Experts’ Corner: Pitch Deck Tips for Fundraising Success

Experts’ Corner is a series of articles sharing practical tips and solutions that our experts have gained over years of on-the-job experience. It aims to elevate our readers’ day-to-day execution and performance.

Fundraising, for companies at any stage, is undoubtedly a challenging process. According to a recent study, an average series seed raise requires contact with 58 investors, 40 investor meetings and over 12 weeks to close a round. Even for seasoned entrepreneurs and startups already with market traction, a compelling pitch and accompanying pitch deck are still necessary. Despite variance around stylistic delivery and aesthetics, you might be relieved to hear that the infamous pitch deck boils down to a formula. In fact, there are a number of topics and slides that investors actually expect—all of which will be discussed in this article.

The following piece is meant to serve as a guide for creating effective, successful investor decks. It focuses on the creation of the deck itself, instead of the delivery of the pitch. While there is no ultimate one-size-fits-all format for investor decks, we will share a set of widely-accepted guidelines along with corresponding pitch deck examples.

Pitch Deck Best Practices

Treat your pitch like a story

Weave a compelling narrative about a problem in the world, what the inevitable solution is, how your product is that solution, and why your company will succeed. Your story should lead to your product being the logical response to the problem you’ve identified. Rather than adding bells and whistles, focus on crafting a story that is both streamlined and coherent. Be passionate. Make it personal.

This task can sometimes prove tricky for founders who have lived and breathed their business for months or years. Take a step back and imagine that you were learning about your business for the first time. As venture capitalist Tomasz Tunguz suggests, “The most successful pitches argue the market will unfold inexorably in the way the founders envision on a relevant time scale. And, that this startup in particular will dominate share in that new world. There is no prescriptive way I can recommend to consistently argue inevitability. Some founders use data. Others use logic. Still others use emotion and passion to do it. But in the end, these exceptional storytellers make you want to believe, suspend doubt, and disregard the great risks that all startups face all along their journey, and get involved with the business.” If you need a bit of inspiration, you can borrow from the famous Hero’s Journey narrative.

In the below example from marketing software company SEOmoz founders Rand Fishkin and his mother Gillian Muessig were not shy about sharing their trials and tribulations. In their opening, they position their story as “How a tiny Mom + Son consultancy became the world leader in SEO software.” Being open and utilizing a timeline makes their narrative something people can understand and root for.

Continually refresh your pitch deck

According to Finance Expert Jeff Fidelman, who has executed over $500 million in transactions across industries, “A pitch deck should be viewed as a dynamic, living document that evolves over time.” As an entrepreneur continues to pitch multiple audiences, they will notice that they are often asked the same questions time and time again. They should take note of these questions, incorporating and addressing them in the presentation.

In addition, the market data and company traction data (e.g., number of users, traffic to your website, sales numbers) should also be continually updated. You never want your data to seem outdated, as you want to minimize the opportunities to call into question your knowledge or credibility.

Understand the context

Understand and evaluate the context in which your audience will be reading or listening to your pitch. How far along are you in conversations with them? Are they familiar with you and your company already? Are they familiar with the market and technology in question? You should even consider whether investors will be reviewing the deck in soft copy form or in-person with a printed copy.

Toptal Finance Expert Kelly Sickles, who raised $100 million for Boxed’s Series C, explains, “Make several decks. Except for the lucky few, pitching is a process more akin to dating than an arranged marriage: You may have to share a deck with investors that you’ve never met. The goal of that deck is to simply entice them to take a meeting. Once interested, you’ll need a deck for your initial meeting. The goal of that deck is to enable a meaningful conversation about your business and your roadmap – again, not to overshare details so that the investors stare at a PowerPoint throughout the meeting.”

Anticipate potential questions and incorporate answers into the deck

An oft-overlooked step in the pitch deck creation is the anticipation of investor questions. You must critically examine your company and your presentation to identify the potential gaps. Instead of being caught off-guard by the investor, think about what investors might ask and create supplemental slides to provide visual support for your answers. If you are delivering an in-person pitch, it could even be helpful to include these supplemental slides in the appendix section of the investor deck.

Keep the aesthetic polished and consistent

The pitch deck should be aesthetically pleasing and professional—this can help form an investor’s first impression of you and your company. You can simply use the colors and design from your product as a theme. Or, it can be beneficial to hire a professional for the deck design. In any case, the pitch deck should reflect your company’s personality and align with the branding on your site and product.

In designing the investor pitch deck, keep in mind that not all investors have the same goals and investment approach. Toptal Finance Expert Zachary Elfman, who has served as a buy-side advisor for a multimillion dollar Series A funding round, underscores the importance of this: “If you are pitching a young investor new to VC, maybe having cashed out after selling their own startup, a racier or trendier look and feel might be appropriate. Whereas with more veteran investors, a more to-the-point presentation would provide more credibility. Stay high-level and avoid pictures, small print, and any font that has been invented in the past decade with these investors who have seen both sides of the cycle. There are surely a lot of gimmicky decks flying around at this very moment that more seasoned investors are tossing immediately into the wastebasket. DOA.”

In the below investor pitch deck from Tealet, an online farmers’ market for tea, the aesthetic matches their product and website. It’s also clean and easy to read.

Pitch Deck Mistakes to Avoid

Don’t make it too long; 15-20 slides should suffice

Investors are people too. This means that they have limited attention spans. According to the aforementioned study, VCs spent an average of three minutes and 44 seconds reviewing soft copies of series seed raise pitch decks. Continually remind yourself that you are building a pitch deck, not a comprehensive business plan. Include the necessary and most compelling components; don’t try to cram all the details in. If you are overly ambitious, chances are that the excessive information will divert attention away from the story you’re trying to communicate. Should you need to include more information such as growth details, complex technical explanations or financials, opt for creating separate documents.

Finance Expert Aleksey Krylov, who has advised over 50 clients on raising a collective $1.6 billion, suggests abiding by the acronym KISS: “Keep it simple and short. I advise my clients to keep their decks under 15 slides and move non-essential details to the appendix. Investors review numerous pitch decks and business plans a day. All else equal, shorter pitch decks are likely to produce a more positive response from investors.”

Don’t include too much information or text on a slide

Similar to the preceding point, investors won’t have the time or energy to actually read the fine print or all the extra details on the slides. You’ll want to focus on communicating a few key takeaways per slide, making it as easy as possible for your audience to understand and remember these points.

In addition, be sure to include relevant graphs, charts, images, or other media. Utilizing supplemental visuals can be a powerful tool for reinforcing or communicating your message. However, be judicious when deciding which to add; each visual should add real value.

Don’t use overly-complicated jargon

Even if your product is particularly technical or detailed, don’t fall into this common trap. Be exceedingly clear about how you present your company and your story, and be willing to simplify. If you pitch your product as a “B2C scalable cloud-based social media platform for the next gen,” it’ll remain unclear whether it’s a website, an app, and what exactly it does. If the jargon would annoy a tech journalist, it probably won’t impress investors either.

Don’t belittle your competition

While acknowledging your company’s position relative to your competition is necessary, as we’ll discuss in the upcoming section, it’s important not to underestimate or belittle your competition. This could backfire, reflect poorly on you, or potentially be off-putting for investors.

Imperative Slides to Include

The following section will detail the topics that investors will expect and look for in pitch decks. Still, there is some flexibility in terms of topic ordering, as long as you are crafting the narrative in a logical manner.

Company Overview

The Company Overview slide, which can serve as the opening of the deck, should set the stage for investors so they have an idea of what’s to come. It should include a handful of points (between three to eight) about what problem your product solves, background on the management team, and any key traction that your company has seen. The information you include on this slide should be straightforward, exciting, and easily understandable. You don’t want to confuse anybody or get them stuck early on in the deck.

Below is an example from social news, media and entertainment company Buzzfeed. In just six bullets, the slide includes key highlights communicating traction, press, headcount, and high-level financial information.

Company Mission, Vision, or Purpose

This slide is meant to convey your company’s ultimate goals, whether you choose to include its purpose, mission, or vision. According to Harvard Business School, here’s how to define these terms:

  • Mission statement: Describes what business the organization is in both now and in the future. Its aim is to provide focus for an organization’s employees.

    Example: The mission for a consulting firm could be, “We’re in the business of providing high-standard assistance on performance assessment for middle to senior managers in medium to large firms in the finance industry.”

  • Vision statement: Says what the organization wishes to be like, and takes the thinking beyond day-to-day activity in a memorable way.

    Example: Ericsson’s (a global provider of communications equipment, software, and services): “the prime driver in an all-communicating world.”

  • Purpose: Summarizes what the company is doing for its customers, connecting “the heart with the head.” Greg Ellis, former CEO and managing director of REA Group, refers to his company’s purpose as its “philosophical heartbeat.”

    Example: Insurance company IAG: “To help people manage risk and recover from the hardship of unexpected loss”

When describing your business and its goals, aim to convey the originality of your idea. Many entrepreneurs describe their business by utilizing comparisons to other well-known tech companies such as “We are the Airbnb for cooks.” However, this approach is not recommended because it can diminish the uniqueness of your idea. According to Amy Webb, Professor at NYU’s Stern School of Business, “On one site alone—AngelList, where startups can court angel investors and employees—526 companies included “Uber for” in their listings. As a judge for various emerging technology startup competitions, I saw “Uber for” so many times that at some point, I developed perceptual blindness.”

Below is an example of a Company Purpose slide from video-sharing company YouTube:

The Team

Startup investing, particularly for early stage startups, is often focused on human capital. At the end of the day, investors base their decisions on whether they can trust in you, your capabilities, and your persistence.

