The VC Factory

The VC Accelerator

How Elite VCs Read Startup Pitch Decks In 3 Minutes

Aram

Venture Capital is a high-velocity asset class requiring quick go/no-go decisions multiple times daily. Data reveals that Venture Capitalists typically spend just a few minutes on startup pitch decks, either to prep for a call with a Founder or to decide whether such a call is worth their time. Understanding this, the question becomes: How do elite VCs efficiently sift through the clutter to focus on the potential winners?

In this post, I draw from best practices top VCs use to evaluate startup pitch decks quickly. The article is structured around the critical questions VCs ask themselves while going through startup pitch decks, ultimately answering the question: “Why should I care?” This article primarily aims to assist Venture Capitalists in streamlining their pitch deck evaluation processes. Still, Founders will also benefit immensely by gaining an insider’s view into the Venture Capital decision-making process.

I illustrate my points using the famous Airbnb pitch deck as a case study. While not perfect, this deck is often imitated but rarely surpassed, capturing many elements that Venture Capitalists typically look for in early-stage startups.

Join our VC Career Accelerator (for active VCs) or our VC Job Accelerator (for aspiring VCs) to benefit from personalized mentoring and tools to succeed in your Venture Capital careers.

In This Post

1. “What Is This Pitch Deck About?”

First impressions are crucial, more so for Venture Capitalists who receive dozens, if not hundreds, of startup pitch decks yearly. Elite VCs know what they expect from pitch decks, and many VC firms have shared startup pitch deck templates to help Founders make a document in a particular order that is easy to read because they are used to it.

However, it doesn’t mean VCs read startup pitch decks page by page. Venture Capitalists will flip back and forth through a deck, ticking off their mental checklist. So not only should the deck immediately answer the question—”What is this about?”—but it must also do so in a way that sets the stage for the rest of the slides to come.

Cover and Tagline: More Than a Formality

The cover slide and tagline aren’t merely placeholders—they’re an integral part of how a Venture Capitalist assesses a startup at first glance. A well-crafted tagline can instantly convey the essence of what the startup does and why it could be a game-changing venture.

If the tagline resonates with the Venture Capitalist’s current focus or personal convictions, it could significantly increase the chances of a deep dive into the deck. Conversely, a vague or overly complicated tagline may signal a lack of clarity in vision or value proposition.

Taglines also serve a crucial role in immediately focusing the Venture Capitalist’s attention on the vertical being addressed by the startup. Given the high deal flow, a Venture Capitalist’s day often involves reviewing an eclectic mix of startup pitch decks, ranging from B2B SaaS startups to e-commerce operations. A clear, concise tagline enables the Venture Capitalist to instantly contextualize the startup, making assessing fit with their investment strategy easier.

Airbnb hosts initially offered airbeds in their apartments

The tagline “Book rooms with locals rather than hotels” employed by Airbnb in their early-stage fundraising pitch deck is an exemplary case of effective messaging. It immediately signals to the Venture Capitalist not only the vertical the startup is operating in—travel and hospitality—but also hints at the disruptive nature of the business model.

The tagline succinctly contrasts Airbnb’s offering with traditional hotels, capturing the essence of the startup’s unique value proposition. For a Venture Capitalist navigating through multiple startup pitch decks in a single day, such a tagline acts as an efficient mental bookmark, aiding in rapid contextualization and evaluation of the investment opportunity.

Page Design: The Subconscious Weighs In

The design of the pitch deck is often an overlooked element that carries subtle, sometimes unconscious, biases. A clean, professional design not only enhances readability but also signals a well-thought-out pitch and, by extension, a competent team.

Conversely, inconsistencies in font, cluttered layouts, or even the wrong color scheme can introduce a slight but pervasive sense of disorder. While seemingly trivial, these visual factors can subconsciously affect a Venture Capitalist’s willingness to invest time in evaluating the opportunity. Design elements can tip the scales in the startup’s favor—or against it.

Airbnb’s Founders are designers; it is one reason why their fundraising pitch deck stands out.

Go Further: The 7 Secret Evaluation Criteria Venture Capitalists Use To Make Investment Decisions

However, top-tier VCs do not underestimate the psychological dimension of their decision process. They know how to look beyond the surface of well-designed or lackluster startup pitch decks to hone in on the essence of what a startup brings to the table. They recognize that not all Founders are design-savvy, yet they may be visionaries with groundbreaking ideas. By not fixating on design aesthetics, VCs give themselves the latitude to evaluate the core merits of a business idea and the team behind it.

