more importantly shows that real people (and potential customers) have already leaned in and expressed interest.  Even if the numbers are small, the people are real.  And that’s what gets investors most excited.

While the relative value of acquiring customers at various stages can be debated, the value of paying customers and real revenue is hard to argue against.

There are always two challenges with showing traction for revenue - either you don't have any, or what you do have isn't enough to make a big deal out of.  Don't worry, almost every startup deals with this.  It's like trying to show your SAT scores when you're in Kindergarten.

In demonstrating Revenue traction you essentially need to touch on three key points:

1. Will people buy? (Conversion Rate) At any price point, have you proven that customers are willing to pull out a credit card for your product?  
2. How much will they pay? (Price Point) As best you can tell, what's a reasonable price that you can charge that people would pay, even as you scale?
3. How much will that customer be worth? (Lifetime Value)  Assuming this customer will buy another pizza from your store, how many pizzas will they buy in a year?

Ideally you want to demonstrate all three, but in many cases you may not have sold anything yet to know.  If that's the case, you need to build a case as to why the assumptions you'll make to these answers is based on a strong argument.

Even a small data set can tell a very powerful story, so trying to build small numbers is a very good use of time in the formative stages of a startup.

Out of 1,000 sign-ups, we’ve had 50 people pay $19 per month for our product.  (Real people have validated that they will pay for this - and in this case 5% of them)

On average our customer payments have recurred 3 times, giving us an average yield of $76.” (Not only will people pay, they will keep paying which demonstrates there is consistent value)

Assuming you don’t have much traction around revenue it’s OK to skip this altogether and simply say “We have yet to fully explore revenue with in-market customers because .  We plan on validating some of our core assumptions as soon as possible.”

Among the different factors of Traction, Revenue is the one most likely to be missing from most startup pitches, so don’t feel too bad if you’re not there yet.

Recruiting a team is real traction.  Recruiting a team with great credentials is even better traction.  When discussing the value of your team traction you want to dig into how the background of your team maps well to the mission of the company.  Sometimes this can be hard, especially with a very junior team.

If your team has specific credentials, lead with those over everything else.  Where you went to college matters a lot less than if you worked on a product that's specifically related to what you're doing now.  If you've recruited someone from a notable company that has jumped ship to work on your idea, highlight that.  Show that you're able to get real, credentialed people behind your idea.

If you're a junior team without a lot of credentials, try to dig into where your passions lie and why that aligns well with this product.  Many junior level teams have built amazing companies, but it was always tied to a crazy ambition they had around the product itself.

Is the product or service built?  How far along is it (and when will it be complete?)  If you've built absolutely nothing because you had the idea 9 seconds ago that's one thing.  But if you've been working on this idea for 9 months and still have nothing to show for it in terms of a product, that's not awesome.

Investors want to see that you can create something out of nothing. And everyone starts with nothing.  They want to see that you can hustle your way to find resources and more importantly use those resources to get a serviceable product out the door.

Your traction around Product doesn't have to be a completed item.  It can be a prototype.  It can be the marketing site that you're using to say you're "coming soon".  It can be the crowdfunding campaign you created to take pre-orders.  No matter what you can show, you want to show that you're heads down every day trying to get any aspect of the product moved forward, resources be damned.

Most business plans and pitch decks are a long preamble to one question - will you fund me?

Ah, the age-old question.  It's like asking someone to get married, only in this case you're both really hoping to have a glorious breakup in the end (a sale).

There are lots of really bad ways to ask for capital, and a few good ones.  In the interest of time, let's just focus on the good ones!

Every funding ask comes down to three basic questions:

1. How much do you need?
2. What do you need it for?
3. How much impact will that have on the value of the business?  

Most people know how to answer "how much do I need", a few people can answer "what will I use it for" and hardly anyone ever explains "and this is how the value of my business will increase."

Let's skip to the end - here's what a perfect funding ask looks like:

"We need $1 million to primarily drive customer acquisition and product development which should lead to $3 million in annual sales which would make us worth about $20 million."

A bit wordy, yes.  But it tells an important story.  Let's dig into the story.

It's never hard to articulate the fact that you need money - because you probably don't have any.  The question becomes - "How much should I ask for?"

There are a few ways to size the funding ask appropriately.  As a general rule you should ask for enough capital to get you to your next major milestone where you can either have a viable ask for more capital (you've done something wonderful) or you're generating enough revenue that you don't need capital (also, you probably did something wonderful).

