Tech Consultant & CEO of Ingenuity Design Group, Paul Moutzouris offers product development expertise to drive innovation & growth.
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It was in the pivotal final moments of my pitch that I realized that something was terribly wrong. The panel of venture capitalists, the arbiters of my fate, gazed back at me with disapproval in their eyes.
For the better part of my presentation, I had meticulously detailed the technical intricacies of my invention. I had passionately expounded the problem it solved, its inner workings, its unparalleled features and its superiority over every existing solution. I believed, naively, that the mere revelation of these truths ensured that my prospective financiers would immediately recognize my destiny for success. I was sadly mistaken.
As a startup founder, the strength of your pitch can have a significant impact on your ability to secure funding. This, in turn, can be the difference between seeing your dreams come to fruition and watching them fade into obscurity.
The Mindset
Reflecting on this experience years later, I've come to understand its significance. Now, with the wisdom gained through shepherding various technology startups through the funding journey as well as being an angel investor, I've learned the critical importance of understanding investors' mindsets and addressing their concerns to achieve funding success.
Generally, investors are primarily concerned about two key aspects—the first is return on investment (ROI), and the second is risk. These factors are explicitly intertwined, and together, they determine the virtue of any investment.
An investor may accept a lower return for lower risk. They may also accept a higher risk for a prospect of higher return. Your goal as a founder is to secure funding for your venture at a fair valuation by showcasing potential ROI and reducing perceived risk. In general, earlier-stage investments are less established and are considered riskier. In turn, this requires a lower valuation to achieve a higher potential return.
Future Return
To establish a potential ROI, you should forecast the value of your startup at a particular time in the future when you expect to be able to exit the business, typically through an IPO or trade sale. The future value can be derived from estimating future revenues and/or forecasting its profit.
To forecast revenues, you need to know what people will pay for your product and how many you are likely to sell. To forecast profit, you must also understand in intimate detail all of the costs required to produce, promote, distribute and support your product. This will require you, among other things, to develop a detailed business plan.
Even if you intend to reinvest the profit into growth, it is still beneficial to model the theoretical future earning potential of the business to confirm its financial feasibility. From this, you can predict what someone might be prepared to pay for your business at exit based on standard industry multiples and, in turn, infer a present-day value of your venture based on the investor's acceptable ROI.
Present Risk
However, beware of blind optimism and baseless projections. Investors are discerning and require more than just promises; they require evidence for your assertions. Substantiate, wherever possible, the basis for your forecasts. Show reasons for sales projections and ensure cost calculations are based on realistic figures.
It's surprising how many startups forecast future sales growth from arbitrary market penetration rates gleaned purely from conjecture. To instill confidence in your forecasts, you can obtain letters of commendation from potential distributors, conduct market surveys or verify user intent to purchase through mock price sensitivity tests. This can be used to understand your target market and what it values about your product. Ultimately, you will need a comprehensive plan that shows how you will position your product and reach your target market.
Ideally, you will want to validate your business model with real-world data rather than a purely theoretical analysis. Get your product in front of real customers as quickly as possible. We used a crowdfunding campaign to validate the demand for our product and customers' willingness to pay for it. It also provided valuable funding without the typical dilution. However, the most important aspect of this campaign was the confidence it provided potential investors.
When investors can find a basis for your forecasts, their confidence grows—increasing your funding chances and maximizing the present-day value of your startup.
Conclusions
The next time you stand before a panel of VCs that can determine your future, remember that simply highlighting the brilliance of your product or solution won't be enough. Consider the mindset of investors and address their critical questions and concerns. While you won't have sufficient time to cover every detail in your initial pitch, use these as a foundation for your presentation and let them guide your focus.
Ultimately, your goal is not to entice investors to accept unrealistic expectations. Instead, it's about building enduring partnerships driven by a shared vision and transforming this into a reality that leaves a positive and lasting impact on the world. In this, I wish you every success.
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