Hey Hackernoon! My name is Igor Shaversky. I am the co-founder of WaveUp. You can read more about us in our profile here or on our website. We are engaged in a rather rare line of business - consulting in VC. What does this mean? That we can tell you a lot about the best way to raise money.
In our first publication, we want to talk about the best way to build the funding ask slide. Let's go!
The moment you make the “big ask,” you have arguably reached the culmination of your pitch deck presentation. Surprise, surprise, that’s also the part where many founders fall flat on their faces, diminishing their chances of getting to the negotiation stage.
Asking for money isn't always as straightforward as it seems. Ask for too much, and you can end up looking for funds for months or years on end. Fail to show how the money will support your business model and facilitate 10x growth – which is what VCs actually invest in – and you’ll be met with a bunch of chuckling faces instead of cash.
While a flawless funding ask slide alone won’t secure you the round, it will do something equally important: it won’t blow your chances. The information discussed below will help you with that.
Three components of the perfect funding ask
The funding ask is the final stage of your fundraising pitch. It often consists of two parts: the ask itself and a description of the use of funds. Here, you explain the sum you are raising, how you will use it, and what it will achieve for the business.
Ideally, it must contain three main components.
- The funding sum
Make sure to put enough thought into how much money you’ll request. A rule of thumb is to base your ballpark on the numbers in your financial model so that you can defend it should the investors challenge you. Remember that, over the course of the fundraising process, you will likely need to adjust the sum anyways. Knowing your maths will help you to find the perfect compromise between what you need and what you are offered.
In some cases, you can also mention the funding stage if you need to put the numbers into context. Mentioning it shows whether the sum and the stage match (which isn’t always the case) and informs the investors about your previously raised funds, if you have any.
- Use of funds & milestones
The vital use of a funds slide must convince investors that
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You know what to do with the money they might give you.
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You know how to achieve X results.
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You and the investors are on the same page about it.
There are a few ways to go about this. One option is to make a pie chart with the main spending categories, the percentage and dollar amount that will go to each, and a brief explanation of what each category will achieve.
For example:
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50% / $700k Product development (release an MVP, add new AI capabilities)
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30% / $420k Marketing and sales (expand sales and marketing teams, Facebook ads)
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20% / $280k Management (hire key C-level team members, etc.)
Here is a good example of a use of funds slide for any stage:
What’s good about this slide?
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It shows milestones
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It shows funds distribution
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It briefly expands upon the processes
Here is another one of the good use of funds examples for mature startups raising their Series A rounds:
You can see that this example of uses of funds skips plenty of details, mainly focusing on strategic goals and expansion; thus, this approach might not work for raising pre-seed or seed stage rounds.
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Traction regarding previous rounds
If this is not your first round of raising funds, mentioning the traction gained in previous rounds can help to tip the scales in your favour. By “traction,” we mean a track record of the efficient use of funds you previously raised. As capital efficiency has officially taken the front seat in terms of importance, anyone who can demonstrate it has a real chance to make the investors’ shortlist for a new round.
Including the logos of the VC firms or the names of your current angel investors are also good moves. Serving as compelling social proof, they show who has trusted you with their money, motivating others to follow suit.
Haven’t raised before? No worries. Investors don’t expect this information if it’s your first raise; after all, there are other ways to show traction early on. Just keep this ace up your sleeve for future rounds.
Most common funding ask mistakes to avoid in your slide
In the course of talking to founders every day, we at Waveup stumble upon a fair share of poor choices made willy-nilly. We have boiled them down to the three most repeated funding slide mistakes that we help our clients fix in their funding proposals.
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The sum is pulled out of a hat
Way too many founders we meet arrive at their funding amount randomly. One client read in a Medium article that you should always request triple what you need. Another one didn’t estimate his cash burn rate and the investment period correctly, asking for money that would keep him afloat for seven months at best. In determining the use of funds, startups benefit from precision.
If your estimate is unreasonably low, you’ll run out of money before reaching your milestones. Asking for too much is no better, either. No one will commit more than the necessary amount unless you show stellar traction and growth.
How to fix: Calculate how much money you need for the next 12–18 months; that’s how long a typical round lasts. This sum is situated between your burn rate, cash flow gap, and runway numbers. To arrive at these figures, calculate the following:
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CapEx, or one-time expenses (licences, machinery)
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OpEx, or recurring expenses (salaries, marketing, rent)
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Your NWC, or net working capital
Yes, coming up with the right amount can be a tough nut to crack. Some nuances are hard to get right if you aren’t a financial wizard, so we often sit down and calculate them with our clients. This process results in a realistic and defensible sum, therefore the game is worth the candle.
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Putting all the funds into salaries
If only we had a penny for every time we’ve seen founders make this mistake. Yes, we know that at least 60% of the cash you raise will cover salaries (at least at the start), but that’s not what investors want to hear. That’s surely not what’s going to convince them to give you $3M.
How to fix: Instead of funnelling everything into salaries, be more strategic. Manipulate the structure and numbers in your use of funds slide. Distribute the funds evenly across the departments, like in our example at the start. You could also attribute the money to the core activities that will achieve the key milestones (e.g., user acquisition, purchasing licences, etc.). As for the salaries, the more of them you can cover from your future revenue, the better.
- Oversharing your terms
Particularly, valuation. There are two reasons why we don’t recommend our clients drop the V-bomb during their pitch deck. First, it can scare off investors who expect a larger piece of the pie, killing the chance to negotiate with them. Or conversely, you’ll end up giving up more than you could’ve.
How to fix: It never hurts to save the conversation about your terms for the after-pitch talk. It includes voicing your valuation, discussing the instrument (preferred shares, convertible notes), minimum ticket, and so on. Best case scenario – you reach an agreement and raise the round. Worst case scenario – you don’t get the money but at least establish a valuable connection!
Common after-pitch questions from investors
What are your cash burn and runway rates?
It’s common practice for investors to check if the founders understand how long the round will last. That’s why knowing your maths when coming up with the cash ask is of utmost importance.
What positions in the team do you need to fill?
Knowing your hires demonstrates that you know the ins and outs of your business. Needless to say, answering this question should be as easy as counting to ten.
When are you going to break even?
If you don’t mention this as one of your milestones, expect to hear this question. Of course, you should prepare the answer beforehand. Check with the industry benchmarks, and be realistic in your projections, especially if you’re an early-stage startup.
Why does so much money go to X?
This question can stem from either a negative experience with a given line of expenditures, simple curiosity, or a test of your business acumen. Either way, it can be handy to have an explanation ready.
Wrapping up
The funding ask provides the momentum of your pitch deck presentation. The stakes are too high to take your chances and rely on guesswork. A well-structured, visually appealing, and persuasive funding ask slide that moves you to negotiations is rarely a result of randomness. No effective pitch deck ever is. That is why it is so important to know your numbers, show how the use of funds will facilitate business growth, keep the visuals simple, and use our examples as a reference.