The most typical milestones to size a funding ask are:

• Breakeven - your revenue will pay for your operating expenses
• Meaningful Trajectory - the growth of your business is exploding in a meaningful way
• Product Launch - the product has hit a major milestone that will allow you to make money
• Proven Assumptions - people will buy, conversion rates are strong, product is viable

Once you've set the milestone, you then begin working backward to figure out how much capital it will take to get there.

Another important consideration is to make sure who you're asking for capital is appropriate for the size of ask.  While there are plenty of exceptions to this rule, a good starting place is this:

• Less than $50k - Friends, Family, Incubators and Debt/Loans
• $50k - $1m - Angel Investors
• $1m or More - Venture Capital

Asking most Angel Investors for $5m is about as useless as asking Venture Capitalists for $50k.  Each investor type typically has a check size they are comfortable with and looks for deals that fit that check size.  If you're not sure, ask.  Investors are used to being asked what deal sizes work best for them.

Now that you've got a golden dollar figure in mind, let's dig into how you're going to spend all that money.  The "Use of Funds" as it's formally known, should provide enough detail about how you plan on using that capital so investors can feel good about their capital.

Here's a really bad way to describe your use of funds:

"We plan on spending money on marketing to get more customers to buy our products."

Well, you've just described the use of funds for every company in history!  It's OK to have a brief summary (backed up by lots of financial data) but you'll want to be specific about your explanation so an investor can "see it" in their minds.

Here's a more detailed version of the same answer:

"We will spend 50% of our funding on customer acquisition across Facebook, Google and Sponsored Content targeted to 25-year-old females who show strong interest in organic cosmetics."

As an investor I can envision that spend.  I know where you're spending, how much you're spending and how you're going to target your spend.  I may have a hundred questions about the details of how you use Facebook versus Google advertising, but now I at least know you plan on using those mechanisms.  I also now know how you're going to do customer segmentation, so I can think about whether that segment feels either too broad or too narrow.

In some cases you may need to modify that a bit more, including what you expect the results to be.  If you were spending money to build a product, you'd want to explain what features that spend will enable you to provide and how that might help you.

Think about the Use of Funds more in terms of the outcome it will create than the input of capital.  If the output of investor money feels worthwhile, the investment of capital is justified.

The output of the investment (the product is done, customers are acquired) should then drive some notable increase in the value of the company.

To be clear, there's no magical decoder ring that allows you to always figure out how the output of your work translates into a whole dollar figure to value the company.  Don't take "value" to just mean dollars.  Sometimes you can figure out where more value will have been created even if dollars aren't part of the equation just yet.

This is an example of "implicit value".  We're not saying that we know exactly what the company is worth.  We're saying that our milestone is having a unique product position in a very large market (which we would have defined earlier).

From there you can have a conversation about what the value of that market position could be.  What important is that the milestone begets a very specific value point.

Here's a really bad example:

This is also true but fairly useless.  The value created is vague at best.  You just told me money is going into some amorphous vortex that will spit out an equally amorphous outcome.  Not cool.

Your goal here is to convince investors that the Use of Funds will give them an ownership of an asset that has meaningful value. Meaningful value can be things like market position, first-mover advantage, patent protection, customer acquisition trajectory, or product evolution.  Ideally you can create value across a handful of these vectors at once.

If you can put the 3 pillars of funding together you'll have a great foundation for your ask.  However, it's important to stress that you probably don't have a lot of definitive answers on this.

There's rarely a chance that you'll know how every penny is going to be spent or what every outcome will be.  That's OK.  You're not necessarily trying to be ultra granular here - you're trying to be more right than wrong.

It's all of the ballpark assumptions such as:

In each case you'll want to be able to explain how you got the assumptions, even if they are just assumptions.  Investors know you're guessing - they just want to know *how* you're guessing, so be prepared to explain your thought process.

Seasoned Founders who have pitched many investors can tell you that investors are more interested in how a Founder thinks than whether their plan can predict the future.  So let this section reflect how you think about funding and outcomes.

Ah, the dreaded financials!  Ask any Founder (who wasn't an accountant in a previous life) what their least favorite part of a business plan is, and they will almost always talk about the financials.

Part of the reason is because they don't know how to approach the financials in a way to make the numbers not only easier to investors to understand, but easier for the Founders to present.

There are tons of forecasting and P&L tools out there that take inputs and turn them into forecasts. Your problem isn't access to tools and templates, it's knowing what values to use and how to articulate them.

So let's start with how you make the assumptions that drive your model.