Given the importance of the team in shaping investors decisions, make sure you highlight both the range of skillsets and the necessary experience that the founding team possesses. Toptal Finance Expert Samir Chaibireinforces this concept: “You can show me that you can execute in two ways: traction and team; a combination of both is, of course, best. I would happily back a founding team of a fashion marketplace that can show me that they know that industry very well, that they have worked with global fashion retailers and brands, and the skills of the team as a whole represent the right mix to take on the industry incumbents. In that case, a mix of experience in eCommerce, operations, and marketing/merchandising would be best. If you are raising your seed round, your team won’t be complete and you will lack some key competencies; your pitch should address that through a detailed hiring plan.”

This slide typically includes images and accompanying titles for each key team member and brief summaries of team members’ educational attainment and prior employment. It also highlights relevant expertise. It should also list out advisors, consultants, and board members, if any.

There’s varying advice around whether to introduce the team earlier or later on in the deck. Finance Expert Grant Blevins, venture capitalist who has has helped raised over $20 million in early stage capital in the past year alone, recommends putting the team early on: “Put Team first, at the very beginning of your slides. Bias investors from the beginning with your credentials. I can tell you some stories of average pitches where I was not that interested in the product until I found out how accomplished and educated the team was.”

Below is an example from content marketing software company Contently. It exhibits the key team members, including images and impressive credentials from each (education and work experience). It also includes other investors, which can stoke the FOMO (fear of missing out). Y Combinator founder Paul Graham talks about this herd mentality in one of his blog posts: “The biggest component in most investors’ opinion of you is the opinion of other investors. Which is of course a recipe for exponential growth. When one investor wants to invest in you, that makes other investors want to, which makes others want to, and so on.”

Current Traction or Progress

Regardless of what stage your company is in, including compelling traction statistics will be received positively and can help build credibility among investors. Typically, “traction” include sales, traffic, downloads, or any other growth metrics to indicate scale and adoption. On this slide you can also include any strategic partnerships, large accounts or clients won, client testimonials, or accolades achieved. Feel free to include the logos of any clients or large customers.

Finance Expert Aleksey Krylov contends that entrepreneurs should “Always highlight milestones. A startup’s milestones can be associated with technology, product, regulatory, market or other developmental goals. Market testing and customer traction milestones tend to be of particular interest to investors.”

Below is an example from map creation platform Mapme, which includes press and user statistics.

Total Addressable Market (TAM)

The Total Addressable Market slide is meant to demonstrate to investors that the opportunity at hand is part of a larger market shift or trend. The TAM figure is meant to indicate the underlying revenue opportunity for a given product or service. As such, entrepreneurs often include the largest, most impressive statistics they can find from various research reports.

According to Reid Hoffman, founder of LinkedIn, however, the issue with most TAM slides is that they often quote huge numbers from research companies or reports that are incentivized to inflate those numbers. Therefore, Hoffman recommends that the TAM calculation utilize a “bottoms-up” approach—an approach focused on revenue and traction. If you do not use your own calculations, be sure to cite sources that are objective and independent. In general, Hoffman suggests that if you are to include a TAM slide, not to linger on it too long during the actual pitch.

Below is an example from personal finance app Mint. It details the assumptions used to calculate the total addressable market, an approach that can lend more credibility than simply showing the number itself.

The Pain Point

You’ve probably heard this advice before: you must spell out the “problem” you are looking to solve with your company, product, or service. It is particularly important to frame the problem in a way that people can easily relate to. You should view this slide as an opportunity to add a personal touch and connect with your audience.

According to Samir Chaibi, who has raised a $1.5 million seed round and prepared a $10 million Series A fundraising for multiple startups, “Too many times I see founders attacking a vertical without a clear-cut understanding of the problems users are experiencing that are not already solved by the incumbents. When you develop a pitch, be mindful about the pain points you want to focus on from the start. It is fine to show a growth path towards a broader set of offerings that will turn a startup into a category leader but your pitch deck should start with the specific problem you are solving, always.”

Below is example from data platform Mattermark:

Solution: Your Product or Service

You’ll want to immediately follow your “Problem” slide with the natural solution: your company’s product or service. On the same slide or on a separate slide, you’ll also need to spell out exactly what your company’s product or service involves, and why it is distinct from what already exists on the market. Showing your product is far more powerful than simply describing its functionality in words. If your company has a product ready to be demo-ed, this would be a natural point to introduce it to investors, either live or in a video. Otherwise, you can also include screenshots and powerful images or visuals. If you haven’t completed the product itself, include a mockup so investors have a visual aide. You should highlight your product’s key features, target user, product milestones and roadmaps, and key differentiating features.

Below is an example from online housing marketplace Airbnb, which chose to separate the Solution slide (Slide 3) from the Product slide (Slide 6).

Business or Revenue Model

In order to build investor confidence, you will want to address your company’s planned revenue model, pricing strategy, average account size, or sales and distribution model. To indicate that you are not simply making empty promises, you can include not just current revenue model plans, but also future ones. You can also include specific dates to demonstrate decisiveness. Of course, investors expect that your company will need some flexibility to iterate, so being decisive does not necessarily mean making decisions that are set in stone either.

Below is an example from personal finance app Mint, which details both current and future revenue models.

Marketing & Growth Strategy

This slide is meant to provide investors with insight into how you plan to growth and market your product or service. It’s also a slide with a lot of latitude. You can include anything from the various market channels you’ll use to promote your product (paid search, social media, email marketing, etc.) to hiring plans.

Below is an example from Mixpanel:


Investors will want to understand the company’s current financial situation and future burn rate, the rate at which a new company is spending its financing before generating positive cash flow from operations. Separate from the pitch deck, you should have your financials ready in Excel if investors are interested in more detail. This will allow you to present a simpler summary in the deck itself.

Below is an example from mobile payment service Square, which actually exhibits “best,” “base,” and “worst” case financial scenarios. This approach can help investors understand the general range of the projections, and can appeal to conservative and optimistic investors alike.

Competitive Landscape

It’s all relative. Even if you’ve built the most comprehensive product on the market, perhaps it’s a low barrier-to-entry industry, or there are already a couple giant competitors to contend with. Therefore, your “Competitive Landscape” slide should address the following questions: Who are your company’s competitors? How is your company different from them, and what are your competitive advantages? Including more details helps to build investor confidence.

Below is an example from business social networking service LinkedIn, which not only includes the company’s competitors, but also indicates their relative positions in the market.

Investment “Ask”

Be clear about what you are asking for. Demonstrate that you have thought about your “ask” carefully and haven’t just plucked the amount you’re looking to raise out of thin air. Toptal Finance Expert Aleksey Krylovrecommends specificity: “I recommend my clients be very specific about their target number as opposed to using a range. They should be conservative in their estimates, as a lower targeted raise is more likely to close quickly.”

Krylov also advises including information on how you will use the proceeds, adding, “In my experience, it is important for building trust. It should highlight that the capital sought is not going to be used to maintain the founder’s lifestyle. The slide also needs to communicate that the money raised will bridge the company through the next value creation milestone(s). Investors like stories where step up in valuation is highly likely from the current round to the next.” You should show your 18-24 month plan and how much you’ll need to execute on that strategy.

Below is an example from marketing software company Intercom:


If you are interested in downloading or utilizing pitch deck templates, the following have been provided by venture capital funds: Google VenturesSequoia CapitalNextView Ventures.


As a parting thought, it is worth keeping in mind the following: In today’s world where startup fundraising has been glamorized to such an extent that raising capital is portrayed as a key success metric, one must remember to think about whether your “ask” is what your company actually needs. As Chris Dixon of Andreessen Horowitz says, “The best thing is to either never need to raise money or to raise money after you have a product, users, or customers.” Equity is the most expensive form of capital, so be sure to have truthfully assessed your startup’s needs, as opposed to feel like you have to fundraise just because it is the prescribed path for technology startups.

And if you do decide that you really need to fundraise, be clear about how much you need to raise, and what exactly it will be used for. The following two blog posts from legendary investor Fred Wilson can get you started: What Seed Finance Is For and How Much Money to Raise.

The art of fundraising is one that, if mastered, can often mean survival for your newly-established startup. In fact, you’ll also need to master the art of persuasion through Aristotle’s three modes of persuasion. The web is awash with advice on these matters, but much of the material out there is, frankly, not high quality. Should you need it, at Toptal, we have an array of experienced fundraising experts and pitch deck consultants who can help you craft successful pitches and fundraising strategies.


What is a pitch deck?

A pitch deck is a brief PowerPoint presentation used by companies seeking external funding. The presentation includes key highlights from the company, used by entrepreneurs as a persuasive tool and used by investors to learn more about the investment opportunity.

This article is originally posted in Toptal.

Three Core Principles of Venture Capital Portfolio Strategy

Key Highlights

  • Growth in startups worldwide has seen an influx of new professionals into venture capital. $3.8bn across 32 first-time manager funds was raised in 2016, continuing the trend over the last 5-7 years.
  • Returns for the asset class as a whole continue to be lackluster. VC returns haven’t significantly outperformed the public market since the late 1990s, and, since 1997, less cash has been returned to investors than has been invested into VC.
  • A driver of these returns is the decreasing barrier to entry for the industry and the basic mistakes made by many new entrants.
  • VC is a game of home runs, not averages. Strikeouts are extremely common. 65% of venture deals return less than the capital invested in them. But strikeouts don’t matter. The best performing funds actually have more strikeouts than mediocre funds.
  • The vast majority of a venture fund’s returns come from a few home run investments. For the best performing funds, less than 20% of their deals generate 90% of the returns.
  • Not only do the best funds have more home runs, they have bigger, better home runs.
  • Home runs are also extremely rare; the chances of hitting one are in the 0.5-2% range.
  • Some funds (e.g., 500 Startups) have gone for a strategy of maximizing at-bats. However, larger portfolios come at the detriment of quality. The ratio of accelerator-funded startups receiving follow-on investments is 18%, significantly below the market average of c. 50%.
  • Top US VC funds tend to do 1-20 investments per year, with the larger funds focused on the lower end of this range. Within a 4-5 year investment period, this implies a portfolio size of less than 50. Conventional wisdom in the VC space seems to be for there to be 20-40 companies in a given portfolio.
  • Many newcomers to the space fail to reserve sufficient capital to follow-on in the companies they have invested in. Andreessen Horowitz’ 2010 investment in Instagram of $250k, for instance, returned 312x in less than two years. Whilst being an incredible return on a deal basis, at a fund level Andreessen would have had to invest in 19 other companies on the same terms and with the same incredible performance to break even on the fund as a whole, illustrating the importance of following-on in the home run investments in a portfolio.

