Second of two parts
In the last article I described the terms, process, and different presentations entrepreneurs should have ready to raise money. This article will focus on what to include in the pitch, what angel investors look for in an investment, and how to handle the question-and-answer portion of a pitch. Pitching to investors can raise anxiety because many entrepreneurs think it is their only shot. Think of a pitch as an important opening conversation. If you make a big mistake, such as being arrogant or rude, or have a terrible presentation, it might be your only shot. Often, angel groups will let an entrepreneur pitch a second time after 6-18 months if they have met milestones and shown improvement on traction or the business model.
Let’s start with who should do the presentation. Typically, the chief executive and founder should present. However, it is often wise to bring key members of your management team, such as your CFO, technical person or marketing person. If you are technical, then bring the complementary people. Maybe your marketing person is more polished as a presenter, but he or she is not a founder. A good presentation by the founder is often more effective than a great presentation from the marketing person who is not a founder. Investors want to see the CEO present. Although you don’t want too many people presenting, it is not a problem if a total of two or at most three present if they have different domain expertise and responsibility. Therefore, the CFO presenting the financials is fine. However, a good CEO should still know the main numbers, such as cost of product, gross profit, revenue and cash flow. Investors want to know the CEO can present to customers in a reasonable fashion. It is important to understand that investors look for passion, leadership, and being genuine. Thus, the most polished presentation without being completely genuine is not your best bet. Sometimes, an entrepreneur will bring in a professional CEO who may not convey the passion as much as the founder. Both my research and my experience in watching over 1,000 screenings say that passion is very important.
Often, an entrepreneur has 12-15 minutes to present to investors. Some struggle with what to include since they have so much to say. However, it is important to remember that no matter how interesting the technology or service is, it has to solve a problem that people are willing to pay for. Sometimes entrepreneurs are so wrapped up in the technology or service, they forget that at the end of the day, it has to create a profitable and sustainable revenue. Most products or services come down to doing something faster, more accurately, better or cheaper. Rarely do investors get excited if it does just one. In addition, they want something that is dramatic on one of those dimensions. For instance, if your product is 10 percent to 20 percent cheaper, there is not enough of a competitive advantage to ensure that your competition cannot simply lower their price and push you out of the market. Also, it needs to solve a big pain, in other words, there needs to be a big market potential. Without a big market, the fast growth needed to pay off in the end will not be there. Typically, the presentation starts with the problem and an overview of your solution. Since most fast-growth companies have some technology, it is important to have intellectual property in place, such as patents, to create a barrier for companies to enter the market (and if the market is big, there will be many) or for existing companies to copy what you are offering. Lastly, and maybe most importantly, you need to have a reasonable exit plan. It is important to remember when you pitch to investors that they don’t see any return until you sell the company or do an initial public offering. Therefore, although profit is important, investors need to know your company will be attractive to be acquired by someone. Building a fast-growing company often takes five to 10 years. It is a very risky and a long bet for investors, so be sure you show them a way to an eventual return on their investment. Other things that are important are a competitive matrix, financials that show the profit and loss and cash-flow statements for three years, a slide on the team members, the target demographic, the size of the market, cost of customer acquisition and your sales and marketing plans.
In addition to the above content, investors are looking for entrepreneurs with passion and who are genuine and coachable. They are not just looking for an entrepreneur, but a team. If you are at a very early stage, then explaining what the team will look like after funding is important. In other words, you may not have the money to attract the team you need, however, you have carefully thought out what the teams looks like, the qualities of those team members and possible candidates. Remember, investors are betting on you for five to 10 years, so they need to trust you. Nothing scares away an investor quicker than someone who appears not to be trustful. Also, building a company is a very difficult process, so investors look for deep passion, since they know the entrepreneur and team need to be fueled by not just making money, but also the need to solve this particular problem in the market. Lastly, entrepreneurs need to be coachable. Coachability can be tricky to assess since we want entrepreneurs with deep passion, which sometimes can correlate with stubbornness. However, they also need to listen and always be searching for a better product, business model or approach. Also, we want them to listen to their clients, team and investors. We want them to focus on winning, not on being right. Therefore, we look for a coachable entrepreneur.
Often after the presentation there is a question-and-answer portion ranging from 10 to 20 minutes. This is a crucial time for the entrepreneur, as many investors weight this time heavily in their evaluation and interest. Investors are not just looking for what your answer is, but how you answer it. There are a few sure ways to get ejected during the question-and-answer time. First, arrogance is rarely tolerated. It creates an impression of insecurity and will likely lead to failure. Second, not answering the questions the investor asks is bad. If you don’t know, say you don’t know. Investors don’t expect you to have all of the answers if there are detailed financial, product or operational questions. Investors expect you to get back to them quickly (within a day or so) with the answer. Younger entrepreneurs sometimes think they need to have all of the answers. It is much better to give an accurate answer. With that said, investors expect you to know most of the answers related to the costs of your product, the competition, and ways to ramp up revenue. Next, arguing with an investor if you have a different viewpoint is frowned upon. It is fine not to agree, but how you handle conflict and pressure in this situation is typically thought of as a signal of how you will handle pressure as the CEO. Also, be sure you answered the question. A good technique to use after some of your answers is to ask the question, “Did I answer your question?” This shows you are thoughtful in responding to an investor question. Lastly, remember if investors don’t think you have reached enough milestones, you are likely to be invited back if you implement their feedback and make progress. Don’t burn any bridges if you think the pitch is not going well.
Remember, pitching comes down to communicating a plausible business plan with passion. Do your homework and show investors you are the entrepreneur to make this business idea work!
