Guest Blog: Fundamentals-Investor decks by Octopus Investments
“This article was originally published by Octopus Ventures, and is re-printed with permission of the author.”
Every year we get thousands of investor decks, both good and bad. Much of the material in a well-produced deck can be used again for sales and marketing purposes but it is worth investing the time to get it right.
Ideally we would meet with every entrepreneur, understand the opportunity in detail and make a decision, but this is hard to do with finite time. As a result, we often use investor decks as a tool to decide if prospective businesses are a potential fit with the kind of deals we are looking to complete, and whether to take a meeting in-person. The challenge we face is the risk of missing out on a great business due to an investor deck that doesn’t do it justice. Therefore, we hope our below thoughts on what’s important to include in an investor deck are helpful, and in turn, reduce the chance that we’ll miss out on great businesses.
We have laid our thinking on this subject out around 3 key areas:
- Why is the deck important?
- What financials should I include?
- Best practice and common mistakes
Why is the deck important?
- It answers the fundamental questionsThe deck should allow anyone reading it to understand what a business does, what it is looking to do, and enable the audience to take a view on the likelihood of reaching that goal. The core questions at the heart of the deck are typically:
- What does the business do
- What does the team look like and how does that give an unfair advantage
- What impact does the product deliver and how is this measured
- How does the business make money
- How big could this business be and what has to be assumed to get there
- Who are the largest competitors and what impact will this have
- How efficiently will the business grow
- What has the business achieved so far
- What does the current investment round look like and where does that get the business
- It should get the audience sufficiently interested to meet in personYou should not expect to answer every question and risk in the deck. The purpose of circulating a deck is to get whoever is reading it sufficiently interested to get a meeting.When entrepreneurs try to fit everything into the deck it often reduces the overall impact and may obscure the overall messaging. If a potential investor wants additional information then you can always provide additional information.
- It is a good example of how you communicateCommunicating the product, market and potential opportunity clearly tests many of the core attributes of a successful senior sales person and any CEO. Companies with the most successful sales functions are typically those that understand their customer well and can communicate with them effectively. This often translates into the most successful businesses. As a result, if an entrepreneur cannot sell to an investor this can raise concerns about how easily the business will be able to sell to its customers.
What financials should I include in my deck?
For a seed-stage business, in an initial deck we would expect to see:
- High level Profit and Loss forecast for 3 yearsWe often see businesses that project their financials out to 5 years despite having not sold anything yet. We understand that there are many unknowns in the model but we are more interested in understanding the assumptions you have made and how you think about where the growth comes from in the business. We would expect to see an ambitious level of growth but this should also be achievable. When we see forecast which show £100m of revenue in year 1, this raises big questions about the commercial experience of a management team.We would expect to see what the Gross Margin would look like and how this will trend over time. It is also useful for us to understand how you think about reaching break even. Many of our most successful portfolio companies are not yet profitable but we want to see that there is the opportunity to become cash flow positive in 2-3 years if it was deemed the right thing to do.
- Historic financial performanceIn many ways the gradient of growth in financial performance and KPIs is just as important as the absolute values. If you have historic trading results it is useful for us to understand what pace you operate at and what kind of growth you have been recently generating. This also allows us to evaluate the assumptions around future growth in a more informed way. This only needs to be on a profit and loss basis and showing monthly cash burn is also useful.
- Cash flow profileWhilst this is more relevant for later stage businesses looking to raise Series A rounds and beyond, it is useful to understand how efficiently the business will scale in terms of marketing spend and customer acquisition. Understanding the monthly cash burn is and where the current investment round would take the business is important. Our interest around this is closely connected with our requirement to work out how much cash a business may require for it to be successful and reach inflection points in its growth. This can often be easily shown in a simple graph.There are many other supplementary pieces of information that may be required but should not be included in the initial deck including;
- Cap table (see article);
- Financial model in spreadsheet format with clearly laid out assumptions;
- Balance sheet;
- Maximum 15-20 slides
- Should be able to present them in under 20 minutes, leaving plenty of time for questions
- Clearly explains the fundamental questions
- Clearly lays out the vision and how the current product links with that
- Time spent on polishing the finished product – front end developers can be good for simplifying and tidying up decks!
- Overly long
- Addressable market irrelevant or exaggerated
- Outrageous revenue forecast
- Does not communicate what the value to customers is and contextualise this
- Gives a competitor matrix which deliberately ignore the most relevant competitors
In terms of other resources that may be useful when building your deck:
For use by journalists in their professional capacity and should not be relied upon by retail clients. This blog is issued by Octopus Investments Limited which is authorised and regulated by the Financial Conduct Authority. Personal opinions may change and should not be seen as advice or a recommendation. The value of an investment, and any income from it, could fall or rise. Investors may not get back the full amount invested. We do not offer investment or tax advice. We recommend investors seek professional advice before deciding to invest. Registered office: 33 Holborn, London, EC1N 2HT. Registered in England and Wales No. 03942880.