VC: The En Vogue Asset Class

From humble beginnings, the venture capital (VC) industry has exploded into one of the most significant, and certainly best-known, asset classes within the private equity space. Venture-backed startups are some of the most disruptive and influential companies of our generation. The venture capitalists backing them have also taken their spot in the limelight, with the likes of Marc Andreessen, Peter Thiel, and Bill Gurley gaining recognition far beyond the confines of Sand Hill Road. You could compare this cult of personality to that of “corporate raider” era of the 1980s, when Michael Milken et al catalyzed the start of the LBO and junk-bond boom.

Partly as a result of this, the venture capital space has seen an influx of participants and professionals. First-time fund managers continue to raise new VC funds at healthy clips (Chart 1), and the once clear lines separating venture capital from private equity, growth equity, and other private asset classes have begun to blur (Figure 1). Corporates have also shifted into the space, creating venture arms and participating in startup funding at ever increasing levels. And perhaps the greatest sign of the times, celebrities such as Kobe Bryant, Jay Z, and Derek Jeter have all thrown their hats into the startup-investment ring. As John McDuling puts it, “Venture capital has become [one of] the most glamorous and exciting corners of finance. Rich heirs used to open record labels or try their hand at producing films, now they invest in start-ups.”

Chart 1: VC First-time Fundraising Activity; and Figure 1: VC Raised vs. VC Contributed ($bn)

Succeeding in venture capital is not easy. In fact, while data assessing the asset class as a whole is scarce (and data on individual fund performance is even harder to come by), what is clear is that the asset class has not always lived up to expectations. As CB Insights points out, “VC returns haven’t significantly outperformed the public market since the late 1990s and, since 1997, less cash has been returned to investors than has been invested in VC.” Even the most well-known venture funds have come under scrutiny for their results: At the end of last year, leaked data showed that results for Andreessen Horowitz’ first three funds are less than spectacular.

The reasons for this lackluster performance are of course varied and complicated. Some believe that we may be in a bubble, which, if true, could explain the less-than-satisfying results of many funds (inflated values slowing the rush towards exits and offering a higher risk of valuation down rounds). Others argue that current fund structures are not properly set up to incentivize good performance. Scott Kupor’s response to the leaked results of Andreesen Horowitz also gives a defensive angle to this narrative, in that the lack of a wider understanding of the performance of the VC asset class drives the negative rhetoric.

But while all of this may or may not be true, another potential reason for lackluster performance amongst many funds is that they’re not following some of the fundamental principles of VC investing. As former bankers and consultants reinvent themselves as venture capitalists, they fail to assimilate some of the key differences that separate more established financial and investment activities from the more distinct form of venture investing.

To be clear, I am firmly within this camp. As someone who made the transition from the more traditional realms of finance into the world of venture investing, I have witnessed firsthand the differences between these activities. I am not in any way annointing myself as a venture capital guru, but through continual learning, I acknowledge and respect some of the important nuances that distinguish venture capital from other investing activities. The purpose of this article is therefore to highlight three of what I believe to be the most important venture capital portfolio tactics that many participants in the space fail to internalize.

1. Venture Capital Is a Game of Home Runs, Not Averages

The first, and arguably most important, concept that one has to understand is that venture capital is a game of home runs, not averages. By this, we mean that when thinking about assembling a venture capital portfolio, it is absolutely critical to understand that the vast majority of a fund’s return will be generated by a very few select companies in the portfolio. This has two very important implications to one’s day-to-day activities as a venture investor:

  1. Failed investments don’t matter.
  2. Every investment you make needs to have the potential to be a home run.

To many, particularly those from traditional finance backgrounds, this way of thinking is puzzling and counterintuitive. Conventional financial portfolio strategy assumes that asset returns are normally distributedfollowing the Efficient-market Hypothesis, and that because of this, the bulk of the portfolio generates its returns evenly across the board. A 2014 10-year analysis of 1-day returns from the S&P 500 in fact conforms to this bell curve effect, where the mode of the portfolio was more or less its mean (Chart 2).

Chart 2: S&P 500, 1-Day Returns over the Past 10 Years (2,500 Observations)

Turning away from the more liquid public markets, investment strategies in private markets also strongly emphasize the need to balance a portfolio carefully and manage the downside risks. In a recent interview with Bloomberg, legendary private equity investor Henry Kravis said this:

“When I was in my early 30s at Bear Stearns, I’d have drinks after work with a friend of my father’s who was an entrepreneur and owned a bunch of companies. “Never worry about what you might earn on the upside,” he’d say. “Always worry about what you might lose on the downside.” And it was a great lesson for me, because I was young. All I worried about was trying to get a deal done, for my investors and hopefully for myself. But you know, when you’re young, oftentimes you don’t worry about something going wrong. I guess as you get older you worry about that, because you’ve had a lot of things go wrong.”

And putting aside what we are taught from financial theory altogether, Chris Dixon mentions how the adversity to losses may be an in-built human mechanism:

“Behavioral economists have famously demonstrated that people feel a lot worse about losses of a given size than they feel good about gains of the same size. Losing money feels bad, even if it is part of an investment strategy that succeeds in aggregate.”

But the crux of the point with venture capital investing is that the above way of thinking is completely wrong and counterproductive. Let’s run through why that is.

Strike-outs Don’t Matter

Most new companies die out. Whether we like it or not, it happens frequently. And unfortunately, there is ample data to support this. The US Department of Labor, for instance, estimates that the survival rate for all small businesses after five years is roughly 50%, and falls dramatically to a low of 20% as more time passes. When it comes to startup investments by venture capital funds, the data is bleaker. A Correlation Ventures study of 21,640 financings spanning the years 2004-2013 showed that 65% of venture capital deals return less than the capital that was invested in them (Chart 3), a finding corroborated by a similar set of data from Horsley Bridge, a significant LP in several US VC funds which looked at 7,000 of its investments over the course of 1975-2014 (Chart 4).

Chart 3: Realized Multiple Range by % of Total; Chart 4: US Venture Investments by Return Range

Attentive readers may of course point out that the failure rate of startup investments may simply be upward-skewed by a number of bad funds who invested poorly. And they’d be forgiven for thinking that. But the fascinating outcome of the Horsley Bridge data is that this is in fact not correct. Quite the opposite, the best funds had more strikeouts than mediocre funds (Chart 5). And even weighted by amount invested per deal, the picture is unchanged.

Chart 5: Money-losing Investments as % of Total by Fund Return Range;

In other words, the data shows that the number of failed investments you make does not seem to be associated with the fund’s overall returns. It actually suggests that the two are may be inversely correlated. But if that’s the case, then what does drive a venture fund’s performance?

What Matters Are the Home Runs

What matters is other side of the coin: the home runs. And overwhelmingly so. Returning to the Horsley Bridge data, one can clearly note how returns for its best performing funds are overwhelmingly derived from a few select investments that end up producing outsized results (Chart 6). For funds who had returns above 5x, less than 20% of deals produced roughly 90% of the funds’ returns. This provides a tangible example of the Pareto Principle 80/20 law existing within VC.

Chart 6: Deal Distribution by Share of Fund

But it goes further than this: Not only do better funds have more home runs (and as we’ve seen above, more strike-outs too), but they have even bigger home runs (Chart 7). As Chris Dixon puts it, “Great funds not only have more home runs, they have home runs of greater magnitude,” or as Ben Evans summarizes, “The best VC funds don’t just have more failures and more big wins—they have bigger big wins.”

Chart 7: Gross Fund Returns, Horsley Bridge

Whichever way one chooses to word it, the takeaway is clear. Venture capital fund returns are extremely heavily skewed towards the returns of a few stand-out successful investments. The investments end up accounting for the majority of the fund’s overall performance. Perhaps the best way to summarize all this comes from Bill Gurley, one of the most successful venture capitalists around. He stated, “Venture capital is not even a home run business. It’s a grand slam business.”

The Babe Ruth Effect in Startup Investing

The above has led to what is commonly referred to in the venture capital space as the “Babe Ruth effect” to startup investing. For those unfamiliar with Babe Ruth, he is widely considered to be one of the greatest baseball players of all time, and was elected into the Baseball Hall of Fame as one of its “first five” inaugural members. In particular, what made him so famous, and such a crowd-drawer, was his batting ability. Babe Ruth set multiple batting records, including “career home runs (714), runs batted in (RBIs) (2,213), bases on balls (2,062), slugging percentage (.6897), and on-base plus slugging (OPS) (1.164)”.

But what is surprising, and less well-known, is that Babe Ruth was also a prolific misser of the ball. In other words, he struck out. A lot. His nickname for many years was the King of Strikeouts. But how could the two things be reconciled? The answer lies in Ruth’s batting style. In his own words:

“How to hit home runs: I swing as hard as I can, and I try to swing right through the ball […] The harder you grip the bat, the more you can swing it through the ball, and the farther the ball will go. I swing big, with everything I’ve got. I hit big or I miss big. I like to live as big as I can.”

The reason why Babe Ruth has this abstract association with venture capital portfolio strategy is that the same principals behind Ruth’s batting style can, and should, be applied to startup investing. If strikeouts (failed investments) don’t matter, and if most of the returns are driven by a few home runs (successful investments that produce outsized results), then a successful venture capitalist should look to invest in those companies that display the potential for truly outsized results, and to not worry if they fail. To contradict Henry Kravis’ thoughts on private equity investing, in VC one shouldn’t worry about the downside, but just focus on the upside.

