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When you are about to start a new venture, there are two paths along which you can go. You can either bootstrap the business by yourself or with help of your relatives or by raising capital provided by investors. This, the second option to be more precise, is what we will discuss in this post … How you can prepare your pitch to face experienced investors and sell them your business. This is a skill every entrepreneur must have. Let’s begin …
The world of institutional investors
OK. You want to raise money for your business, but bootstrapping is, for whatever reason, not a suitable solution. What can you do then? Another option is to reach investors from the outside and pitch them your business. When you are looking for outside investment for your startup, there are two types of investors you can reach to. These are institutional and retail investors. Let’s take a look at the institutional type as first.
Institutional investors are people or organizations (including banks and insurance companies) that base their business on trading securities, property and other kinds of investments in a large amount. Venture capital and, hedge funds and various investment trust belong into this group as well. Since it is assumed that institutional investors are more knowledgeable and are able to protect themselves, they face fewer protective regulations.
The most attractive entity in this group of investors will probably be venture capital, or VC. VC are often approached by startup founders for their willingness to provide money investments to seed these startup companies in the early stages, thus accelerating their growth. What’s more, venture capital type of investors are not afraid to invest into novel and more chaotic industries such as biotechnology, robotics and other emerging fields.
The main distinguishing sign of an institutional type of investors is they exist in the form of big companies and entities. Never in the form of individuals. As mentioned, institutional investors also buy much larger share quantities, partially to lower the commissions.
The world of retail investors
The second type of investors are retail investors. This type, on the other hand, is represented by individual investors who buy and sell securities for their personal account, not for another company or entity. This type of investors is also known as a “small” or “individual investor”. Couple examples of retail investor can be a sweat equity investors, collectors, Angel investors or just gamblers playing on luck on their investment accounts at night. You will probably know at least the last one mentioned–person thinking he can beat the market.
If you want to approach some retail investors, who you focus on? Go for an Angel investor. Why? Angel investors are willing to provide financial backing for startups and small companies without the goal of reaping a huge profit from it. This is where Angel investors are different. They invest rather in person in front of them (the founder) rather than the business itself. Angel investors also come earlier than VCs willing to carry more risk.
Although institutional investors are represented by individuals, not everyone can be called an Angel investor. To become one, you must dispose a net worth of $1 million or more (excluding their home) or have an income of $200,000 per year. Add another hundred grand if you are married. Since they have less resources than VCs, Angel investors will often focus on investments between 25k and 100k. You can also look for Angel Groups.
Two worlds of the same–is founding the right thing for you
So, now, the two most interesting types of investors for us are venture capitalists (VCs) and Angel investors. Before approaching any investors, you should consider whether backing your business with outside money is the right thing for you. Every investor you approach will want something an exchange to his investment. In majority of cases, this something will be an equity in your business. This is where the rubber meets the road.
Keep in mind that giving some percentage of your equity to investors also mean giving up some control over your business. In other words, the more equity you give, the less control you will have. If you are unsure about how much equity are you willing to give, you should either reach to people with prior experiences (entrepreneurs and investors) or wait. If you don’t have serious reasons for raising capital, waiting can be a good strategy to stick with.
Reason to wait with founding is simple … The bigger your startup company is the less equity you have. If you don’t believe me, use elementary math. Getting, say twenty percent of equity, in small start requires much less capital than getting the same twenty percent in bigger and more established company with sales in tens of millions. The first option could easily fit into 100K–250k range. In case of the second option, 250K might not get your foot even into the office of CEO.
Remember, if you plan to remain in control in your business, never give more than fifty percent. Investor or a group with this amount of equity can take over your business. However, this will not happen to often. Investors are in this type of business to make profit without the need to work on that business on a daily basis. They want to hear from you only when you have great news and on scheduled meetings. Not planned takeover of a startup company because its CEO is idiot is not something they are wishing or dreaming for.