Your financials aren't just a bunch of spreadsheets that tell people whether you will make or lose money.  They are the tool to help you determine what assumptions you need to target in order to make the business viable.

Most business success comes down to validating a handful of really critical assumptions. Those assumptions are typically:

• Sale Price per Product
• Cost of Goods Sold (manufacture, delivery)
• Cost to Acquire a Customer
• Staff Costs

Typically most financial models are driven by just a few key assumptions.  What you want to do is isolate those assumptions and make them really stand out.

Picking which assumptions to highlight is simple - focus on the assumptions that have the greatest impact toward success or failure of the model.  Those may not necessarily be the biggest costs.  Your biggest cost may be staffing, but you'll only be adding stuff if you can acquire customers profitably at a price point you need to sell at.

Prior to presenting your glorious spreadsheets, reserve a single page to create some narrative around which assumptions matter and how you're thinking about them.  As it happens, Founders rarely do this well, and leave the investor simply guess what's driving the model.

Imagine you had 3 critical assumptions that drove your business model financials.  You might use a description like this on the introduction page or slide:

"Our business is driven by 3 critical assumptions - customer acquisition costs, sale price per unit, and the number of times the sale recurs per month.  If our assumptions are fairly accurate on these factors, the rest of the business grows accordingly."

Wow, that's a huge help to me as an investor.  Instead of trying to magically determine what factors I should dig into, you've told me where your head is at saving me boatloads of time.

With that introduction, you'd then devote a small paragraph to how you derived your values for your assumptions.

"We are assuming customer subscriptions for our product will recur 3 months per sale.  That means that our sale price of $20 will be the initial sale plus 3 more charges, totally a $80 yield per customer.  Our estimate is based on the fact that two similar services have shown roughly the same customer retention for what we feel is an inferior product."

In short order you just told me, as an investor, what's driving your assumption and how you determined the value.  We also demonstrated that in this case it's not a total guess.

Many people will tell you that the financials are really "just a guess".  What they mean is that there are many factors which you can't predict, so you're left guessing at what the values may be.

That's true to a degree, but saying it's "just a guess" isn't a license to provide bullshit assumptions! What investors want are estimates, not guesses.  Estimates are forecasts built on a series of assumptions where you're trying to incorporate as many known parameters as possible.

"We don't know what the final cost will be to manufacture our product, but we know similar products aren't less than $200 and wouldn't likely exceed $350 even at a small scale run."

Now that's a wide range, but it's at least founded in some basic parameters such as what you know similar products are manufactured for.  In your own example we'd recommend being even more detailed.

An example of a horrible approach would be:

"We think the product can be manufactured for less than $350."

In that case you're not giving any indication how much less or how you arrived at $350 to begin with.  Once again, isolating and explaining your assumptions is critical.

Startups have a tendency in their financials to provide a single view of their outcomes.  The probability of every one of your assumptions being spot on from the outset is almost zero, so why would you present a model that doesn't consider any other path?

We do it our of laziness in some cases and fear that investors will think we weren't accurate enough for just one answer in others.  Both are bad approaches.

A better approach, and frankly this will set your mind at ease when preparing your estimates, is to offer a few alternate scenarios, typically based on your key assumptions.

In your own narrative you'd probably add to that a bit to explain why each scenario might play out that way.  But you're also showing investors that you're prepared for different outcomes, which is reassuring and shows that if your assumption aren't spot on, it doesn't break the model wholesale.

This actually provides you with a lot of support when you present your model so that if an investor doesn't quite agree with one scenario she may find another scenario that she feels comfortable with, which accelerates the conversation substantially versus getting hung up on one point (never fun).

At some point you're going to get called on to either present your model (as a pitch deck) or walk through the numbers you put in your business plan.  In either case, you're going to have a conversation about the financials.

What you want to avoid is talking about the entire financial model.  You don't want to be fielding questions about whether or "Making $100 million per year in Year 5 is reasonable."

You want the conversation to be isolated to one thing - how you arrived at your key assumptions.

The reason is because you can prepare for that conversation and lean heavily on the fact that if your assumptions are valid, the rest of the model works.  If your assumptions hold up, yes, you really can make $100 million in year 5.

This is where isolating those assumptions as their own narrative page (the intro before the spreadsheets) can really help.  It tells the investor "the rest is just math, but you should be asking me how I came to these assumptions specifically."

Even if you're wrong about your assumptions, so long as you show that you're a thoughtful Founder that really focuses on getting to deliberate answers, that's what investors care about the most.