Jeff Bezos takes this analogy even further, contrasting the ceiling of a 4-run baseball grand slam to the infinite possibilities of a successful financial deal:

“The difference between baseball and business, however, is that baseball has a truncated outcome distribution. When you swing, no matter how well you connect with the ball, the most runs you can get is four. In business, every once in a while, when you step up to the plate, you can score 1,000 runs.”

2. How to Maximize Your Chances of Hitting a Home Run

Given all of the above, the logical follow-on question should be how one can maximize their chances of finding a home run investment. This is a contentious topic to answer and I am going to frame it across two areas that are worth looking into. The first is how one can assess each investment opportunity to ascertain its potential of being a home run, and the second relates to more general portfolio strategy and number of investments in order to maximize the chances of having a home run in your VC portfolio. I look at these in turn, starting with the latter:

More At-Bats = More Home Runs?

If we follow the probabilities laid out above regarding the percentage of hitting a home run, we will note that no matter what data set is chosen, the probabilities are very low. The Correlation Ventures data shows that less than 5% of investments return above 10x, and of those, only a tiny fraction are in the 50x+ category. Similarly, the Horsley Bridge data shows that only 6% of deals return more than 10x.

Following this logic, a reasonable conclusion might be the following: In order to maximize your chances of hitting a home run, you need to have more at-bats.

Several VCs have taken this path. The most notable, and outspoken proponent of this investment strategy is Dave McClure, founder of 500 Startups. In a now famous blog post, McClure outlines his thesis clearly:

“Most VC funds are far too concentrated in a small number (<20–40) of companies. The industry would be better served by doubling or tripling the average [number] of investments in a portfolio, particularly for early-stage investors where startup attrition is even greater. If unicorns happen only 1–2% of the time, it logically follows that portfolio size should include a minimum of 50-100+ companies in order to have a reasonable shot at capturing these elusive and mythical creatures.”

His thesis is backed by a few illustrative portfolio examples, which he uses to display the importance of portfolio size, and which we’ve reproduced below (Tables 1, 2, and 3)

Table 1: Highly Concentrated Portfolio; Table 2: Modestly-Concentrated Portfolio; Table 3: Highly Diversified Portfolio

His numbers rely heavily on an arguably overlooked concept when it comes to portfolio strategies: the law of rounding. He is of course right, in that you cannot have a fraction of a startup. Which means that, assuming the probabilities he uses are correct (and in fairness they seem aligned with other data sets we’ve seen), if you really want to be “sure” of landing on a unicorn, you need to invest in at least 50 startups for that to happen (given that he assumed a 2% change of investment turning into a unicorn.)

McClure’s overall point is an interesting one. It resembles the “moneyball-style” investment tactics that have emerged successfully in many other areas of finance. And as mentioned, several other funds have taken a similar approach. In a sense, this is a fundamental philosophy behind all accelerators and incubators.

And yet, most venture capital funds do not follow this strategy. While information on fund size is hard to find, we charted data from’s 2014 VC rankings and, showing a 3-way cross reference of number of deals (x) vs. average deal size (y) vs. fund assets under management (z), an interesting segmentation of the market emerges (Chart 8).

Chart 8: 2014 Data for 100 Largest VCs in the World. Number of Investments per Year, by Fund Size and Average Ticket

One can see in the chart above that the bulk of funds tend to do 1-20 investments per year, with larger funds (aside from a few outliers) focused on the lower end of the range. Within the context of a 4-5 year investment period, this leads to an implied portfolio size which is smaller than McClure’s suggested number. What is clear from the above is that the strategy of investing in many companies rather than fewer is not the norm. But if McClure’s analysis is correct, then why haven’t the majority of VC funds followed this approach? In McClure’s own words:

“My guess is it’s due to the mistaken belief by traditional VCs that they need to serve on boards directly, rather than simply securing the necessary voting rights and control they want that usually come with board seats. Or maybe they think they’re just better than the rest of us who aren’t tall, white, male, or didn’t go to the right schools. Or who don’t wear khakis. Or maybe it’s due to all those tee times, I’m not quite sure.”

It’s a colorful argument that has credibility from his experiences, but it is of course subjective and difficult to assess. Unfortunately, a data-driven approach at evaluating the true “value-add” that VCs bring to startups is near impossible. Nevertheless there are a few data points out there that seem to contradict McClure’s theory. Data from CB Insights, for instance, shows that the success rate of accelerator-funded companies to achieve a follow-on funding round are significantly lower than the market average (Chart 9). And if Forbes columnist Brian Solomon is correct in saying that “Only 2% of companies emerging from the top 20 accelerators have a successful exit yet” then that would again imply below-average results.

Chart 9: Follow-on Conversion for US Accelerator Portfolio Companies

Piecing this all together shows that there probably is a tradeoff between portfolio size and quality. While there has been a huge increase in startup activity in recent years (meaning that the sample to choose from has grown a lot), it’s hard to believe that shooting for 100+ companies in a portfolio allows for a maintenance of quality standards. But the truth will ultimately come out in due course, as data becomes more publicly available and time is called on portfolios that have emerged in the last decade.

Picking the Winners Effectively

If one rejects the moneyball-style approach and instead embraces the more traditional doctrine which holds that VC firms should pick fewer companies and “cultivate” them to succeed, then an important question becomes: How can you pick your investments wisely in order to maximize the chances of landing on a home run?

This is of course an extremely difficult question to answer, and one that differentiates the successful venture capital investors from the rest. After all, if it were so easy, then the returns of the asset class would be far superior to what they really are. The practice of choosing which startups to invest in is more of an art than a science, and as such no definitive playbook can be laid out. Nevertheless, there are a few general points that emerge from scanning the writings of the best investors.


In an investment decision, two factors are being assessed: the idea and the people behind it. More emphasis should be applied to assessing the team. Back the jockey, not the horse, so to speak. In the words of Apple and Intel early investor Arthur Rock:

“I invest in people, not ideas […] If you can find good people, if they are wrong about the product, they’ll make a switch, so what good is it to understand the product that they are making in the first place?”

Ideas are more malleable than people. Someone’s personality is far harder to change than executing a product pivot. The vision and talent of a founder is the drive behind everything in the company and, in these days of celebrity founders, it is also a branding exercise.

Empirical data is now being released that supports this theory. A study by by professors Shai Bernstein and Arthur Korteweg with Kevin Laws of AngelList found that on the latter’s platform, teaser emails about new Angel Deals that featured more prominent information about the founding team increased click rates by 14%.

Addressable Market Size

If each investment made needs to have the potential for outsized returns, then an obvious facet of these companies is that they have a large addressable market size. Total Addressable Market slides are now a mainstay of pitch decks (and equally so, a source of derision when they all contain the now-seemingly-obligatory $1 trillion market opportunity).

A deeper understanding of the dynamics of the market being tackled is necessary in order to understand how truly addressable this market is. This example from Lee Howler sums up this fallacy quite well:

“There’s $100bn+ spent each year on plane flights, hotels, and rental cars in the US […] but if you’re an upstart online travel service, you’re not competing for those dollars unless you actually own a fleet of planes, rental cars, and a bunch of hotels”

Investors want to see entrepreneurs that have a profound understanding of the value chains and competitive dynamics of the market that they are tackling. In addition, a startup needs to show a clear roadmap and USP of how they can carve an initial niche within this and grow, or move into horizontal verticals.

Scaleability/High Operating Leverage

Good venture investors are looking for startups that grow exponentially with diminishing marginal costs, wherein the costs of producing additional units continually shrink. The operating leverage effects of this allows companies to scale quicker, more customers can be taken on for little to no operational change, and the increased cashflows can be harvested back into investing for even more growth. How would an investor asses this at Day 0? Steve Blank provides a strong definition of a scalable startup:

“A scalable startup is designed by intent from day one to become a large company. The founders believe they have a big idea—one that can grow to $100 million or more in annual revenue—by either disrupting an existing market and taking customers from existing companies or creating a new market. Scalable startups aim to provide an obscene return to their founders and investors using all available outside resources”

Consider Tesla open sourcing its patents. This was not intended as a solely benevolent gesture by Elon Musk; instead, it was an attempt by him to accelerate innovation within the electric car space by encouraging external parties to innovate in his arena. More efforts to produce better technology (i.e., longer life batteries) will ultimately help Tesla to reduce its marginal costs faster.

The importance of operating leverage is one of the main reasons, amongst others, why venture capitalists often focus on technology companies. These tend to scale faster and more easily than companies who do not rely on technology.

An “Unfair” Advantage

Startups face up to deeper pocketed and more experienced incumbents with a goal to usurp them. To do this, they have to employ unconventional tactics that are not easily replicated by incumbents. An investor must look to what innovative strategies the startup is using to tackle larger competitors. Aaron Levie of Box sums this up in three forms of unfair advantage: via product, business model, and culture. Lets consider three examples of this.

An unfair product: Waze turns geo-mapping on its head by deploying its actual users to generate its maps for free. Exponentially quicker and making a mockery of the sunk costs incurred by incumbents like TomTom.

An unfair business model: Dollar Shave Club realizes that the majority of shavers care very little that Roger Federer uses Gillette and creates a lean, viral marketing campaign that delivers quality razors for a fraction of the price. It was impossible for incumbents to respond to this without cannibalizing their existing lines.

An unfair culture: The two former points will be driven by a culture in the startup that is more laser focused than an incumbent. Consider this example of Dashlane, which built a unified culture from eschewing traditional startup perks and using innovative video technology to bring its French and American offices together.


Through looking at the reasons for success across a range of startups, Bill Gross of Idealab concluded that timing accounted for 42% of the difference between success and failure (Chart 10). This was the most critical element from his study, which also accounted for team, idea, business model, and funding.

Chart 10: Top 5 Factors in Success across More Than 200 Companies

To give an example of how he defined this, he referred to Airbnb during his TED Talk:

“[Airbnb was] famously passed on by many smart investors because people thought, “No one’s going to rent out a space in their home to a stranger.” Of course, people proved that wrong. But one of the reasons it succeeded, aside from a good business model, a good idea, great execution, is the timing.”