This approach also promotes greater diversity in deal sourcing, allowing VCs to uncover gems that might otherwise be overlooked due to superficial shortcomings. Being open to different styles and formats of presentation can provide a competitive edge, enabling VCs to source deals from a broader, more diverse set of opportunities than those who focus solely on surface-level elements.

2. “Does It Fit My Investment Strategy?”

As outlined in my post “Venture Capital Funds: 5 Questions For Optimal Capital Deployment”, a VC firm’s investment strategy is a core driver of its investment team’s focus. To make efficient use of their time, experienced VCs quickly discern whether a startup aligns with their investment strategy. While they review the deck, they make mental notes to validate whether they should spend more time on a particular investment opportunity.

The typical information they look for includes:

These elements are typically scattered throughout the deck and sometimes not mentioned, which sometimes is a drag of VCs’ time.

Go Further: The 3 Investment Criteria Venture Capitalists Use to Screen Deal Flow

In later stages of investment, particularly in growth equity and leveraged buyouts (LBOs), it’s common for Founders to include an executive summary as part of their fundraising pitch deck material, called an information memorandum.

The “exec sum” efficiently informs Investors whether the company aligns with their specific investment strategy, allowing for quick decision-making. Unfortunately, this best practice is rarely emulated in early-stage Venture Capital scenarios. Adopting this approach could significantly streamline the evaluation process for VCs and offer a concise way to convey the startup’s value proposition, key metrics, and alignment with a Venture Capitalist’s investment criteria.

Airbnb’s fundraising pitch deck slide titled “Financial” encapsulates some pivotal elements that align with what Venture Capitalists typically look for regarding investment strategy. The slide succinctly states that they are seeking financing for 12 months to achieve 80,000 transactions, underlining both the short-term objective and an explicit key performance indicator (KPI). The visual representation of their $500K Angel round juxtaposed against the expected 80K trips and anticipated $2M revenue makes for quick and efficient comprehension.

I also like that this slide focuses on milestones, not costs.

I often ask Founders: “What do you want the money for?” to test them. When a Founder responds with a generic list like “hire a sales team, spend on advertising, and hire more developers,” a mental orange flag appears in my head. Such answers lean towards describing inputs and may indicate a prevention-focused mindset. VCs are primarily interested in the expected outcomes these inputs will drive.

By emphasizing milestones, Founders can better align with a Venture Capitalist’s perspective. A growth-oriented metric offers a tangible and quantifiable goal, enabling Investors to measure progress, predict potential returns, and assess the company’s ability to execute its strategy.

Go Further: Don’t Ask Venture Capitalists Too Much Money – Here’s How To Size Your Funding Round

However, one noteworthy observation is the placement of this crucial slide. It is positioned at the end of the fundraising pitch deck. Given its importance in communicating alignment with a Venture Capitalist’s investment strategy, leading with this slide or placing it more prominently might have helped Airbnb more immediately establish the nature of the opportunity and its strategic goals. This is especially salient considering that VCs, due to high deal flow, may not always progress through every slide in the deck.

3. “Yet Another Product That Nobody Wants?”

We now get into the crux of the analysis VCs conduct on startup pitch decks. Contrary to what many Founders believe, Investors are not primarily interested in their product. After validating that the startup indeed fits their investment strategy, experienced Venture Capitalists obsess about the reality of the problem the startup decided to tackle.

They know the pitfalls of investing in startups that might appear innovative but lack a genuine problem to solve. They’ve witnessed, time and again, bright ideas that did not resonate with a sizable or urgent market need and ultimately joined what I call the “startup cemetery.” The ability to discern between a startup genuinely addressing a pressing issue versus one that is merely an answer without a question becomes paramount.

Most startups are great at creating, over time and over budget, a product that nobody wants.

Eric Ries – LEan Startup

VCs learned the hard way that the primary cause of startup failure is not securing a loyal and expanding customer base. It’s not enough for a startup to showcase an impressive product or solution; it has to resonate with an actual pain point or unmet market needs. Elite VCs have cultivated an instinct for this, often seeking tangible proof, like early traction or deep market research, to validate a startup’s proposition. This is why product-market fit is such an essential concept for financial Investors.

Go further: “Adding More Money To A Situation of Lack of Product-Market Fit Rarely Works.” – Justin Kan.