Pitching investors without your key pitch assets is like going to war without a gun – it doesn’t end well.

If investors are interested in your deal they are going to certainly request a handful of key pitch assets, whether it’s a product demo or a pitch deck. You’ll be expected to have these items at the ready to send or present as soon as possible.

This is a case where you don’t have to have every last asset ready, but it typically goes that the more prepared a Founder is for their pitch, the better their pitch. In many cases just having gone through the exercise of preparing these assets is what truly gets your ready to pitch your business.

We’ll walk through each asset and give you an idea of what you need to feel comfortable sharing with prospective investors:

Right now it may help to just scan each of the assets to get a feel for what’s involved. You can zoom in on a particular item when you’re ready to start building it.

Your elevator pitch is a short, consistent summary of your business. It can be hard to boil your business down into just a few sentences, but often that is all the time you have. The term “elevator pitch” comes from the idea of a chance meeting with someone in an elevator – can you pitch your business to that person in that short amount of time?

It may surprise you the amount of work and thought required to put together just a few sentences. Although the amount of content you need to create is tiny - just a few sentences - the amount of thought that goes into it is extraordinary. But remember, it may be the most important couple of sentences you speak for the next several days, months, and years.

A good Elevator Pitch conveys a few things quickly - the problem you solve, the solution you provide, and the people you do it for.

Netflix allows anyone to easily rent movies from their home computer

Under Armour provides apparel to keep athletes cool, dry, and light when they need it most.

You will use your Elevator Pitch often - in introduction emails, in presentations, and yes, actually in elevators during chance meetings. Keep rehearsing it and keeping it short. It can be very useful.

Take great care in crafting your perfect elevator pitch – you will use it often in emails, presentations, and even on the fly. Keep rehearsing it so you can deliver it effectively and quickly.

In today's world, you're likely going to pitch far more investors through an initial email than you will in person. A great Email Pitch won't necessarily get you a meeting but a bad one will definitely prevent one. Therefore creating the perfect Email Pitch is essential.

The perfect Email Pitch is a little longer than a commercial but not nearly as long as an infomercial. Your goal is to pique the investors’ interest by tapping into each of the key areas they are interested in.

The pitch deck is the modern version of a business plan. Typically PowerPoint, Keynote, Prezi, or some other presentation software is used to prepare a group of slides that tell the story of your business.

Unlike the executive summary, a pitch deck is a much more visual explanation of your business, often taking advantage of graphs and other visual collateral to tell your story and show how your business provides value. While a business plan tends to be a long narrative of the business intended for one person to read on their own (which rarely happens—but more on that later), the pitch deck is what you’ll use to present your concept directly to a room of investors.

Pitch decks are frequently presented to investors, and may even be requested ahead of time by the investor in order to get an idea of your business before they listen to you speak. Because of this, it would be wise to have your pitch deck prepared before even contacting potential investors.

When preparing your pitch deck, keep in mind that there are several must-haves that investors are going to be looking for. We’ve broken down the critical pieces of information that you would absolutely want to have accounted for in your pitch deck.

Sitting between your elevator pitch and a full-blown business plan is the executive summary. An executive summary is a more robust sales pitch for your business, distilling each key area of your business down into a paragraph or two to convey your business quickly.

The point of your executive summary, as the name implies, is to briefly summarize your business plan into just a few pages. Make no mistake though, it’s effectively the sales pitch for your business. Not only are you communicating the mechanics of the business, you are selling the value of your idea.

The executive summary tends to distill each key area of your business plan down to a paragraph or two, so that investors can get the gist of your plan easily.

There are two general ways of thinking about writing an executive summary. The first is to take your full business plan and distill it down into a few paragraphs about each key point. This makes sense and is easily done – assuming you have a full business plan written. The problem is, many startup founders do not have a full business plan nor do they intend to write one.

The second way to approach writing an executive summary is to look at the key sections of what would be in a business plan, and write the key points for each one of those (Management Team, Marketing Guide, Financials, etc.).

However you choose to write your executive summary, it is a key asset to have on hand for investors to get a more detailed idea on your business.

It may seem as though entrepreneurs must prepare a business plan before approaching investors, but in reality few do.

There are a few reasons for this. First, authoring a 50-page manifesto on how your future business will operate is typically the domain of MBAs and academics, and entrepreneurs rarely have the time, resources or desire to dive into a project of that scope when they just want to get their business launched.

The second is that it’s an incredibly time-consuming process if you really want to dig into every step of a business plan from start to finish.

That said, it’s also an invaluable exercise.

