Passthrough’s unusual pitch memo told investors why not to invest
- Passthrough creates software for fund managers to help with the closing process.
- The three founders feared that investors would turn them down due to the small size of the market.
- After addressing this concern head-on in a pitch note, Passthrough raised a $5 million seed round.
A pitch deck is used to tell investors why they should be excited about a company’s product or service. But recently, a very early start-up managed to raise funds by explaining in a presentation note why investors should not invest.
This approach led the software company to weed out doubters and find the right investors sooner, said Tim Flannery, co-founder of Passthrough. In February, Passthrough closed a $5 million seed round led by Positive Sum.
“It doesn’t look like a business that someone should have given us money for,” Flannery told Insider.
Passthrough builds software for private equity firms to process “subscription agreements”, which are contracts that allow an investor to enter into a limited partnership – a legal entity that binds a fund and its outside backers .
These documents involve lengthy questionnaires that investors often fill out by hand, and they take days or weeks to complete, Flannery said. Passthrough works by asking investors to create a profile, fill out a form once, and reuse their responses the next time they invest in a fund. Flannery compares it to TurboTax for subscription agreements.
The need is obvious. “The state of the art on this has been pen and paper,” said Flannery, who previously served as chief marketing officer at Carta, a $7.4 billion startup that offers data management software. shares.
But as he and his two co-founders, Alex Laplante and Ben Doran, began work on the company, they worried about their own ability to raise money from venture capitalists. Investors look for companies that sell in large markets. Yet there are only a limited number of fund managers who want to purchase software to manage their subscription contracts.
When it came time to launch, Passthrough wanted to preempt any skepticism. Thus, its presentation document included a page entitled “Why you should not invest” which addressed investors’ concerns about the total addressable market.
“Fund closeout software seems like a small market, but our market opportunity is much bigger than that,” he said. The memo explained how Passthrough’s offering was unique and how it could evolve to generate new revenue streams, including serving others in related industries, such as fund-creating lawyers.
“When you’re not in the room, they’re going to have joint criticism,” Flannery said of investors. By providing them with a memo that absolves the start of their criticisms, “you can be in the room and you can control the narrative.”
Mark Zuckerberg used this method when he jokingly pitched Sequoia on investing in its short-lived file-sharing service, Wirehog, and used a PowerPoint presentation titled “Top Ten Reasons You Shouldn’t Invest.” “.
Admittedly, Passthrough was not suitable for some investors. But Positive Sum, a venture capital firm founded by three former entrepreneurs, liked her enough to lead the startup’s $5 million seed round. The round also had participation from Okta Ventures, Great Oaks Venture Capital and Company Ventures, as well as angel investors including Allocate CEO Samir Kaji; Bob Moore, CEO of Crossbeam; and Deanna Fong, program manager at Meta.
The new capital will be used to hire for engineering and sales at the 18-person New York business.
Read the nine-page memo Passthrough used to raise $5 million.