Reading these early signals is the focus of my VC Career Accelerator‘s practice sessions. We review real-life startup pitch decks and “build the muscle” of quickly evaluating their potential. I encourage Investors to get into the end user’s shoes when considering a startup’s value proposition. They must learn to discern if the product or service offered helps their customers fill at least one of the following needs:

Above all, experienced Venture Capitalists prize a distinct insight that sets the Founding team apart—an understanding or vision that eludes others in the market. Such insights often form the bedrock of disruptive innovations.

Let’s take Airbnb as an illustrative example. Bryan Chesky’s unique insight is to have recognized that while hotels had streamlined the unpredictability of bed and breakfast stays with standardization, there was an untapped opportunity. He envisioned a model that combined the consistency and predictability guests cherished in hotels with the warmth and authenticity inherent to bed and breakfasts. His unique perspective on blending the best of both worlds was central to Airbnb’s novel approach to lodging.

Airbnb’s problem slide succinctly highlights the main pain points faced by travelers: the cost of online bookings, the impersonal nature of hotels, and the lack of easy local hosting options. While these are valid concerns, from a Venture Capitalist perspective, it’s essential to see data backing these claims, demonstrating a genuine market need. (See the next slide).

The slide might also benefit from a clearer presentation of how widespread these problems are and who specifically faces them. Airbnb is a platform catering to hosts and guests, which makes the message a tad complex. The Founders should have shown both parties’ problems. One of the startup’s critical success factors is that, after the 2008 Great Financial Crisis, more people were open to renting out their properties to make an extra buck.

There is another issue with Airbnb’s problem slide. A cardinal rule is the singularity of focus. Often, startups fall into the trap of presenting an assortment of problems, each necessitating its own unique product, go-to-market strategy, and distinct marketing endeavors. This scattershot approach not only dilutes the core message but also raises red flags for potential Investors about the startup’s ability to execute efficiently.

Consider, for instance, a startup aiming to revolutionize the health industry. If their Problem slide highlights issues ranging from inefficient hospital administration to the need for better mental health apps and the lack of effective fitness trackers, it immediately begs the question: Which problem are they truly equipped to tackle? A scattered approach hints at a lack of clear direction and strategy, which is precisely what Investors are wary of.

To me, this slide is the master stroke in Airbnb’s pitch deck. It illustrates perfectly what Harvard Business School’s Bill Sahlman preached to entrepreneurs for decades: they need to produce data to shift discussions from a debate of opinions—that they are bound to lose, being on the wrong side of the checkbook—to a dialogue rooted in facts. Startups often face skepticism, and without hard data, they are left in subjective debates where they are at a disadvantage.

Startups are in the business of gathering data. Investors are in the business of analyzing data.

Bill Sahlman – Harvard Business School

Perhaps no other successful startup in history met as much skepticism from Investors as Airbnb (with the exception of Tesla and SpaceX). VCs were convinced that guests would be sexually assaulted or murdered. They had trouble understanding how anyone in their right mind would host a complete stranger on an airbed.

The “Market Validation” slide, which is uncommon in startup pitch decks, was a critical part of Airbnb’s demonstration that there was indeed a market for their product.

The fact that Couchsurfing, a platform connecting travelers with locals willing to offer a free place to stay, had 660,000 total users demonstrated that there was already a sizable number of people comfortable with the idea of staying with strangers. This helped dispel the commonly held belief that people wouldn’t be open to such arrangements due to safety concerns or the perceived oddity of hosting strangers. (Fun fact: Very few people identified the typo “Couchsufing” in the slide).

Go Further: “The best entrepreneurs see things as they are and not how they want them to be.” – Arthur Rock

Additionally, the 50,000 temporary housing listings per week on Craigslist in the U.S. showed that there was a significant demand for short-term housing solutions outside the conventional hotel sphere.

By presenting this data, Airbnb effectively convinced Investors that there was a pre-existing market and demand for their proposed service. Instead of relying on mere conjectures or beliefs about the potential dangers of hosting strangers, Airbnb grounded its market validation in tangible numbers.

4. “Is It Compatible with Venture Capital?”

Contrary to what constant social media posts led many to believe in the last market upcycle, Venture Capital is not a one-size-fits-all solution for every startup. After validating that the startup fits their investment strategy, top VCs avidly look for signs of scalability and the potential to address a large market.

Market Size or Market Opportunity?

How do elite VCs evaluate market size? I wrote two lengthy and detailed posts on the topic, mostly to help Founders create helpful market slides. VCs use the TAM SAM SOM to evaluate market size, and the beachhead approach to assess market opportunity.