Using the 2009 recession at the time to frame this:

“[This was at a time] when people really needed extra money, and that maybe helped people overcome their objection to rent out their own home to a stranger.”

A venture capital investor will look at the timing of startups as part of their investment process. Is the deal arriving at the optimal time and is this business model riding a macroeconomic or cultural wave? The investors in Airbnb will have had the vision to frame this investment away from the prevailing biases of the time and view it as a unique opportunity arriving at the opportune moment.

3. Follow-on Strategies: Doubling Down on the Winners

The final venture capital portfolio strategy that I want to highlight, and one that many newcomers to venture investing fail to account for, relates to follow-on strategy. By follow-on, I mean the ability and disposition to invest further capital into future fundraising rounds of the companies that are already in the portfolio.

The importance of follow-ons was illustrated by Peter Thiel in his book, Zero to One. In it, he gives the following example:

“Andreessen Horowitz invested $250,000 in Instagram in 2010. When Facebook bought Instagram just two years later for $1 billion, Andreessen netted $78 million—a 312x return in less than two years. That’s a phenomenal return, befitting the firm’s reputation as one of the Valley’s best. But in a weird way it’s not nearly enough, because Andreessen Horowitz has a $1.5 billion fund: if they only wrote $250,000 checks, they would need to find 19 Instagrams just to break even. This is why investors typically put a lot more money into any company worth funding. (And to be fair, Andreessen would have invested more in Instagram’s later rounds had it not been conflicted out by a previous investment). VCs must find the handful of companies that will successfully go from 0 to 1 and then back them with every resource.”

The example above demonstrates vividly the importance of follow-ons. If only a few investments end up being home runs, then a successful fund will identify that and double down on its winners to maximize the returns of the fund.

The actual decision of when to double down is, however, not as simple as it may seem. At a high level, the chart below shows how a venture investor should choose their follow-on targets, using the analogy of doubling down at the “elbow.” As the slide behind this chart explains: “1) Invest at “The Flat” when prices are low, 2) Double-down if/when you detect “The Elbow” (if valuation isn’t crazy), and 3) Don’t invest at “The Wall” unless capital is infinite—if valuation starts running away, you usually can’t buy any meaningful ownership relative to existing.””

Chart 11: The Flat, The Elbow, The Wall

Nevertheless, in real life, being able to distinguish between Startup W, Startup K, and Startup L is not that easy. Particularly between Startup W and Startup K. Mark Suster wrote a helpful post outlining his way of thinking about this issue, but the fact remains that the decision is not always a clear-cut one. But that is, of course, where, again, the best VCs will differentiate themselves from the also-rans. And as in the previous section, this is more of an art than a science. Successful following-on is a strong test of a venture manager’s chops, where they are presented with the sunk cost fallacy decision, of pouring more money into a loser in the hope it turns around, or letting the investment die.

The importance of follow-ons to a fund’s overall returns stands out in the publicly available data. Union Square Ventures’ 2010 Opportunity Fund had a calculated IRR of 60.59% (Pitchbook), making it an extremely successful VC fund. If we look at follow-on trends (CB Insights) for USV after this period, we can see the majority of their funding choices were going as follow-ons into their winners. They were doubling down and the fund result shows that this was indeed a profitable strategy.

Chart 12: USV % of New vs. Follow-on Investments

This post has been about highlighting certain often overlooked venture capital portfolio strategies that serve to maximize performance. And this last point around follow-ons should not be considered least. Fred Wilson of USV sums it up:

“One of the most common mistakes I see new “emerging VC managers” make is that they don’t sufficiently reserve for follow-on investments. They don’t go back for a new fund until they have invested 70 to 80% of their first fund and then they run out of money and can’t participate in follow-on rounds. They put too many companies into a portfolio and they can’t support them all. That hurts them because they get diluted by those rounds they can’t participate in. But it also hurts their portfolio companies because the founder and/or CEO has to explain why some of their VC investors aren’t participating in the financing round.

Most people think that VC is all about the initial portfolio construction, selecting the companies to invest in. But the truth is that is only half of it. What happens with the portfolio after you have selected it is the other half. That includes actively managing the portfolio (board work, adding value, etc.) and it includes allocating capital to the portfolio in follow-on rounds, and it includes working to get exits. And it is that second part that is the harder part to learn how to do. The best VC firms do it incredibly well and they benefit enormously from it.”

At the start of this section, I said following-on was an overlooked part of VC. This is because the initial investments and their associated glamor of pitch decks and coffee meetings are the tip of the iceberg. The home runs are followed out of the park with the 66% of the fund that is reserved for follow-ons.

Optimizing for the Power Law

At the beginning of this article, we mentioned how the venture capital industry, as an asset class, has posted generally unsatisfactory returns. A fascinating report by the Kauffman Foundation shed further light on the issue and produced some interesting results. In the report, called We Have Met the Enemy and He is Us, the Foundation found that when looking at a collection of venture capital funds, only a few were responsible for most of the returns for the asset class as a whole (Chart 13).

Chart 13: A Small Number of Funds Generate Big VC Returns

In many ways, the performance of funds is analogous to the performance of venture deals: a few home runs and a lot of strikeouts. The shape of fund level returns follows a similar pattern to the distribution of single deal returns shown in the Correlation Ventures study in Chart 3 at the beginning of this article in which the 50x deals constitute a tiny portion of the sample, but with a significant magnitude of absolute returns.

The implication of the above is very significant. Readers will recall how returns of public stocks seemingly follow a normal distribution. What we hope to have conveyed in this article is that returns in the venture capital space, both at a deal level as well as at a fund level, do not follow a normal distribution. Rather, they seem to follow a power law distribution, a long-tail curve where the vast bulk of the returns are concentrated within a small number of funds. Figure 2 below illustrates the difference between a power law distribution and the more common normal distribution.

Figure 2: Power Law Distribution vs. Normal Distribution

The concept of the VC industry conforming to a power law distribution was rendered popular by Peter Thiel in Zero to One. In it, he said:

“The power law becomes visible when you follow the money: in venture capital, where investors try to profit from exponential growth in early-stage companies, a few companies attain exponentially greater value than all others. […] We don’t live in a normal world, we live under a power law.”

On an empirical level, evidence is arising to support this claim. Dario Prencipe of the European Investment Fund performed a detailed and fascinating statistical analysis of the fund’s returns from VC, which showed preliminary evidence supporting this power law principal. Investor Jerry Neumann also offers an in-depth look into the concept of power law existing in venture capital.

All of this implies that investors looking to succeed in the venture capital space must internalize the concepts and implications of the power law. Whether it is empirically and mathematically correct that the VC industry’s returns are distributed according to a power law is perhaps still a question, but conceptually, it is very clear that the venture capital space is very much an “outlier-driven” industry.

Not only this, but once one has internalized the concepts underlying the power law, one then needs to think about how to tactically use this to one’s advantage. The concepts we’ve outlined above regarding the number of at-bats and the importance of follow-ons are some of the more important ways one can do it.

The proliferation of startup “culture” and venture capital investing worldwide is arguably a positive phenomenon for the world. Paraphrasing Peter Relan, “[The world] needs new ideas, and citizens can’t expect the government to foster tomorrow’s disruption […] [Startups] have become a pathway to achieve this approach; they give people an opportunity to make their dreams come true. And even if most of these ideas fail, they will still create innovations that can be reflected in the product technology in other spaces.”

So the influx of new professionals into the venture capital space is a good thing. But for this all to continue and succeed, LPs need to see positive results for their investments. If only a few venture capital funds really know what they’re doing, and drive most of the returns for the asset class, then perhaps the solution would be for there to be fewer venture capital funds. But following on the above, that could be detrimental to society. Instead, we’d like to think that the solution should be the other way around: More venture capital funds should know what they’re doing. Hopefully this article can, even in a small way, be helpful in that regard.

This article is originally posted in Toptal.

Glass-Steagall Act: Did Its Repeal Cause the Financial Crisis?

Key Highlights

  • The Glass-Steagall Act of 1933 effected a separation between commercial and investment banking activities. Prior to its implementation, J.P. Morgan & Co. operated in commercial banking and securities activities. Afterward, it split into investment bank Morgan Stanley and commercial bank JPMorgan.
  • After decades of erosion, two provisions of the Act were repealed in 1999 by the Gramm-Leach-Bliley Act under then President Clinton’s administration. It allowed for universal banking under one structure.
  • Two remaining provisions are still intact today: They limit investment management firms like Bridgewater Associates from offering checking accounts and prohibit commercial banks like Wells Fargo from dealing in risky securities such as cattle futures.
  • The repeal ushered in a period of mega-mergers. The new six largest banks grew their assets from 20% of GDP in 1997 to over 60% of GDP in 2008.
  • The percentage of borrowers who defaulted on their mortgages nearly doubled from 2006 to late 2007, in large part due to imprudent lending standards.
  • Debate has centered around whether Glass-Steagall’s absence led to a decline in underwriting standards. A study found that securities issued through universal banks had “a significantly higher default rate” compared to those issued by investment companies.
  • Citigroup eventually required the largest financial bailout in history, to the tune of $476.2 billion from the government and taxpayers, lending credence to the claim that Glass-Steagall’s absence caused the financial crisis.
  • However, most too-big-to-fail institutions were actually pure investment banks or insurance companies, not universal banks (e.g., Lehman Brothers, Bear Stearns, Merrill Lynch, AIG).
  • Ironically, Glass-Steagall’s repeal allowed for the rescue of some institutions after the crisis. It enabled JPMorgan Chase to rescue Bear Stearns and Bank of America to rescue Merrill Lynch.
  • Leading up to the crisis, the shadow banking repo market exploded, growing from $2 trillion in 1997 to $7 trillion in 2008. The repo market’s growth is indicative of the overall growth in shadow banking, whose liabilities had far surpassed those of the traditional banking sector by 2008.
  • Did Glass Steagall’s absence enable commercial banks to fuel the growth in the shadow banking sector? “Commercial banks could have done all of those things in the 1960s or earlier, even before the Fed and the OCC court decisions began to loosen the structures of Glass-Steagall.” –Lawrence J. White, financial regulation expert at New York University
  • Overall, while the general consensus is that Glass-Steagall’s absence was not a principal cause of the crisis, the underlying culture of excessive risk-taking and short-term profit was real. According to the Financial Crisis Inquiry Commission, “The large investment banks […] focused their activities increasingly on risky trading activities that produced hefty profits […] Like Icarus, they never feared flying ever closer to the sun.”


