At the end of the first season of the Smart-up x female founders luncheons, we addressed a very important topic: financing your own business. Marco Stutz, investment director and board member at various startups, enriched this event with his valuable inputs. What does the term “venture capital” actually mean and when is the right time to request for it? We’ve captured this and much more in our blogpost.
But first, what is Marcos background?
Marco Stutz has been working in corporate finance for 12 years now and has already managed over 50 deals. He has always been fascinated by entrepreneurs and the way they organize themselves and get creative and innovative. One day, he came across an entrepreneur who had already invested in over 100 companies. For this entrepreneur, Marco moved to Switzerland 12 years ago and joined the company Mountain Partners. Marco’s job is to support young companies with ideation and the creation of business plans and to assist them with the first venture capital, the necessary legal foundations and organizational structure, up to the following financing rounds.
Wait a minute. What is venture capital at all?
Most importantly, as a first step, you must always ask yourself whether it’s even necessary to raise venture capital and thus give away shares of your company. Maybe you can even pre-fund yourself or you receive funding from a university, the public sector or an accelerator program? But there will come a time, desirably, when your company grows and you need to hire more employees. Your revenues may not yet be enough to cover the costs and you need to feed your company operations even more. For that, there are many options available to you, for example:
- To take out a loan (borrowed capital), e.g. from a bank
- Raise venture capital (equity) from an investor
Venture capital is where you raise equity and give away shares of your own company in return. You should make sure that you not only get money on board, but also the right people (e.g. business angels), who have good experience in setting up a company and provide you with access to their network. People who have a good appraisal of assessing the potential of your business idea, are preferably specialized in your field of business and can thus establish good first touchpoints with customers.
Well fine, I have understood that now. But when do I ask for venture capital? When is the right time to do so?
The important thing is: make yourself and your business unmissable right from the start!
So, it’s all about sharing, sharing, sharing and getting feedback and tips from investors as well as friends and family! This will quickly give you a sense of what potential investors are looking for and what they are missing in your business idea. Furthermore, you will quickly realize when it’s the right time to ask for venture capital and how much money you should raise. For example, if an investor asks why you are only asking for CHF 500’000, you will probably have to increase your amount.
Your company does not necessarily have to be profitable at the time of the presentation. In any case, you should be able to show the investor how you plan to make money in the future and what plan you are following to move to a profitable business model. The investor also wants to see that your team is able to execute the business idea and grow quickly and profitably. This is called scaling and is very important to venture capitalists. So, you should cover all the necessary competencies in your team.
But of course, it also depends on the phase in which an investor invests in companies. At Mountain Partners, for example, many cases are not yet profitable because they invest at a very early stage. The path to profitability has to be shown in the first 12 to 24 months. It’s also interesting that in 95% of the cases, the business model has been adjusted at least two to three times. This means that the first case was not necessarily the case they became successful with.
How do I calculate how much venture capital I need?
Investors like to talk about a business plan, but to me, it’s much more important to understand the financial plan behind it. You should approach the planning with the following assumptions:
- For cost planning, assume the worst case and calculate without income/sales, because it’s sometimes very difficult to estimate.
- In a next step, you should set a time period for which the amount of the funding round should be sufficient. Marco recommends to calculate with 12-18 months.
- Look at all your resources. How much money do you need in this 12-18 months? Examples of resources are: Salaries, a lawyer, startup costs, office rent, CRM system, etc.
- In a next step, define your KPIs. Which performance is relevant for your specific business model?
Okay, I understood how to calculate the amount of the financing round. But what financing rounds are there in the first place? And what are their characteristics?
You should have invested CHF 25’000 to CHF 50’000 in your company before you raise any money. As mentioned above, you either finance this yourself or with funding from a university or an accelerator program – and it doesn’t always have to be in cash.
- Pre-Seed: You have a good idea and you’ve tested it by doing first surveys? Then you’re currently in the pre-seed phase. With the money from this phase, you should go to the market within three months and test your product with so-called “pilot customers” and try to close a first transaction.
- Seed-Phase: If your product or service is already on the market and you have your first customers, you are in the seed-phase. The next CHF 300’000 to CHF 500’000 will be used to professionalize the product in the next 12 months and to reach a minimum number of customers and a stable revenue forecast.
- Series A: You can prove that your concept/technology/product works and more and more customers want to benefit from it? Then you are in the Series A phase. The money of this financing round will be used to further strengthen the initial growth. An example would be that you introduce your product to new markets or sell it to additional customer segments.
Subsequently, there are the Series B, C, D, etc. financing rounds. We won’t elaborate on these.
What does an investor expect from my pitch? What should my pitch deck look like?
Your pitch deck should be about 20 pages long. The presentation of your idea and your company is like an application. The quality has to be high (no famous coffee stain!), pay attention to the design and give the investor access to all possible information. Also, try to get to investors through a warm intro, for example a personal message on LinkedIn and even better an introduction. Investors don’t check the info@ email address.
The content of your pitch deck is also very important. The following should be included:
- The problem and your solution (product/service)
- The business model: how do you make money?
- Market information and your competitors
- Your team
In conclusion, Marco would like to recommend the following thing to you:
- Browse the internet for pitch decks from successful companies and use them as a guide!