Elite Venture Capitalists understand that mere market size isn’t an indicator of a startup’s potential success. They don’t fall into the “TAM trap,” where founders highlight an immense market and argue that by capturing just “1%”, they’d be on their way to creating a unicorn. This overly simplistic approach often fails to convince experienced Investors.

Rather, seasoned Venture Capitalists gravitate towards the SAM (Serviceable Available Market). SAM doesn’t just represent a number; it showcases the unique insight the Founding team possesses about their market. It reflects the granularity of their understanding, suggesting that they’ve engaged with potential customers to discern who feels the most acute pain from the problem the startup aims to solve.

Go Further: TAM SAM SOM Explained From The Investor’s Point Of View

When Founders present vast market sizes without clear identification of segments or pinpointing their beachhead customers, they inadvertently send a signal to Investors. It suggests they’re more inward-focused, rather than genuinely understanding the external market and its intricacies. Worse, it may indicate a tendency to fear failure, which is not a precursor to success in entrepreneurs.

For a startup to truly resonate with elite Venture Capitalists, it’s not just about showing opportunity – it’s about demonstrating a deep, nuanced understanding of that opportunity.

Airbnb’s presentation is a good example. The Founders didn’t fall into the TAM trap; they started with TAM but quickly moved to more refined and actionable segments. The TAM gave a sense of the magnitude of the entire market, especially as the share of the budget and online segments grows in the total travel market.

By narrowing down their SAM, Airbnb’s Founders demonstrated a clear understanding of their target clients. They’ve identified their niche (budget and online travelers) and have set clear short-term goals.

This slide would likely indicate to an experienced Venture Capitalist that Airbnb’s Founding team is looking outward and has a clear comprehension of their place in the larger travel market. They’ve identified their core client base and are not just chasing after the allure of a vast, but generic, market.

Assessing Scalability in Startup Pitch Decks

A startup may have a great product and address a large market, but if the business model is not scalable or the market size is limited, it could be a quick “no” for most Venture Capitalists. It is essential to take a moment to gauge these factors because they can be the ultimate litmus test for the company’s compatibility with VC investment.

Surprisingly, scalability’s core essence is often misinterpreted by many, including some Venture Capitalists and, even more frequently, Founders. At its heart, scalability isn’t just about rapid expansion or skyrocketing user numbers; it’s deeply ingrained in the very fabric of a startup’s business model and growth strategy.

Simply put, scalability describes a startup’s ability to grow without being hampered by its structure or unavailable resources when facing increased production. It’s about achieving higher revenue growth without a corresponding linear increase in costs. This property makes a scalable business particularly attractive, as it means potentially exponential profit growth. Virality and network effects (which are two different concepts) help scalability, but they don’t equate with it.

I don’t know how to write a business plan, but I know how to read them. You start at the back, and if the numbers are big, we look at the front.

Tom Perkins – Kleiner Perkins (Read more about this quote in this article)

Consider Dropbox, whose business model exemplifies scalability. Once the infrastructure was set up, adding an additional user incurred minimal costs–mostly storage costs, which continued to decrease over time due to technological advancements. Their revenue, however, increased with each premium user addition, creating a situation where revenues grew at a much steeper rate than costs.

What makes Dropbox’s example even more compelling is that even their user acquisition strategy was scalable. By offering additional free storage to users who referred others, they turned their user base into promoters. This referral strategy meant that their user acquisition costs didn’t spike significantly as they grew, maintaining a scalable model not just in product delivery but also in marketing.

Go Further: Venture Capitalists: Here’s How To Identify Network Effects

Experienced Venture Capitalists pay keen attention to the business model slide in startup pitch decks, as it provides pivotal clues about a venture’s scalability potential. For instance, platform-based models, like Facebook and Uber, inherently possess scalability. These models allow for the addition of new users at marginal costs, who are then monetized through advertising or commissions on rides, respectively.

Conversely, models that rely heavily on manual processes might not scale as efficiently. Think of tech firms that might need to install hardware for each new client or provide intensive, one-on-one customer service. It’s a trap that even SaaS startups, which are supposedly the epitome of scalability, often fall prey to.

Airbnb’s “Business Model” slide provides a comprehensive insight into the company’s potential for growth and its inherent scalability. The slide commences with the statement, “We take a 10% commission on each transaction.” This commission-based model underscores Airbnb’s strength. Since Airbnb operates as a platform without owning the properties, it means that each new booking brings in a significant profit margin once the minimal variable costs and fixed costs, such as platform maintenance, are accounted for.