Over the last several years, the Glass-Steagall Act has made many headlines in the news. In 2013, it brought together Democratic Senator Elizabeth Warren and Republican Senator John McCain as they proposed their 21st Century Glass-Steagall Act. During the most recent presidential election campaign, it created an unexpected accord between political figures as varied as Donald Trump and Bernie Sanders. Since then, enthusiasm for the issue has exhibited few signs of waning. In April of this year, Gary Cohn, advisor to the president, publicly advocated for the legislation’s revival, and as recently as mid-May, Warren and Treasury Secretary Steven Mnuchin went head to head on the issue.

So, what exactly is the Glass-Steagall Act and why all the controversy?

The Glass-Steagall Act was passed under FDR as a response to the stock market crash of 1929. It effected a wall between commercial banking and investment banking, only to be partially repealed in 1999. While there exists consensus around what the Glass-Steagall Act pertains to, there’s disagreement around its influence on the financial markets. In particular, the debate has centered around the repeal’s effects on the 2008 financial crisis and whether it was a principal cause of the crisis. Notably, it remains relevant despite the introduction of recent legislation. In 2010, the Obama administration enacted the Dodd-Frank Act in response to the financial crisis. Similar to Glass-Steagall, it attempted to promote financial stability and protect the consumer, but Dodd-Frank did not reinstate the repealed provisions of Glass-Steagall.

The following piece examines the historical context of the Glass-Steagall Act, the erosion of its effectiveness over several decades, and its repeal in 1999. It then delves into an analysis of its impact on the 2008 financial crisis.

Historical Context and Components of the Glass-Steagall Act of 1933

In the aftermath of the 1929 stock market crash, the Pecora Commission was tasked with investigating its causes. The Commission identified issues including risky securities investments that endangered bank deposits, unsound loans made to companies in which banks were invested, and conflicts of interest. Other issues included a blurring of the distinction between uninsured and insured practices, or an abusive practice of requiring joint purchases of multiple products. Congress attempted to address these issues with the Banking Act of 1933 and other legislation.

Through Sections 16, 20, 21, and 32 of the Banking Act of 1933, Congress mandated a separation of commercial banks and securities firms. The following four provisions are what have become commonly known as the Glass-Steagall Act:

  • At their simplest, Sections 20 and 32 prohibit affiliations between commercial banks and investment banks.
  • Section 21 stipulates that investment banks cannot receive deposits.
  • Section 16 prohibits commercial banks from investing in shares of stocks, limits them to buying and selling securities as an agent, and prohibits them from underwriting and dealing in securities. However, certain securities are exempted from the Act, collectively referred to as “bank-eligible securities.” We’ll explore why this is relevant later.

The effects of the Glass-Steagall Act can be exemplified by a familiar name: Prior to enactment, J.P. Morgan & Co. operated in both commercial banking and securities activities. However, afterward, it split into two separate firms: the investment bank, Morgan Stanley, and the commercial bank, JPMorgan.

While the effects of the Glass-Steagall Act were wide-ranging, it is equally important to note what the Glass-Steagall Act did not do. Beyond limiting the scope of activities for commercial and investment banks, the Act was not intended to limit the size or volume of such activities. Therefore, returning to the example of J.P. Morgan & Co., while the Act prohibited the bank from conducting all the same activities within a single organization, it did not prohibit the same activities (type and volume) if carried out separately through JPMorgan and Morgan Stanley.

The Glass-Steagall Act of 1933 Deteriorates

Over the course of several decades, the intended clear-cut separation between commercial and investment activities gradually deteriorated. Multiple factors contributed to this effect, including market forces, statutory changes, and the exploitation of regulatory loopholes.

As far as market forces were concerned, economic conditions such as rising inflation in the 1960s and rising market interest rates (Chart 1) during the Glass-Steagall era caused disruptions. These meant that commercial banks struggled to compete effectively, so consumers and corporate customers increasingly turned to investment banks for more lucrative products like money market funds and commercial paper. By the 1980s, the number of failed and “problem” depository institutions on the FDIC watch list rose to record levels (Chart 2).

Chart 1: Historical US Federal Interest Rate; and Chart 2: Number of FDIC Commercial Bank Failures, 1934-1995

The financial difficulties for commercial banks led to calls for regulatory changes, resulting in several laws that added to Section 16’s list of “bank-eligible securities” and helped them compete more effectively. Between 1983 and 1994, the Office of the Comptroller of the Currency (OCC) widely broadened the derivatives in which banks could deal. In addition, another major piece of legislation—the Bank Holding Act of 1956 (BHC Act)—generally mandated that bank holding companies (BHCs) were not allowed to own companies engaged in non-banking activities. Crucially, however, the act did permit BHCs to own companies engaged in activities “closely related” to banking activities. This vague language left much room for interpretation.

The Federal Reserve Board (Fed) and the OCC agencies were tasked to implement, interpret, and enforce the legislation. In interpreting the ambiguities and subtleties of Glass-Steagall and the BHC Act, the agencies gradually permitted an increasing number of activities similar to securities products and services. Higher courts allowed for a broad interpretation of the act and stated their deference to agency interpretations, leading to further loosening of restrictions originally imposed by the Glass-Steagall Act.

Aside from the above, loopholes also allowed financial institutions to bypass the separation between commercial and investment banking. For example, Section 21 of the Glass-Steagall Act was ruthlessly exploited. As mentioned previously, Section 21 prohibited investment banks from receiving deposits. However, “deposits” were defined narrowly, leading investment banks to issue short-term debt instruments that essentially functioned as the equivalent of deposits but were technically permissible. Therefore, though the banks were in compliance with the law, they violated its intention.

Repeal of the Glass-Steagall Act

By the late 1990s, the Glass-Steagall Act had essentially become ineffective. In November 1999, then-President Bill Clinton signed the Gramm-Leach-Bliley Act (GLBA) into effect. GLBA repealed Sections 20 and 32 of the Glass-Steagall Act, which had prohibited the interlocking of commercial and investment activities. The partial repeal allowed for universal banking, which combines commercial and investment banking services under one roof.

Many experts view GLBA as “ratifying, rather than revolutionizing” in that it simply formalized a change that was already ongoing. However, GLBA left intact Sections 16 and 21, which are still in place today. These continue to have practical effects on the industry today. For instance, they limit investment management firms such as Bridgewater Associates from offering checking accounts and prohibit commercial banks such as Wells Fargo from dealing in risky securities such as cattle futures.

Figure 1: Original Glass-Steagall Act Provisions

Following the repeal, the US banking sector embarked on a period of mega-mergers, creating behemoths such as Citigroup and Bank of America. The extent of this consolidation is shown graphically below.

Figure 2: M&A Activity Over Time

After this period, the new six largest banks grew their assets from about 20% of GDP in 1997 to more than 60% of GDP in 2008, as shown below:

Chart 3: Six Largest Banks: Total Asset Value as Percentage of GDP

Central Debate: Did the Absence of Glass-Steagall Cause the 2008 Crisis?

In the aftermath of the 2008 financial crisis, there has been much discussion around whether the absence of Glass-Steagall’s provisions caused the crisis. Given the complexity of the issue at hand, a conclusive assessment of the issue is beyond the scope of this article. Nevertheless, we have summarized below the main topics of discussion, and what the two major schools of thought believe for each.

The Housing Bubble and Imprudent Lending Standards

Between 1998 and 2006, the housing market and housing prices rose to previously unseen highs. As many readers already know, the market’s later crash was a primary cause of the Financial Crisis. A major determinant of the housing boom was the utilization of imprudent lending standards and subsequent growth of subprime mortgage loans. Most of these loans were made to homebuyers with factors that prevented them from qualifying for a prime loan. Many subprime loans also included tricky features that kept the initial payments low but subjected borrowers to risk if interest rates rose or house prices declined. Unfortunately, when housing prices started to fall, many borrowers found that they owed more on their houses than they were worth.

According to the Financial Crisis Inquiry Commission (FCIC), which conducted the official government investigation into the crisis, the percentage of borrowers who defaulted on their mortgages months after the loan nearly doubled from 2006 to late 2007. Suspicious activity reports related to mortgage fraud grew 20-fold between 1996 and 2005, more than doubling between 2005 and 2009 (Chart 4). The losses from this fraud have been estimated at $112 billion.

Chart 4: Yearly Filling Trend for Mortgage Loan Fraud SARs

Did the Glass-Steagall Act’s repeal contribute to the deterioration in underwriting standards that fueled the housing boom and eventual collapse? Predictably, opinions are divided.

On the one hand, those who believe the absence of Glass-Steagall did not cause the crisis highlight that offering mortgages has always been a core business for commercial banks, and so the banking system has always been exposed to high default rates in residential mortgages. Glass-Steagall was never intended to address or regulate loan qualification standards.

In addition, while the Glass-Steagall Act limited the investment activities of commercial banks, it did not prevent non-depositories from extending mortgages that competed with commercial banks, or from selling these mortgages to investment banks. It also did not prevent investment banks from securitizing the mortgages to then sell to institutional investors. Nor did it address the incentives of the institutions that originated mortgages or sold mortgage-related securities. Because it did not directly address these issues, it’s unlikely the Glass-Steagall Act could have prevented the decline in mortgage underwriting standards that led to the housing boom of the 2000s.

