Why and How to Build a Startup – Chapter 4: Pitch!

Marco-Trombetti-Pitch

Editor’s Note: The following is the 4th chapter of the book “The New Prince“, a collection of essays on the counterintuitive lessons Marco Trombetti, founder of Translated and VC firm Pi Campus, learned by building and investing in startups. We agreed with the author to publish all 12 chapters through a guest post series. Check out the previous chapter here.

Pitch!

Pitching an idea is easy, if you know how to do it.

Most of the people who have pitched me their idea have failed to do it properly. Learning how to properly pitch is one of the most important skills a founder needs to develop. It allows them to find investors, to attract great co-founders, to recruit the best employees, and ultimately to fine-tune their idea.

There is a simple reason why pitching is so hard: we very rarely pitch ideas, and when we do, nobody gives us feedback on the pitch itself – at best, we receive feedback on the idea.

That’s why I do something different when a startup pitches to me as an investor: rather than discussing the idea, I try to give advice on how to pitch it. Founders generally know more about the problem than me, and I have realized that working on the pitch is a faster way to make progress.

The ideal pitch contains all the information that an investor needs in order to decide, and nothing more. I have no experience in later-stage pitching, but I estimate that I have seen about 1,000 pitches from early-stage companies. As a fast but lazy thinker, I get very bored with redundant information and frustrated by missing key information. All this has led me to spend a lot of time thinking about the ideal pitch, the one that could convince me to invest in the shortest amount of time possible.

I suggest using these 5 points: Problem, Solution, Market, Traction, Team.

If founders are well-prepared when it comes to these points, the time can be used efficiently. We can have a more open discussion on how to solve the remaining challenges and make the startup a success.

Point 1: Problem

Here, you have to describe a pain point that the user perceives and is willing to take action to alleviate. You also have to say how people today are solving this pain point.

The two important words here are “perceived pain”. Users should be willing to pay a premium or invest time to solve this pain point. Pain points are everywhere, and they are not just physical: vanity and laziness are pain points that have inspired some of the world’s most successful startups.

Bad examples of problem pitching are: “People need insurance for their computer, at the moment they don’t insure them, so here is our innovative computer insurance” or “People are scared of losing data, at the moment they don’t back it up, so we are offering a cloud backup”.

We can agree that these are potential pain points, but they are not perceived by the user. The fact that users are not solving the problem in some way indicates that they do not perceive the pain, so they are not willing to take action to solve it. If car insurance wasn’t compulsory, many people wouldn’t bother getting it. This is practically the opposite of the urgent need for action that you are looking for. Losing data is a pain, but again, it is not perceived by users; in reality, people don’t make the backups that they should. Many founders often say that they want to address the pain by making users perceive it. They take inspiration from the fact that large monopolists are able to create perceived pain points. But managing a monopoly and creating a new company are completely different. Trying to create a perceived pain point as a startup is by no means a good strategy. If we were in 2007, a good example of problem pitching would be: “sharing big files via email is limited in size – people currently use FTP servers, but these are too hard to set up for those who aren’t tech-savvy”.

Point 2: Solution

Present your solution. Make sure it is clear how your solution is addressing the pain point and, most importantly, why it is a bettersolution than those currently available.

A bad example of pitching the solution is: “we will create an innovative cloud storage system that will cost less than an external drive thanks to our compression technology”.

You are not addressing the perceived problem described above (sharing large files) and you are not saying why this is better than an FTP server.

A good example would be: “With our software, you can right-click on a file of any size and get a link that you can share. We will store your files in a secure cloud, eliminating the need to set up your own FTP server”.

Point 3: Market

Take the number of people using the current solution today and multiply it by the price of your solution. This is called the TAM (Total Addressable Market).

A bad way of doing it is thus: “Market research company X estimated cloud storage to be worth $12 billion next year. It has a 16% compound annual growth rate”. This actually tells the investor that he should put his money into a stock fund for cloud storage rather than into your company. It is safer, and he could potentially get a 16% return every year.

Some time ago, a company building a marketing software system for grocery stores in Italy told me that their market was estimated by a market research firm at $2 billion. The startup was building a solution at $1,000/month, and there are 10,000 supermarkets in total in Italy. Their total addressable market was therefore $120 million, not $2 billion. Their estimation was out by 16x, and there was no way to build a unicorn while sticking to their initial plan. When they realized, they felt like they had wasted a year of work on the wrong problem/solution. You want to avoid this, and it’s easy to do so.

At this early stage, investors want to know the number of people who perceive the specific problem you are solving, and if that number is big enough to produce a unicorn. If your calculations reveal a small market, don’t waste your time with the next few points: take advantage of this discovery and adapt your idea. If you feel that addressing a larger market makes your pain point more diluted and less acutely perceived, change your idea and start again.

The right way to pitch the solution is as follows: “1 billion users use email to share files, 100 million of them tried to attach a file larger than the limit multiple times. We charge $5 a month, so our total addressable market is worth $6 billion.”

Point 4: Traction

Traction is about showing that, over time, an increasing number of users want your solution.