While analyzing business models offers a good first step, the litmus test of scalability often lies in the financial projections. A detailed examination of how revenues are projected to grow in comparison to costs can give a more concrete picture of scalability. During the exploratory due diligence process, top-tier VCs sensitize the startup’s financial model. By adjusting key variables to see how they affect outcomes, they can further probe and validate a startup’s scalability claims, ensuring they’re not just on paper but viable in the real world.

Airbnb’s fundraising pitch deck does not include detailed financials, which are rarely shared publicly, but no doubt early Investors such as Sequoia carefully analyzed the company’s scalability.

5. “Will The Startup Be Profitable One Day?”

The balance between growth and profitability remains a hotly debated topic in Venture Capital. While some Venture Capitalists champion rapid expansion at the expense of short-term profitability, others argue for a more balanced approach. Nonetheless, both sides agree that long-term profitability is non-negotiable. A startup’s future profitability, by and large, provides assurance that it will find an exit route and yield returns, making it a critical metric for Venture Capitalists.

Central to this assessment is the concept of unit economics. Simply put, unit economics break down the financial performance of a business into its fundamental units, elucidating the profit or loss incurred per unit of product or service sold. This granular analysis offers Venture Capitalists a clear lens into the viability of the startup’s business model. Positive unit economics indicate that as the business scales, profitability should follow. Conversely, negative unit economics, unless addressed, may signal inherent challenges in achieving profitability.

Go Further: How Venture Capitalists Evaluate Unit Economics

To discern a startup’s trajectory toward profitability, top-tier Venture Capitalists meticulously analyze three pivotal slides in startup pitch decks:

Certainly, the vast majority of early-stage startup pitch decks, especially those constrained to a concise 10- or 15-page format, do not encompass all the nuanced details that Venture Capitalists seek. The primary goal of these decks is to captivate interest and open doors, rather than serve as exhaustive business plans. Airbnb’s pitch deck does not contain such data either, given how early the company pitched Investors.

Recognizing this, elite Venture Capitalists have honed their ability to draw preliminary conclusions from the limited data presented, discerning the potential and viability of a venture. If a pitch piques their interest, they will subsequently engage with Founders for deeper exploration, delving into the facets not covered in the initial presentation.

6. “What Type of Risk Am I Taking?”

I often joke that most Investors focus more on “capital” than “venture” when they join the industry, meaning that they like juicy returns but fail to understand that there is no easy payout in VC. Investing in startups is inherently tied to embracing various forms of risks.

Top-tier VCs see things differently. They are fine with taking enormous amounts of risk, provided potential returns are commensurate. They focus their time and value on startups with low odds of success, but tremendous potential.

Depending on the startup’s development stage, different types of risks emerge, attracting distinct categories of Investors. These Investors, based on their specialization and tolerance, are inclined to bear specific risks that align with a startup’s growth trajectory.

Go Further: Understanding the Power Law: Do Venture Capitalists Take Enough Risks?

A common oversight of Founders is their struggle to express clearly the risk they’re presenting to Investors in their funding round. One of the primary reasons behind this is their inability to delineate the precise objectives or tests they aim to execute using the procured funds. The clarity in communicating these tests and objectives can greatly influence an Investor’s perception of the risk involved.

The spectrum of risks associated with startups is broadly as follows:

Elite Venture Capitalists meticulously comb through pitch decks, hunting for breadcrumbs that shed light on these risks. Their scrutiny isn’t isolated to one or two slides but spans the entire narrative of the deck, integrating all the facets previously mentioned.

Ultimately, the way Venture Capitalists interpret the risks shapes the startup’s valuation they have in mind. This valuation is the culmination of their risk-return analysis, reflecting their perceived balance between the potential rewards and the venture’s inherent uncertainties.

7. “How Likely Are They To Succeed?”

Determining the likelihood of a startup’s success is the linchpin around which a Venture Capitalist’s decision revolves. Predicting success is a complex endeavor. If it were straightforward, everyone in VC would make money. However, experienced VCs lean on the power of pattern recognition, developed over years of observing trends, identifying traits of winning startups, and sometimes learning from missed opportunities.

Three slides in startup pitch decks that VCs use to forecast success are the Solution, Competition, Go-To-Market, and Team ones.

Solution: Core vs. Periphery

The solution or product presented in the pitch deck should seamlessly align with the problem pinpointed earlier. Surprisingly, some startups occasionally miss this crucial connection. They correctly analyze a market problem (say, the high price of a specific procedure) but then present a solution focused on offering more range, not a lower price.

