Updated: May 22, 2020
An investor simply wants to understand, “Why is this startup worth investing in?”, which is another way of saying, “If I give this company funding, what value can they create with it?” Yet most founders merely explain how they plan to spend funding.
A simple way to explain this is the XYZ formula, where:
X = the amount of capital you are seeking to raise from a given investor type (equity, debt, grant, et cetera)
Y = what you intend to spend this capital on, and
Z = the value you will unlock or create
A poor investment thesis: “We will spend $500k on marketing”.
A great investment thesis: “[X] $500k in funding allows me to [Y] acquire 178 customers over the next year, which equals [Z] $250k in monthly recurring revenue”.
This level of precision shows that you understand how to drive value in your company, and that your plan is aligned with returning the investor’s capital. Leo Polovetz outlines a similar methodology in his post Fundraising Roadmap Algorithm.