The real value of a business plan isn’t in the actual document itself — it’s unlikely anyone will ever read it. The value comes from the planning, brainstorming and research that goes into crafting the plan. The result of this effort makes your assault on your new business idea far more credible.

If you decide to build your entire business plan, you’ll certainly want to have it handy, but make sure if you’re introducing yourself to investors you start with more digestible documents like an executive summary or pitch deck. This is a nice teaser that will prompt a request for a business plan if you’ve piqued their interest.

There are a couple of essential financial documents you will be asked to produce, provided your pitch is going well so far. After all, the point of investing in your company is to gain a return. Investors want to have an idea of what this return can be, and at what time.

The complexity of these documents varies. It is becoming harder and harder to project financials as things move more quickly – especially for scalable tech companies. They can vary from a one-page spreadsheet to a complex document of macros and changing outcomes. If everything is going well, you're going to be asked for your Financial Documents. The Financials cover a few aspects of your business from your Revenue Forecasts to your Operational Expenses to your Cash Flow.

The complexity of these documents can range from a single slide in your Pitch Deck showing some baseline guesses on where revenues will come from to highly complicated Excel Docs that involve macros and formulas changing outcomes based on key assumptions and scenarios.

For general purposes you'll need to cover at least a few aspects of your financial picture.

Revenue Projections. You'll need to explain where your revenue is going to come from, and within what periods. A four year Revenue Projection is a good place to start. Mind you no one really knows exactly how much revenue is going to get generated for years to come, so this is more an exercise of what's possible, not what's guaranteed.

Operational Expenses. As the company grows, it's critical to point out where your expenses will grow accordingly. This is where you will explain how staffing, product costs, marketing and overhead (rent, supplies) will scale with the growth of your business.

Cash Flow. The value of this information tends to vary with the type of business. Seasonal businesses, for example, will have particular cash flow concerns when they are heavy on cash in one period and light on cash in another. Similar to your Revenue and Operational Expense projections, your Cash Flow should detail exactly when you expect cash to come in and out of the business.

You may be asked for additional information such as a Balance Sheet, Pro-Forma Income Statement (a fancy word to mean "projected" revenue and expenses) and such. As long as you're communicating the three main tenets of the business - revenue, expenses and cash flow - you should be in good shape here.

A website is not critical for all businesses, and therefore may not be one of your key pitch assets. However, it is highly recommended to at least create a sort of landing page for your business telling people how they can instead reach you or find out more. Think of your website as sort of an e-brochure for your business, giving some visuals or just outlining your idea. As you grow your business, it’s a great way to provide validation, gain traction, and even gather contact information for potential customers.

Your pitch assets tend to be things you’ll either print or attach to an email. What the website provides is a reference point that provides supporting information for people who are interested in learning more after hearing your pitch.

You don’t have to put your company’s financial forecasts or secret sauce on your website. You can save that information for more personal communications.

The website should serve as a virtual brochure for your company. That could include screenshots of your product, a short explanation of what you’re setting out to do, a personal blog discussing your thoughts on the industry, etc.

What’s important about the website is that it gives people a professional view of your company, along with a taste of who you are and what you’re trying to accomplish. Your website is a convenient destination for anyone — both investors and consumers — who want to know more about your company. Plus, it’s much easier to direct people to your website than to a document.

The important mission for your website is to provide a professional-looking brand for your business for legitimacy, giving someone a view of who you are and what you do.

In thinking about the most effective way to approach your pitch, you’ve probably asked yourself, “How do I know what specific elements of my business investors want to hear about to determine if it has potential?”

We’ve devoted this phase to showing you that it doesn’t require being a mind reader to nail the essential criteria every investor looks for (and expects) regardless of how you pitch them your story -- whether via elevator pitch, your pitch deck, or business plan.

While we deconstructed the 10 key sections that go into longer form pitch presentations, the most important thing to take away here is that at its core, every great startup pitch revolves around a tremendously refined summary of your problem, solution, and market size.

We learned that the problem is the foundation on which your entire concept is built, and that creating a compelling, relatable story around the biggest problem you solve is crucial to making your solution all the more impactful when you explain how it ties back directly to that problem.

We also understand that connecting your problem to the biggest possible addressable audience, or your total addressable market, is absolutely key in showing investors that the market your operating in is worth getting excited about (and signing a check over).

Up next, we’re going to revisit the topics we explored during the Investor Selection phase and combine that with what you know now about crafting the ideal pitch to show you how to spark investor conversations to maximum effect.