The solution also needs to be easily comprehensible and encourage swift adoption or implementation. Recognizing that people are generally resistant to changing habits, it’s imperative that the solution not only addresses the issue at hand but does so in a manner that minimizes friction at every touchpoint. The smoother the solution, the greater the likelihood of users integrating it into their routines.

Airbnb’s “Solution” slide materializes its offering (“a web platform“), a crucial point often overlooked by Founders which can leave Venture Capitalists grappling with understanding the nature of the product in startup pitch decks they read at fast speed: software, service, or else.

The slide, however, retains ambiguity from its predecessor, the “Problem” slide. The platform serves two stakeholders with different needs. A better approach would have been to clearly separate Guest and Hosts visually and underscore the solution’s distinct advantages for each user group.

Another crucial point is to distinguish between must-haves and nice-to-haves—a framework that hyperactive early-stage VC firm Kima Ventures calls the NPE Canvas (for Narrative, Primitive, Enablers). While saving and making money are must-haves, core to why clients would be drawn to Airbnb, sharing a connection falls into the realm of nice-to-haves. An experienced Venture Capitalist may challenge this by posing questions like: Would a guest pay a 20% premium just for the cultural sharing aspect? Such insights help to determine the true value propositions that drive customer acquisition and retention.

Competition: Job To Be Done

A common pitfall for Founders is underestimating or being oblivious to their competition. When they declare, “We’re the only ones,” it’s frequently a red flag for Venture Capitalists. Such a statement might indicate the market is premature, previous attempts have been unsuccessful, or perhaps the unit economics simply aren’t viable.

The allure of the “first-mover advantage” is another misconception held by many Founders. Contrary to popular belief, being the pioneer in a market doesn’t guarantee success, a notion well anchored in experienced VCs’ minds—who often learned the lesson the hard way. In reality, most of the time, “fast-seconds”, those who swiftly follow the pioneers, learning from their mistakes, are the ones who prevail. I detailed this argument in the context of the growth vs. profits debate in Venture Capital in the post referenced below.

Go Further: How Venture Capitalists Evaluate Unit Economics

Additionally, Founders often underestimate the vast exposure Venture Capitalists have to startups. It’s not uncommon for a VC to have met multiple teams addressing the same challenge. In such cases, they’re evaluating which team seems the most capable and has the most promising approach.

However, the gravest oversight many Founders commit is confining their competition to direct counterparts in the same product category. Elite VCs comprehend competition more broadly, adopting the customer’s perspective. Drawing from the Job To Be Done (JTBD) theory championed by Harvard’s Clayton Christensen, they recognize that often, the most formidable competitor a startup faces is inertia—the reluctance of potential users to change their existing behaviors.

For instance, while the proposition of mobile payment systems may seem convenient, it took a considerable amount of time to gain traction over traditional payment cards. The inertia of the established behavior—swiping a card—was a formidable opponent. This underlines the fact that sometimes, the biggest competition is simply the status quo or the ease of doing nothing. I wrote a post a while back on this point, which remains valid.

I often hear Founders and even VCs complain about the “four-blocker” competition slide, ridiculed as a consultant ploy to position the startup on the top right. Clearly, those critics do not understand the power of this slide when correctly executed.

Elite VCs use this slide not only to understand how the startup is positioned and whether Founders understand their market’s competitive pressure; they also exploit signals relevant to the startup’s success. Analyzing the slides’ axes, VCs evaluate the startup’s Key Success Factors (KSF), which will make customers buy the product or service.

Airbnb’s Founders indicated that factors crucial to its target customers are affordability (how much a stay costs) and practicality (how easy is it to access). others. This slide not only shows an understanding of their direct product category competitors, but a deeper comprehension of the underlying needs and behaviors of their target market.

If your customers are not desperate for your product, you’re screwed.

Andy RAchleff – Benchmark, Wealthfront (Learn more in this post)

Too often, the two axes pertain to the Founders, not potential clients. For instance, the slide indicates “Depth of the offer” and “High-end positioning”, but it becomes clear that customers want a lower price, faster delivery, or more flexibility. Experienced VCs derive from this slide how much Founders talk to their target clients. Too many entrepreneurs focus on adding more useless features to their products instead of talking to clients, a behavior driven by the fear of failure, the maladaptive form of perfectionism, and a dominant prevention-focused personality.

Go Further: How Venture Capitalists Evaluate Successful Startup Founders — And What They Should Do Instead

Founders often underestimate the signal-seeking behavior of elite VCs, who rely on very little information to make fast-paced decisions.

