Business financial make money capital trading
- Frank Rotman, a founding partner at QED Investors and an early backer of Credit Karma, took to Twitter to share the four parts of a typical startup pitch, and the common mistakes that founders make in each part.
- He urged founders to offer specifics around the business model and avoid leaning too heavily on the founder’s historical successes.
- To capture a VC’s attention, and an investment, a startup needs to not only tell the story of what they are building and the total addressable market, but how they plan to build a a gigantic business, Rotman said on Twitter.
- We’ve shared Rotman’s full tweet thread with his permission.
- Visit Business Insider’s homepage for more stories.
Frank Rotman has heard enough startup pitches to know the rhythm of them.
“Every early stage startup pitch looks the same at a foundational level. This means that the analysis of every early stage startup also looks similar,” Rotman, a founding partner at QED Investors, said in a recent tweet thread.
Rotman is a financial services industry veteran who worked at Capital One for 13 years before he started writing checks into startups, including Credit Karma, Braintree, and SoFi. He also writes a blog called Fintech Junkie.
In a tweet thread, the venture capitalist broke down the typical startup pitch into four components — a problem statement, a solution statement, a financial statement, and a team statement — and explained the mistakes to avoid in telling that story.
Typically, a startup pitch introduces a problem for a group of customers and suggests the startup’s idea as the solution. The so-called “solution statement” should then be supported by whatever evidence the startup has that its approach will be met with strong market demand. The pitch should then present evidence on how much money can be made on its solution, Rotman explained. That’s the money for the company, and the returns for investors, who supported them along the way.
But he said all too often young companies lean on the greatness of their founders to sell an idea. The team’s past wins, however, “aren’t correlated with their odds of success in building something new,” Rotman said.
It’s critical that the startup pitch explains all three other components: problem, solution, and financial, he said.
—Frank Rotman (@fintechjunkie) September 23, 2020
He urged founders to be specific. For the problem statement, the pitch should answer how large the addressable market is and what target customers are willing to pay. For the solution statement, they should show that the technology is possible.
The financial statement should address the unit economics — the revenues and costs — associated with a particular business model, as well as whatever evidence the startup has that it can beat out the incumbent businesses.
“Too many Founders (sic) assume that the competition is slow and stupid. Competitors might be slow to change but they’re not stupid nor are they inert and they have scale on their side,” Rotman said.
And when founders do talk about their team, they can improve the pitch by not just talking about their track records but also “their industry specific knowledge and ability to identify landmines, their experience navigating regulatory complexities, their moral compass when faced with economic tradeoffs, and their ability to attract world class talent,” he added.
Business financial make money capital trading From thesis to a $7.1 billion exit
His advice maps to one of his earliest investments, Credit Karma.
Credit Karma’s sale to Intuit, the maker of TurboTax, for $7.1 billion in February netted Rotman his biggest exit yet. His firm led the Series A round of funding during the last financial crisis in 2009, when few investors had the confidence to back financial services technologies, he told Business Insider at the time of the Intuit acquisition.
Yet, he was convinced to back Credit Karma from a calculated analysis of it’s appeal. Rotman knew that banks and credit-card issuers would want to work with the startup because they relied largely on direct mail to acquire customers in those days. That’s where Credit Karma proved useful. Customers volunteered data to get their free credit score reports. The startup then had data on customers to show them targeted and specific ads for financial products they needed and could qualify for.
His thesis proved correct. And Credit Karma was Intuit’s largest acquisition by sale price in its 37 years of business.
Business financial make money capital trading All the pitching mistakes and how to avoid them
Rotman shared his advice for founders putting together their startup pitch on Twitter. We’ve reposted with his permission, and we’ve bolded what we consider the mistakes to avoid.
1/21: Every early stage startup pitch looks the same at a foundational level. This means that the analysis of every early stage startup also looks similar (especially true in #venturecapital and #fintech). Unpacked:
2/21: Every pitch has four main high-level asserted statements: A problem statement, a solution statement, a financial statement and a team statement.
3/21: The problem statement is the Founder’s way of helping his/her audience internalize a problem they’ve discovered in their target market and an articulation of why it’s a gigantic and profoundly painful problem to a defined group of customers.
4/21: The solution statement is the Founder’s way of articulating a better way of solving the profoundly painful problem they described in the problem statement paired with whatever evidence they have that the end users agree (i.e. – market traction).
5/21: The financial statement is a way of articulating the prize that everyone is playing for if the problem and solution statements are correct.
6/21: The team statement is the Founder’s way of articulating why the audience should trust that the problem is well understood, the solution is well designed, and that the assumptions baked into the financial model are “experientially grounded”.
7/21: The job of an early stage investor is to dig in, tear apart and have opinions on all four of these statements. The work becomes the “path to conviction”.
8/21: Using one “statement” to prove another is lazy but pretty common in today’s over-saturated venture ecosystem. The most common refrain I hear is: “The Founders are great so therefore….”. The team might be great but isn’t proof of the other statements.
9/21: The art in tearing apart the problem statement is to figure out how profound the problem is and what subset of the market is willing to pay to solve it. Founders typically overstate how painful the problem is and don’t always understand how large the addressable market is.
10/21: The art in tearing apart the solution statement is to figure out if the described solution is possible to build and if built is it “better by enough” to overcome inertia and friction. Founders typically underestimate inertia and overestimate how good their solution is.
11/21: The art in tearing apart the financial statement is to figure out the key drivers of the financial outcomes and ground them to known analogues in the current ecosystem. The more a model describes “existing norms delivered in a better way” the more believable the output is.
12/21: Unit economics matter more than Founders want to believe and not enough attention is typically paid to how the units are manufactured. Manufacturing costs are almost always underestimated (OpEx and SG&A) and crush many startups as they scale.
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13/21: Market penetration analysis needs to be put in the context of the competitive landscape and too many Founders assume that the competition is slow and stupid. Competitors might be slow to change but they’re not stupid nor are they inert and they have scale on their side.
14/21: The art in tearing apart the team statement is to find a way to see through charisma and judge a team on other competencies. Charisma can be blinding and many team’s historical successes aren’t correlated with their odds of success in building something new.
15/21: Of importance: The team’s track record, their industry specific knowledge and ability to identify landmines, their experience navigating regulatory complexities, their moral compass when faced with economic tradeoffs, and their ability to attract world class talent.
16/21: Many VCs throw out a company’s solution and financial statements on the grounds that they will change over time as the company learns. This might be true but these statements set the foundation for the company’s learning agenda and are windows into how the Founders think.
17/21: LPs shouldn’t be paying VCs to be 95% talent scouts and 5% business analyzers. Winning plays out over time and if a VC can’t give specific advice day zero then they’re setting the stage to only give generic advice over the next 7-10 years (which is a commodity).
18/21: What “VC conviction” looks like coming out of this process is a narrative about what’s being created, what has to go right to build a gigantic business, how it fits with a view of the future of the ecosystem and what the reward is if things go roughly according to plan.
19/21: The VC is going to be wrong on most details coming out of this process but if they’re directionally right on the drivers the destination will still be an extremely attractive one. Teams can adjust to market feedback but businesses can’t adjust to market forces.
20/21: Venture investing is easy to do poorly and hard to do well but this is true of most professions. There are other ways of being successful as a VC but being thorough and complete is what works for me. I appreciate there are different styles of investing but why be lazy?
21/21: Curious to hear what investors with different styles think. RT with comments so we can get a discussion going!
Now read the full tweet thread.
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