A company that starts with $1 in revenue in the first week and growth of 6.7% week over week will have a $1 billion/year runway revenue in 5 years. With this point, you want to show that you are that company.

Ideally, you want to show a nice graph with weeks on the X axis and revenues, orders, interest or users on the Y. Obviously, revenues are the strongest indicator and users are the weakest, but they can all serve the same purpose. If you have a product with a high sales price and your weekly data is too sparse and inconsistent, you may want to do it by month instead of by week. Weeks are preferable if possible, because they communicate your high resolution and speed.

Most entrepreneurs tell me that they need money to build a prototype to show traction. They also assume that there shouldn’t be a slide on traction for a new startup. This is definitely wrong and, to be honest, it defines mediocre founders driven by building up what they want as opposed to great entrepreneurs obsessed with solving problems. The latter always have a persuasive slide on traction, and it is often the strongest point in their presentation.

The reason why this is so hard for many people is simple: most people hate discovering that their initial idea is wrong, and they try to mitigate this risk by building something with more features so that the probability of failure drops. This is the single most important psychological behavior that will prevent your startup from being successful.

Great founders are motivated by discovering why their idea is wrong rather than by receiving encouragement.

They try to sell their solution before it exists to validate their hypothesis as soon as possible. They quickly adapt the idea and try to sell it again. These are not monthly cycles: they happen in hours, sometimes even in minutes with great founders. When there is no interest in their idea, they ask people what they would buy instead and redefine the idea based on this input. I don’t know any great founders whose first idea was their successful one. They are successful founders because they iterate faster than anyone else, not because they generate better initial ideas.

Before you build anything, you can show traction. Here are some examples.

For internet services, selling to users 1-to-1 is always the best option to start with, but you can also show traction by recording a video of what you are going to build and adding users to a wait list. Invest $50 in marketing per day or post it on a social network and measure how the wait list grows over 2-3 weeks. This is how Dropbox did it. Afterwards, they raised $15K to finish the first release of the product, and when they were approaching 1m users they raised $1.2m in funding to keep growing. Today, Dropbox is the most successful storage solution in the world. They raised almost a billion, but that was a consequence of their traction, not vice versa as most people think.

When it comes to hardware products, most founders will say that they need a lot of capital. Wrong. Instead, you can hire an industrial designer to produce a photorealistic image of your product. If you’re targeting consumers, run a pre-order campaign (e.g. Kickstarter or Indiegogo). If you’re targeting businesses, visit them in person and let them sign pre-orders.

Some companies will need billions to create their final product. If you want to change the world by bringing back supersonic flight for consumers (e.g. you want to build the new Concorde), you may think you need a lot of money to get started. Again, Blake and the team at Boom Supersonic raised the minimal amount of money needed to leave their jobs and focus on Boom. They created a nice rendering of the plane and calculated an estimated price. They went to visit airlines and asked for non-binding letters of intent (an LOI looks like this: I will consider the possibility of buying X planes at price Y, if you can really make them). After going through several iterations with the airlines, Boom Supersonic got $5B in LOIs within the first 3 months without having to build a single plane. With those LOIs, they raised $5m from investors (including me) and started building the plane. With a more advanced design they got $20B of LOIs, allowing them to raise $33m to proceed with the construction, and when they hit a bigger milestone, some LOIs were converted into firm orders. My humble guess is that they will be the next Boeing, and it’s all because they were fearlessenough to visit customers with just a rendering.

In short, you have no excuses: if you don’t have traction after a few months, there is something wrong.

Point 5: Team

At this point, you want to show that there is no better team in the world to address this specific challenge.

The key elements are that you understand the problem better because of X, and the execution of your solution is state-of-the-art because of Y.

The most convincing point for a team could be this (I have to do the full pitch, this is a startup that may actually exist one day):

Problem: many people in wheelchairs want to travel independently, but there is nowhere for them to put their bags. In order to travel at the moment, they need someone to help, or they have to rest the bags on their legs, which is far from practical. Solution: We have designed a practical luggage rack for wheelchairs.

Market: There are 5 million frequent travelers who use wheelchairs. At $200 each, this is a $1B opportunity.

Traction: We produced 20 prototypes ourselves and sold all of them in a day at full price during an event. Afterwards, we ran a campaign on Kickstarter and raised $500k from pre-orders.

Team: I am a young, passionate traveler and have been a wheelchair user for the last 15 years. I know the pain and I am motivated to solve it. My co-founder has been designing and manufacturing luggage racks for Mercedes for the last 5 years.

As an investor, I feel that they understand the pain better than anyone else and that they have everything that is needed to start solving the problem. They also don’t have anything more than they need.

If you feel you are missing a key person or you have more than you need, the best time to change things is before you start.

Watch other people’s pitches and review them before working on your pitch – it will help you to be more rational about yours.

“Share this essay with your co-founders and friends and ask them to test out your pitch using the features listed in this essay. If you have a pitch that sticks to the principles and survives the test, I would love to receive it before any other investor. I promise to reply with a Yes or No regarding the investment in less than a week. marco@picampus.it”