Go-To-Market Strategy: Reach vs. Cost

A well-suited product needs an equally robust plan to reach its intended users. VCs analyze the go-to-market strategy to ensure there’s a well-thought-out plan to gain initial traction and continue growing.

The Go-to-Market (GTM) strategy is a tactical action plan outlining how a company will sell its products and services to customers. It’s more than just a marketing strategy; it spans the entire organization and integrates functions like marketing, sales, product development, and customer service. The goal of a GTM strategy is to provide a blueprint for delivering a product or service to the end customer, taking into account such factors as pricing and distribution.

B2C vs. B2B: Pros & Cons For Top-Tier VCs

The first layer that VCs want to understand is the Business-to-Business (B2B, which also includes public institutions) vs. Business-to-Consumer strategy, as they have different risk-reward profiles.

B2C: CAC vs. Margin. B2C startups such as social media platforms, e-commerce websites, and freemium apps present attractive features such as higher margins. The direct-to-consumer approach also allows for more control over pricing, branding, and customer experience. However, a prominent challenge is gaining market awareness. To establish a brand and product presence in the consumer’s mind, startups typically require significant capital for marketing and advertising efforts—a no-go most many Investors. Experienced Venture Capitalists are also acutely aware that the Customer Acquisition Cost (CAC) tends to increase sharply after capturing early adopters.

B2B: Sales velocity but long commercial cycles. B2B startups often benefit from a more rapid increase in sales. By targeting businesses, they can secure larger contract values compared to individual consumers, leading to higher immediate revenues. However, a challenge inherent to B2B models is the longer commercial cycles. Negotiating contracts, navigating procurement processes, and ensuring integration or compliance can extend the sales timeline. This can lead to cash flow challenges, especially for startups without a substantial financial runway.

Dual approaches. Startups sometimes pivot between B2C and B2B models based on market feedback and opportunity assessment, especially in the early stages. Some startups begin with a B2C model to gain user feedback, build brand awareness, and refine their product. They leverage a proven product and significant user base to offer B2B solutions, showcasing their established platform and user engagement. Conversely, other startups initiate with a B2B approach to secure larger contracts and stabilize revenue streams. Once they have established credibility and refined their solution, they might venture into B2C, leveraging their expertise and reputation.

Direct vs. Indirect Go-To-Market Strategies

Beyond B2B or B2C, the main forms the GTM takes can be simplified to include the following.

Direct-Inbound: This strategy focuses on attracting customers to the company primarily through digital channels, such as content marketing and search engine optimization (SEO). The approach is more passive, as businesses position themselves to be found by potential clients. While it requires upfront investment in content and SEO, it tends to be cost-effective in the long run and attracts well-informed prospects.

Direct-Outbound: In contrast to the inbound strategy, the outbound approach involves proactively reaching out to potential customers. Techniques include cold calling, direct mail, digital advertising, and sales presentations. This strategy requires building an internal sales team or spending money on digital acquisition.

Indirect: Using third parties or intermediaries, companies leverage partnerships or distributors to sell their products or services. While this can amplify a company’s reach and reduce logistical burdens, it can also mean sharing profits with these intermediaries, potentially reducing margins. Another potential drag that elite VCs learned the hard way is that this approach almost always requires “doubling” the partners’ sales team with internal resources, at least in the first stages, to ensure an effective sell.

Airbnb’s adoption strategy, as illustrated in the slide, centers on three pivotal acceleration factors: targeting events, forging strategic partnerships, and a smart technological hack involving Craigslist. This is a smart move, as VCs seek capital-efficient companies. Founders who are keen on spending top advertising dollars or recruiting a large sales team before reaching product-market fit are rarely successful in their fundraising efforts.

Events as a Catalyst for Growth. Airbnb originated as a platform offering conference attendees affordable lodging options by connecting them with hosts willing to offer space in their homes, on an airbed (thus the original name, AirBed&Breakfast). This was a direct response to the high hotel prices during popular conferences and events. By targeting events like Octoberfest, Summerfest, and Mardi Gras, Airbnb smartly tapped into its origin story. These events, attracting massive crowds, often lead to accommodation shortages and inflated hotel rates. Airbnb’s approach provided a win-win solution: hosts could earn by renting out their spaces, and attendees found more affordable and unique lodging options. This strategic targeting acted as an accelerator, rapidly increasing both host and guest sign-ups during peak event times.