On the other hand, those who argue that the absence of Glass-Steagall did cause the crisis believe that the decline in underwriting standards was in fact partially, or indirectly, caused by the Act’s absence. Readers will recall from the beginning of the article that Glass-Steagall’s provisions addressed the conflicts of interest and other potential abuses of universal banks. After Glass-Steagall’s repeal, it is feasible that universal banks aimed to establish an initial market share in the securities market by lowering underwriting standards. Separately, universal banks might also self-deal and favor their own interests over those of their customers. Both of these incentives could have led to or exacerbated the decline in underwriting standards.

A European Central Bank study compared the default rates contained in securities issued by the investment companies to securities issued through large universal banks in the ten years following Glass-Steagall’s repeal. The study found that securities issued through the universal bank channel had “a significantly higher default rate” than those issued through pure investment companies. While the authors found no evidence of self-dealing, they did find evidence of underestimating default risk.

While these results are not entirely conclusive, it does suggest that Glass-Steagall’s absence could have worsened underwriting standards. Had Glass-Steagall been in place, these universal banking institutions would not have been created. Nevertheless, the regulation would not have prevented new, investment-only entrants also looking to gain market share. And as we’ve already mentioned, the Glass-Steagall Act never directly addressed loan qualification standards or prevented non-depositors from extending, repackaging, and selling mortgages. It’s therefore unlikely that the Glass-Steagall Act could have prevented the decline in mortgage underwriting standards, but its absence could have aggravated the situation.

“Too Big to Fail” and Systemic Risks

The second major topic of discussion related to Glass-Steagall and the financial crisis surrounds the issue of “too big to fail” and systemic risks. When the failure of an institution could result in systemic risks, whereby there would be contagious, widespread harm to financial institutions, it was deemed too big to fail (TBTF). TBTF institutions are so large, interconnected, and important that their failure would be disastrous to the greater economic system. Should they fail, the associated costs are absorbed by government and taxpayers.

The relevance of TBTF to the financial crisis was outlined by Ben Bernanke in a 2010 address, which is summarized as follows:

  1. These institutions will “take more risk than desirable,” expecting to receive assistance if their bets go bad;
  2. It creates an uneven playing field between big and small firms, which increases risk and raises the market share of TBTF firms to the detriment of financial stability; and
  3. Just as it did in during the crisis, the failure and near-failure of TBTF organizations disrupted financial markets, impeded credit flows, induced sharp declines in asset prices, and hurt consumer confidence.

If one accepts that systemic risk and TBTF institutions were major contributors to the 2008 crisis, then the debate turns to whether the absence of Glass-Steagall contributed to the creation of TBTF institutions and their disastrous effects. After all, the repeal of Glass-Steagall in 1999 set in motion the wave of mega-mergers that created huge financial conglomerates, many of which fall firmly within the TBTF camp.

Proponents of this philosophy point to the plight of Citigroup. The absence of Glass-Steagall permitted Citigroup (Citi) to be born through the merger of Citibank and Travelers, an insurance company. In years leading up to the crisis, Citi made huge proprietary bets and had acquired heavy exposure to securities based on subprime mortgages, eventually becoming the second largest underwriter of such securities by 2006. As the housing crisis shook the markets, Citi was hit hard, eventually requiring the largest financial bailout in history, to the tune of $476.2 billion in funding from the Troubled Assets Relief Program and taxpayers’ wallets.

However, aside from Citigroup, most of the other severely distressed institutions in the financial crisis were not commercial banks. As financial columnist Andrew Sorkin points out, Bear Stearns and Lehman Brothers were both pure investment banks with no ties to commercial banking. Merrill Lynch, another investment bank that ended up being rescued, was similarly unaffected by Glass-Steagall. American International Group (AIG), an insurance company, was on the brink of failure, but it sat outside the purview of Glass-Steagall. As for Bank of America, its major issues stemmed from its acquisition of Countrywide Financial, a subprime lender that had made poor loans—something permissible under Glass-Steagall.

Ironically, Glass-Steagall’s repeal actually allowed for the rescue of many large institutions after the crisis: After all, JPMorgan Chase rescued Bear Stearns and Bank of America rescued Merrill Lynch, which would have been impermissible prior to the 1999 repeal. Both were already involved in commercial and investment banking when they saved the two failing investment banks. On balance, therefore, the evidence does not seem to support the view that Glass-Steagall’s absence was a cause of the financial crisis.

Shadow Banking and Securities Market Turbulence

Another topic related to Glass-Steagall and the financial crisis revolves around the rise of shadow banking, which many believe was a primary cause of the crisis. According to Ben Bernanke, shadow banking typically involves financial intermediaries that carry out banking functions but operate separately from the traditional system of regulated depository institutions. These activities generate liquidity through capital markets and are not FDIC-insured.

Chart 5: Shadow Bank vs. Traditional Bank Liabilities

Practical examples of what sort of institutions and activities operated in the shadow banking sector are varied. Let’s examine the repurchase agreement market (repo market), a market for short-term, collateralized loans. The repo market works as follows: Depositors (institutional investors and large corporations) need a place to park liquid funds that pay an interest rate higher than that offered by commercial banks. Bankers (investment banks and broker-dealer firms) are willing to provide such a product in the form of repo transactions. In return, the lender receives safe, liquid collateral, so that if the borrower is unable to return the funds, the lender will simply seize the collateral.

In the years leading up to the crisis, the repo market exploded, growing from $2 trillion in 1997 to $7 trillion in 2008. Consequently, the demand for safe collateral for these repo agreements grew too. Mortgage-backed securities, an innovative financial product, helped satisfy this demand for collateral. Commercial banks make loans to consumers and business, but instead of holding these on their balance sheets, they can sell them to shell companies. Shell companies fund the acquisition of these assets by issuing asset-backed securities (ABS) such as mortgage-backed securities that become the liabilities of shell companies and are sold to investors in the capital markets.

The example of the repo market is relevant for several reasons. First, the growth of the repo market was indicative of the overall growth in the shadow banking market (Chart 5 above). Second, it played a particularly significant role in the crisis: the aforementioned US housing boom was financed largely in this way. Lastly, and perhaps most importantly, the repo market and the related MBS markets are illustrative of shadow banking’s complexity (Figure 3). At each step in the process, the true quality of the underlying collateral is further obscured and more loans are included with each link added to the chain. While, in theory, this diversifies risk, it also obfuscates the evaluation of the quality of individual pieces. The result of all this, of course, is that when confidence erodes, the structures come crumbling down as investors are unable to assess the true extent of the risks involved in these transactions.

Figure 3: The Shadow Banking System Process

It is generally accepted that shadow banking was an important determinant of the financial crisis of 2008. However, many debate whether Glass-Steagall would have curtailed shadow banking’s growth and, consequently, the financial crisis.

At a surface level, the shadow banking activities linked to the financial crisis were not prohibited by or relevant to the Glass-Steagall Act. As more activities previously conducted within the commercial banking sector shifted to this parallel and unregulated market, riskier behavior emerged and underwriting and lending standards slipped. But crucially, these new shadow banking markets were outside the purview of Glass-Steagall and the Banking Act. If anything, many argue that the real regulatory culprit was the Commodity Futures Modernization Act of 2000, which deregulated over-the-counter derivatives. Banning regulators from restricting these activities sent a strong “anything-goes” message to the derivatives markets.

However, on a deeper level, many question whether the absence of Glass-Steagall indirectly allowed for shadow banking to propagate. And crucially, it comes down to whether the commercial-banking sector, using its FDIC-insured consumer deposits, funded the sector’s growth, and whether this would have been permissible under the Glass-Steagall Act.

In a January 2016 interview, Bernie Sanders charged, “Secretary Clinton says that Glass-Steagall would not have prevented the financial crisis because shadow banks like AIG and Lehman Brothers, not big commercial banks, were the real culprits. Shadow banks did gamble recklessly, but where did that money come from? It came from the federally insured bank deposits of big commercial banks—something that would have been banned under the Glass-Steagall Act.” Warren Gunnels, Sanders’ chief policy aide, further explicated, “Commercial banks provided the funding to shadow banks in the form of mortgages, repurchase agreements, and lines of credit. Further, commercial banks played a crucial role as buyers and sellers of mortgage-backed securities, credit-default swaps, and other derivatives. This would not have happened without the watering down of Glass-Steagall in the 1980s and the eventual repeal of Glass-Steagall in 1999.”

The general consensus among experts is that these allegations are incorrect. According to Lawrence J. White, an expert on financial regulation at New York University, “Commercial banks could have done all of those things in the 1960s or earlier, even before the Fed and the OCC court decisions began to loosen the structures of Glass-Steagall.” Phillip Wallach, Brookings Institution fellow, adds that “The rise of mortgage-backed securities doesn’t strike me as obviously inconsistent with Glass-Steagall.” However, commercial banks were not blameless. Commercial banks used the shadow banking system to move liquidity and credit risk off their balance sheets, transferring it outside of traditional banking—risks that were not eliminated from the financial system. Still, these activities likely would have been permitted under Glass-Steagall.

Regarding Sanders’ specific mentions of Lehman Brothers and AIG, the FCIC concluded that Lehman Brothers relied primarily on non-bank sources of funding, therefore not endangering deposits. As for AIG, which eventually required a $180 billion federal bailout, “enormous sales of credit default swaps were made without putting up initial collateral, setting aside capital reserves, or hedging its exposure—a profound failure in corporate governance.” The FCIC concluded that this was possible due to the deregulation of derivatives, specifically the aforementioned Commodity Futures Modernization Act of 2000.

While one could make a case that shadow banking markets were the product of a deregulatory environment, further reinforced by the repeal of Glass-Steagall, strictly speaking, the absence of Glass-Steagall cannot be considered as a cause of the market’s growth. Had the Glass-Steagall Act been in full force, its prohibition of commercial and investment banking affiliations would not have prevented the opaque transparency in product risks and the subsequent investor panics that resulted.

