Make your investors cry
just like a nicely peeled onion would - but make sure it's happy tears.
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Venture capital implies that venture capitalists love taking risks.
That's not really the case.
Sure, there would be safer places for them to put their money (have you seen these interest rates lately?) so they do get some credit. But investors take deliberate and calculated steps toward the not-totally unknown.
You wouldn't jump off a plane without knowing that the person you're strapped to has a few thousand hours of training and not one but TWO very reliable parachutes on their back. Right? 🪂
So to convince them that taking the leap is worth the risk, you better lay out what they're signing up for.
The perfect vegetable to help you do that? An onion. 🧅
Risks on day 1, day 100, and day 1,000 are all different, but they'll always be there.
What you want to do is systemize each of those, then tackle them one by one as you talk to investors. Better yet, peel out each layer. Basically:
👉 Explain how you have eliminated risks A, B, and C, and how this next round will allow you to eliminate risks D, E, and F.
👉 Rinse and repeat until investing in your startup doesn’t look as terrifying as jumping off a plane with the neighbor's nephew whose only experience with skydiving comes from playing Call of Duty.
This process is known as the onion theory of risks. It isn't a new thing – but it continues to be a relevant framework for fundraising.
We learned from Marc Andreessen who learned from Andy Rachleff that this is an excellent way to reframe the typical pitching logic and see the relationship between risk and cash from your investors' perspective.
Ok Latitud, but I can't cook to save my life. How do I even start?
Here are the 3 main layers ANY business needs to peel in the early stages:
1. The founder risk 🤹
When the founding team is all there is, investors will give a lot of weight to knowing you've got what it takes. You need to be ready to answer:
Do these folks care enough about the problem to work on it for the next decade or so? Investors need to know you won't bail after the first buyout opportunity. A fund returner isn't made in a day.
Do they have the right skill set? The signals need to be strong. No technical founder? Then they're wondering how you'll mitigate the risk of a tech lead not having enough skin in the game, or of a software house not having the full picture of your product needs.
Will they be able to work well together? If you haven't partnered before, how will you show that all co-founders are aligned on where you want to go and able to solve future conflicts?
2. The market risk 🎯
Is it big enough? And can it be bigger as things progress? You'll need a vision, but also very specific data and convincing interview quotes that validate your hypothesis.
Do they know how to reach it? You proved your market is huge, but what niche are you starting with and what shows you that will work? (Psst, paying customers are a great onion-peeler.)
Can it beat the competition in terms of quality/price/distribution? And don't even think about saying you don't have competitors. Show them how you'll build your moat instead.
Is the timing right? I.e. are people ready to adopt what you're selling? What behavioral and technology trends tell you that?
3. The product risk ⚙️
Can this team build the product? If it's rocket science, you better have rocket scientists – and not depend on any rocket science breakthroughs to make it happen.
Is it scalable? Development costs need to make sense in the long term, especially compared to the expected revenue. Customer acquisition costs might also need to be included here.
Other layers will need peeling depending on your stage (the hiring risk, the growth risk) or model (your virality potential if you're building a B2C product, your vulnerability to regulatory changes if you're in a highly bureaucratic space).
This is just a small part of the recipe you should follow for your pitch – salt, spice, and everything on fire nice.
Wanna get them crying happy tears? Master these too:
Hot News Ahoy! ⛵
🐙 More tentacles for SMEs
Pulpos, a startup focused on transitioning Mexican small and medium enterprises (SMEs) to the cloud, has closed a $4M seed round. Latitud Ventures co-invested with Andreessen Horowitz, H20 Capital Innovation, and Newtopia. Congrats to founders Franco Silvetti, Frank Martin, and Lucas Cortés!
🤝 High-Valor Partner
After 9 years as CEO of PayPal, Dan Schulman has joined Valor Capital Group as a Managing Partner, adding to the firm's goal to bridge the US, Latin American, and Global technology markets.
🔍 A zoom-in on AI
Two Latitud Ventures portfolio companies got great in-depth media features this week. Learn more about how Darwin AI is becoming SMBs' AI sales assistant, and how Arvo is making healthcare more efficient through AI and ML.