Partnerships with Relevant Brands. Airbnb’s association with brands like GoLoco and Kayak, platforms that catered to budget-conscious and tech-savvy travelers, further accelerated its adoption. By positioning themselves alongside these brands, Airbnb signaled its intent to be an alternative to traditional, often pricier, travel accommodations. Such partnerships not only expanded Airbnb’s visibility but also lent it credibility among a demographic already inclined towards online and cost-effective solutions. This strategy is coherent with their TAM SAM SOM slide.

Airbnb’s hack of Craigslist is one of the most impressive ad-hoc integrations I’ve seen in years. 

andrew chen – A16Z (Source: Andrewchen.com)

Craigslist Hack for Streamlined Listings. One of Airbnb’s most ingenious growth tactics was its Craigslist integration. Recognizing Craigslist’s vast user base of people looking for or offering accommodations, Airbnb created a feature that allowed hosts to post their Airbnb listings directly to Craigslist with just a click. This not only made listing on Airbnb more attractive and convenient for potential hosts but also stealthily directed traffic from Craigslist back to Airbnb. This growth hack, although controversial, was pivotal in Airbnb’s rapid expansion. By tapping into an established platform’s audience, Airbnb effectively bootstrapped its growth through a user base already interested in peer-to-peer lodging.

Team Fit to the Execution Challenge

Beyond the credentials and track record, Investors want to ensure the team possesses the right mix of skills and temperament to execute the startup’s vision. They assess the team’s adaptability, resilience, and domain expertise to gauge how they’d handle the multifaceted challenges of startup life.

A comprehensive 2016 survey of hundreds of VCs ranked the most significant criteria Investors look for in startup Founders (% indicate how often the criterion was mentioned):

I wrote a comprehensive post about these points, referenced below.

Go Further: How Venture Capitalists Evaluate Successful Startup Founders — And What They Should Do Instead

While the Team slide offers a structured approach to evaluating a startup, seasoned VCs often search for that indefinable “extra” – the secret sauce. This could be a unique insight the founder has, an innovative approach they’re adopting, or simply a passion and commitment that sets them apart. It’s this elusive element, combined with the tangible metrics, that often seals the deal.

What I like most about this slide is the clarity of roles among Airbnb’s Founders. It answers the question VCs invariably ask Founders: Who does what? “Founder divorce” is a major cause of startup bankruptcy. Experienced Investors know how to “read a team”, which starts with evaluating whether each member has their own zone of influence with minimum overlap.

The prominence of Joe Gebbia and Brian Chesky’s design backgrounds could initially appear misaligned to VCs. Unconventional backgrounds are often viewed with skepticism, even by top-tier VCs. Famous exchanges between renowned figures like Fred Wilson and Paul Graham highlight this point.

We had big doubts about this idea, but they vanished on meeting the guys.

Paul Graham – Y Combinator (Source: his awesome blog)

Yet, Airbnb stands as a testament that a Founder’s potential extends beyond their formal education. Their unique creativity and grit made “the Airbnbs” special. “They did nothing half-way”, wrote an admirative Graham in 2020. Even their design-centric approach, which could have been judged a flaw, distinguished them in the market, with the platform’s user experience and aesthetic becoming a hallmark in the industry.

While design is a focal point, the team also boasts strong technological grounding, especially with Nathan Blecharczyk’s tech background. This blend of design and tech ensures that while the platform looks good, it also works efficiently. Adding Michael Seibel, a successful entrepreneur who later became a YC partner, as an advisory role only enhances the team’s quality to attract top talent.

Conclusion: tl;dr

Elite Venture Capitalists have honed the art of rapidly assessing startup pitch decks, navigating them with a mental checklist at the ready. Their critical lens filters out the “noise”, allowing them to swiftly determine a venture’s potential. This rapid evaluation is crucial in their high-stakes activity, guiding them on whether to delve deeper or move on. As startups vie for attention, understanding this discerning approach can be pivotal in securing that all-important second glance.

The Airbnb pitch deck stands as a beacon among startup pitch decks, often emulated but seldom outdone. Its compelling narrative and clear value proposition have made it a reference point for many budding entrepreneurs. Yet, it’s worth noting that even this iconic deck has its imperfections. Many founders, in their enthusiasm to replicate its success, overlook these nuances.

Aram Founder
Aram is a veteran investment professional with 20 years of experience. He’s realized over 45 transactions across Project Finance, LBO Financings, Growth Equity, Venture Capital, and M&A in half a dozen countries on three continents.
See Full Bio
Venture Capital Entrepreneurship Fundraising
Exit mobile version