“Like Icarus, they never feared flying ever closer to the sun”

It is difficult to reach a definitive conclusion regarding the impact of Glass-Steagall’s absence on the financial crisis. The culprits and causes of the crisis were many and varied, and to single out one factor would be to oversimplify the truth. With that said, the general consensus among academics and finance experts seems to be that Glass-Steagall’s absence was probably not to blame for the 2008 crisis. Even Elizabeth Warren, champion of its revival, acknowledged that the crisis could not have been avoided even if Glass-Steagall had still been in place. Former Treasury Secretary Tim Geithner also dismisses its role in the crisis. And Paul Krugman, a strong proponent of financial services regulation concurs: “Repealing Glass-Steagall was a mistake. But it did not cause the financial crisis.”

Ultimately, one cannot overlook the findings of the Financial Crisis Inquiry Commission, a nonpartisan institution whose 500-page report concluded that “Neither the Community Reinvestment Act nor removal of the Glass-Steagall firewall was a significant cause. The crisis can be explained without resorting to these factors.”

Still, there is credence in an oft-overlooked, indirect cause of the Act’s absence: the creation of a reckless, risk-taking, profit-focused culture on Wall Street. In fact, economic Nobel Prize laureate Joseph Stiglitz included this cultural shift as one of his five major contributing factors to the recession: “The most important consequence of the repeal of Glass-Steagall was indirect—it lay in the way repeal changed an entire culture […] When the repeal of Glass-Steagall brought investment and commercial banks together, the investment-bank culture came out on top. There was a demand for the kind of high returns that could be obtained only through high leverage and big risk taking.”

This mindset and resulting reckless culture, though intangible, were undoubtedly real. As some experts assert, the investment banking culture of risk-taking, focus on short-term profits, and deprioritization of client interests was at the heart of the crisis—which may not have been present, or would at least have been minimized, with Glass-Steagall. The FCIC report sums it up best: “The large investment banks […] focused their activities increasingly on risky trading activities that produced hefty profits […] Like Icarus, they never feared flying ever closer to the sun.”

This article is originally posted in Toptal.

5 Fundamental Principles to Create Stunning Facebook Ads

Facebook is the unrivaled king of social media advertising. How could it not be? In terms of features, insights and targeting, it is unparalleled in the online world, making it the ideal platform to advertise your brand’s products and services.

However, its greatness comes at a cost. For the average entrepreneur, the challenge of designing ads that stand out amid the glut of content littering their audiences’ newsfeed requires an almost herculean effort.

If you are one of these entrepreneurs, I can offer some simple hacks to make it easy to create ads that stand out, excite viewers and leave them eager to click “Buy Now.” Here are those hacks:

1. Understand the psychology of color.

According to a study in Management Decision, 90 percent of all split-second judgments that we make about a product are a result of the product’s color. If you extend this statistic into the realm of advertising, you’ll quickly realize that the colors you select for your ads can make or break a campaign. Consider these science-backed observations regarding the public’s response to different colors.

  • Blue, purple and green are more heavily favored by older individuals. Younger people, on the other hand, tend to prefer yellow, orange and red.

  • According to a poll by Joe Hallock, comparing results from 232 people across 22 countries, orange is the most disliked color, with purple, yellow and brown trailing closely behind.

  • Red is one of the most attention-grabbing colors, apparently due to the implications (food or danger) it had during our ancestors’ hunter-gatherer days.

While you should use this information to improve the visual appeal of your ads, realize that the above statements are generalizations. There is no “one size fits all,” and the biggest factor in the success of your selected color scheme is whether or not it complements what you are trying to sell.

2. Avoid hyperbole and overly bold claims

If your audience members stumble across one of your ads without prior knowledge of your company, one of the first questions they ask will be, “Is this brand credible?” And whether you realize it or not, the design of your ad will have a significant impact on how they answer that question.

Too many marketers rely on hyperbole, exaggerated claims and emotional manipulation. This has made it increasingly difficult for honest brands to make bold statements about their products or services without inviting public scrutiny.

While I am not suggesting that you dilute truthful ads to avoid the wrath of incredulous viewers, you need to be aware of the realities of online advertising and ensure that all of your ads appear professional and credible.

3. Leverage the power of social proof.

One of the most powerful tools in your advertising arsenal is the intentional use of social proof. People’s fears are triggered whenever they purchase a brand’s product for the first time. This fear is largely due to the risk associated with a new purchase and has resulted in countless lost sales throughout the centuries.

One of the quickest ways to alleviate your customers’ fears is to eradicate their perceived risk by providing social proof that reaffirms the quality of your product. Integrating client testimonials, case studies or user metrics (e.g., the number of subscribers/customers) can increase the power of your ads exponentially.

Using Facebook’s retargeting technology with social proof might be the secret ingredient to turning incidents of visitor abandonment into paying leads.

4. Use compelling calls to action.

Implementing calls to action (CTAs) into your advertisements has a very unique effect on your Facebook campaigns. While they will not increase your click-through rate or deepen user engagement, what they will do is eliminate friction and ambiguity, resulting in a higher conversion rate.

What that means is that if a viewer sees an ad for your brand without a clear CTA and then clicks through, he or she will be taken to a sales or landing page without a clear idea of what is going on, and that will likely result in the loss of a lead. However, if that same viewer sees an ad with a CTA saying “Join our email list for your free video,” the process of clicking and converting becomes seamless.

This simple trick will allow you to massively boost your conversion rate while simultaneously reducing the number of clicks generated by unqualified leads.

5. ABT: Always be testing.

While this point may not directly pertain to improving the design of your Facebook ads, the importance of testing cannot be understated. If you want to generate a high ROI through Facebook advertising, then you are going to need to test, and test a lot.

It is essential to your success that you implement the previous four tips and then test them against your previous results to determine what’s working and what’s not. Test everything: the colors of your ads, the headlines, various methods of social proof and different calls to action.


Designing incredible Facebook ads is not as difficult as you might have thought. While it will take months, possibly even years, of tweaking and testing before you have a fully optimized campaign, you’ll find the effort worth it. By implementing these simple techniques, you’ll see your Facebook campaigns and, by extension, your business, flourish.

Sam Oh

Sam Oh is a web strategist, digital marketer and founder of Money Journal. There he publishes in-depth guides to help entrepreneurs gain traction and grow by leveraging online marketing tactics. Oh has also created profi…

7 Steps to Winning New Customers

All entrepreneurs need to master the ability to win new customers. How well you can introduce new clients to your business, irrespective of its sector and size, will determine the level of success and longevity you are likely to have.

In reality, there are literally hundreds of potential ways in which you can win new customers, but I want to highlight seven of the most practical, applicable and impactful.

1. Know your customer

If you have a clear understanding of who your customer is (and is not), then you can target engaged, interested prospects and improve your ability to win new customers.

Understanding the age, geographic location, education level and job title of your customer base also allows you to speak in the appropriate language that resonates and strikes the right chord. This is known as creating an avatar and will give you insight into where your customer hangs out, either online or offline.

I would encourage you to spend some time to think through who your most likely target customer is; what would they look like and what problems would they have that need solving? Be as detailed as you can so you can clearly imagine who will most likely buy from you.

Related: How to Acquire Customers Without a Marketing Budget (Infographic)

2. Incentivize existing customers

The best ambassadors for your business are existing customers. They have already bought from you, and there’s no greater stamp of approval than when people put their money behind their opinions.

Incentivizing existing customers — through discounts on products in exchange for referrals, for example — works so well because those customers can tell their friends, who trust their taste, about you. This leads to quicker and higher conversions of prospects to paying customers.

3. Networking

Even in the digital age, effective networking remains one of the most powerful ways to bring in new customers and grow your business.

Networking in your niche is powerful not only because it allows you to understand changes in your sector, but it also puts you in touch with people who serve same customer base in one form or another. Hence, you can easily get introduced to new customer groups while developing a better understanding of exactly what it is they are looking for.

Related: What’s the Best Way to Acquire New Sales Leads?

4. Explore different sales channels

Too many businesses fail to take advantage of online opportunities. For brick-and-mortar businesses, these opportunities could come in the form of online sales of their associated products. For example, if you are a local coffee shop and brew particular brands of coffee, then you might be able to sell globally via the internet.

However, for many businesses that sell exclusively online, selling offline can provide invaluable customer feedback in real-time and introduce you to a totally new customer base, typically on your doorstep.

5. Secure high-quality public relations

The right public relations (PR) strategy can be like stardust for your business, leading new customers directly to your door.

The appeal of the right PR is that it can reach thousands (or even millions) of prospects. Just make sure you identify the right forum on which to seek PR. Identify key publications in your niche and reach out to the editors to see if you can talk as an expert in your field and add value to them while, at the same time, raising the profile of your own business.

Related: How to Make a Personal Connection with Customers

6. Explore different pricing models

Within your target market, there will always be prospects at different stages of their buying life cycle. In addition to those who are ready to buy, there will be those for whom what you offer is too expensive.

In such instances, figure out how you can acquire these customers: Having a lite version of your product, with less functionality and a smaller price tag, could help achieve this objective.

Deploying different pricing models can be a simple way to increase your overall customer base relatively quickly.

7. Paid advertising

In addition to the traditional TV, radio and press advertising, there are also online options such as pay-per-click and social media marketing.

Paid advertising can guarantee new customers to your business, but it comes at a cost. Hence, you should always start by identifying your objective from any paid advertising campaign. Is it to sell a product straight away? Add a prospect to your email list? Get people to engage with your website or content?

Once you have the objective identified, it is easier to allocate a budget and create realistic expectations for campaigns.

Whatever the size of your business, rest assured the companies you admire have utilized at least some of the above tactics. They can certainly help you as well.

Tallat Mahmood

Tallat Mahmood is the founder of The Smart Business Plan Academy, his online course on building powerful business plans for small and medium-sized businesses to help them grow and raise capital. Tallat has worked fo…