From Vision to Venture: Demonstrating Product-Market Fit to Secure Capital

Even if a product or solution is highly differentiated, the question of product-market fit and market opportunity remains. After all, growing a business often involves capturing existing market share from competitors, educating buyers on how to operate differently, and much more.

Part one of Acquis’ three-part series From Vision to Venture explored how to present a growing business to secure capital. It offered a general framework for creating a pitch deck and how best to message the value proposition.

Part two of From Vision to Venture explores how companies can demonstrate product-market fit. It reviews how to effectively prove value while connecting to an investor’s thesis to secure capital.

Proving Product-Market Fit

In the early days of a business, founders may create a minimum viable product (MVP) that they can take to market and test their product-market fit. This allows business leaders to collect consumer feedback, improve the product, and iterate quickly. In some instances, this MVP gains early traction and allows the business to start generating early-stage revenue.

Demonstrating some level of product-market fit proof is important. It demonstrates that your product adds value to the market and that you have a potential path to commercialization. Some examples of proof include:

• Revenue to date and revenue model (e.g., one-time, monthly recurring, subscription, etc.)
• Number of units moved/distributed to date
• Number of units sold to date
• Number of customers/subscribers to date
• Growth trajectory of number of customers/subscribers
• Customer acquisition rate
• Customer retention rate

If your business is so early that it has not yet achieved a product-market fit, you can frame your proof as a thesis that the company is planning to prove.

Market and Target Consumers

Quantify for investors the size of the identified market and how much of that market you plan to capture. This number should be quantified in dollars (or equivalent local currency) since currency is a universal equalizer. Market sizing in number of accounts or consumers is only somewhat useful. In this scenario, there may not be a benchmark against which to compare. A common approach to convey market size is the TAM, SAM, SOM method.

• Total Addressable Market (TAM): the total global market size for a particular product
• Serviceable Addressable Market (SAM): the portion of the TAM that your business model targets given constraints like distribution, geography, or niche specialization
• Serviceable Obtainable Market (SOM): the portion of the SAM that your business can realistically capture given the presence of competing or alternative products

Having a great product and product-market fit is critical to success but are not the only determining factor. Another key component is having a clear path to market and a clearly outlined go-to-market strategy. Investors want to see that you have a strategic and intentional path to reach customers. Pieces of this strategy can include specific retail locations, geographic targeting, distribution channel selectivity, and direct-to-consumer online sales.

In addition to sizing the market and defining how you will reach your audience, you should also define exactly who your target audience is. An effective way to convey this is to create customer archetypes that represent your target markets. Describe each market segment by personifying them with archetypes. Define what is important to each of them and how their preferences and lifestyles coincide with your product offering.

Financials

A strong business case is accompanied by robust financial modeling. Show investors that you have itemized and estimated your expected costs and potential revenues for a period of three to five years into the future. A cash flow summary or pro forma P&L is necessary. These financial projections allow you to illustrate increasing revenue trends, decreasing cost trends, and most importantly, a movement towards positivity in pre-tax income. This inflection point demonstrates that the venture is on the path to profitability. For example, a consumer products business financial projection can include revenue-related items on a quarterly basis projected years into the future such as:

• Number of units sold
• Wholesale revenue / unit
• Total revenue

Similarly, the cost-related items can include:

• Cost of Goods Sold (COGS) such as raw material costs (e.g., ingredients, packaging)
• Distribution and warehousing costs
• Co-manufacturing fees
• Freight and material storage fees
• Other expenses (e.g., headcount, promotions, insurance, legal, accounting, marketing, advertising, IT, etc.)

After categorizing the revenue and cost-related items, you end up with a total of projected revenues and expenses, which gives visibility to pre-tax income. In some cases, pre-tax income or EBITDA may be negative for the year(s) following founding. If this is the case, you should model the future inflection point where your income becomes positive, demonstrating the transition to a profitable business. Financial models allow investors to dig into the numbers and give them the chance to test the model’s assumptions. This lets investors see in real time what outcomes arise if assumptions change or if there are changes in growth rates, number of users, price points, etc. You should provide the financial model spreadsheets to investors on request. Additionally, you should include high-level summaries of the models in the actual investor presentation.

The Ask

The ask quantifies the total amount you seek to raise in your current funding round along with key milestones and a timeline of the use of the funds raised. Investors need to see how companies will utilize their invested capital and what milestones it will help the business achieve. The milestones chosen should be significant achievements towards critical goals for the business (e.g., product finalization, market entry, key partnerships, pilot launch, soft launch, scaling, etc.). Be sure to include the projected timeline and runway during which the invested capital will be used.

Standard guidance is to raise enough capital to provide runway for your business to achieve meaningful milestones. Fundraising is a full-time job, especially during tight economic times, and can take months to achieve a target raise. For example, if you only raise 9 months of runway, you may only have 6 months of full-time focus on the business before you are back on the fundraising trail. It is important to show investors that your time is being used wisely as a business leader and that you are achieving value-accretive milestones to de-risk the business. A well-designed funding round includes milestones that serve to increase the valuation that the company can raise in future rounds.

Utilizing Social Proof as Part of the Story

If you have already raised funds or a certain portion of your current target total, be sure to inform potential investors of that fact. Anecdotally, investors typically do not like to be the first money in a new investment. They want to see that the idea has been evaluated and vetted by other investors who have decided to invest their money. Showing potential investors a percent to target metric for your fundraise can be a useful tool for encouraging participation in the round. You can also motivate participation from new investors if you showcase your prior investors (if permission is granted), especially if those investors are experts in the field, have noteworthy achievements, or have successful investment portfolios.

Team

An important piece of the pitch deck is information about the team. For many investors, this is the driving force for the vision of the venture. While an idea might be innovative and promising, executing that idea can make or break the business. The team is the crucial factor behind the successful execution of the business plan. As such, instill confidence in investors that the venture is being shepherded by the right group of individuals. Detail the team’s backgrounds, expertise, prior successes, collective vision, and motivation. This provides investors with information about the team’s ability to execute as well as their ability to pivot quickly at critical junctures.

Ideally, the team will be diverse and well-rounded, possessing the skills necessary to drive the business forward and generate creative solutions to inevitable setbacks. In early-stage investment scenarios, investors are investing just as much in the team as they are in the idea. Thus, it is important to highlight the team’s passion, competence, credentials, and determination to achieve value-accretive milestones.

Other Content

The pitch deck should have a robust collection of information in the appendix providing extra details and further data in anticipation of any questions that might arise from potential investors. Information can include:

• Credibility drivers. For example, key partnerships, endorsements, high-profile customers, or investors
• FAQs. Preemptively anticipate questions that you could be asked during the presentation and have answers ready. For example:
  • “What did you learn from your pilot?”
  • “What are your top 3 risks and how are you mitigating them?”
  • “How do you plan to drive revenue growth in the next 12 months?”
• Supporting data. This can include scientific evidence, technical specifications, deep financial modeling, etc.
• Contact information. Provide an email address and/or phone number for potential investors to learn more or get in touch with you

Part three of From Vision to Venture explores legal vehicles and instruments to secure capital. It reviews best practices and how to think about a cap table, dilution, and more.

Disclaimer

This article does not constitute fundraising advice and has been shared for informational purposes only. There are important additional details to consider when strategizing and executing a fundraising approach and/or capital raise for a business. Professionals and subject matter experts should be consulted to help determine what makes the most sense for the specific needs of a business before critical decisions are made and transactions are entered. The information contained herein should not be relied upon to make an investment decision, and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. No representation is being made that any account, product, or strategy will or is likely to achieve profits, losses, or results similar to those discussed, if any.