Preparation for success
Interested in raising capital? You had better be prepared for hard work and a lot of sweat if you want to sell your idea to investors. Investors are taking a lot of risks and will invest only in something they can trust and see potential in. This means they will not be interested in investing in an unfounded idea. So, how can you prepare for meeting with investors?
Perfect your pitch
Every meeting with investors starts with the same thing … Your pitch. Remember that investors are used to see, hear and read dozens if not more pitches and proposals every day. So, leave those long romantic stories about how you discovered the idea or met your co–founder for the end. Your pitch must be short and straightforward. Think about making the pitch in elevator. Meaning, short, simple and memorable pitch always wins. Investors are interested in the “what”, “how” and “why”.
Begin with the problem
Begin your pitch by addressing what problem you are solving. Next, how are you solving this problem. Lastly, answer the “why” … Why YOUR solution is the best and WHY people will want to pay for it. If you have any numbers backed by research or by real sales, make sure to bring them as well. Figures not generated by Excel and delusional or stoned founder is welcomed. Make sure to bring documents supporting your claims to the meeting, else every number will be nothing more than hypothesis.
Competition and market size matters
Also, don’t be afraid to talk about your competitors and market size. Since investing is like a relationship, I recommend including competitors into your pitch, not to hide them from investors. In case of competition, outline what makes you different and better and how do you want to compete with them. In case of market size, stay rational. Bragging about billions of customers and exponential growth each year will only make you look like a fool and someone who cannot be trusted.
Speak English dammit
Next thing to make your pitch perfect is to avoid use of jargon. You don’t want to dazzle investors by the size of your dictionary. Use good old English your parents and grandparents would understand. You can also try to the relate to another already established company with “we are X for Y” approach. If you are already on the market, make sure to throw few backed numbers here and there.
What is your business model
One thing investors are looking for in every pitch is where will the money be made. This means what is your business model–how do you make money. Avoid delivering a meter-long list, it would only tell that you have no idea where will the money come from. Keep it simple and keep the number of sources of revenue to one or two, no more. Even though some investors might prefer more sources of revenue, smaller amount will help you focus.
Every drug needs a dealer
Today, there are a lot of platforms and channels to market you can use to broadcast the message about your business and reach potential customer. However, there are still obstacles you have to face if you want to successfully get your word out to the world. You need to approach investors with a solid plan on how you will get your message out and stand out from the noise. You should view the product you are selling in a way that’s interesting for your customers.
Great team is foundation is great company
Every good pitch should also include information about your team. This does not mean reciting the CVs of your employees. As everything keep it brief. This info can come at the end of pitch, but is always good to mention those hustlers getting you new customers on a daily basis and hackers with great knowledge working on your product from the early morning till the late night. Team committed to the company is the cornerstone of success.
Humor can make miracles
Another thing you can use to distinguish your pitch from the rest is to use humor and make it funnier. Sure, pitching investors is a serious thing, but everyone likes to have fun from time to time. Be creative and include some of your numbers in interesting (read funny) real–life examples. Also, have a courage to show the human side of your business. This can help you win the hearts and brains on the other side of the table.
It all ends with vision
You need to avoid blind spots at all costs. Even thought, the business you are in is highly unpredictable, you need to have a plan for how much money want from investors and how you plan to spend it. Also, make sure you have a clear idea about every investment will be able to get you to a specific milestone. The more specific you can be, the better. If possible, split the investment into smaller chunks and address individual aspects of your business (hiring, marketing, customer acquisition, product development and day-to-day operations).
Closing thoughts on investors and pitching your business
Whether you decide to bring investors to the game and raise capital or not, knowing how to pitch your business is important. Even if you bootstrap the business, you will still need to sell your idea, product, company and yourself to customers. Maybe, you will turn to friends and family for help. Without solid pitch you will not be able to sell them on your idea. Remember, it is not just about a business … Movie you will watch with your girlfriend? Dinner where you take your wife? Your school essay?
You are pitching all day long. You had better be the best at it.
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