Pitch to Investors
Article originally published on July 2012 in Women 2.0 , The Next Woman, & Ellas2.0
I often get asked the question: What are the elements of the “perfect pitch”?
My straight answer is that an awesome soup can only be made if the right ingredients are present in the kitchen. Sophisticated slides only lead to investment if there is an attractive opportunity underneath. Attractive opportunities come in market disruption shape.
There is a clear difference between having an offering that presents an incremental efficiency and having one that completely disrupts the market. Foursquare for example, is a market changer, a disruption. Other apps that focus on finding just movies or just playgrounds around you, would be considered an incremental efficiency of the location-based idea. When it comes to a software product, more often than not, investors look for market disruptions rather than incremental efficiencies.
Market-changers are rare. Most of the time, ideas focused on building a slightly different yet better product won’t get the investor’s attention, unless of course, we are talking about a CleanTech or a Biotech product. The reason is very simple: CleanTech and Biotech both involve a large capital investment cost that makes improvement and retrofitting be preferred options over replacement. In the software world, however, the switching cost between applications is often very low. As such, the preference is for replacement vs. improvement, which makes the start up investment very risky. In one word, incremental efficiencies are very welcomed in industries where switching costs are high. As a customer, it doesn’t really cost me anything to use WyzAnt rather than TutorMatch to find a tutor. As such, launching a startup that optimizes tutor search is a very risky proposition from an investment standpoint. On the other hand, Stryker, a medical device company, works closely with surgeons and healthcare professionals providing top of the line patient care. Surgeons, who are trained on and familiar with Stryker’s products, find it difficult to switch over to their competitor’s products since that would involve high re-training costs on the competitors’ devices, longer time and effort in training and loss of income from conducting surgeries during training period. As such, investing in an incremental efficiency at Stryker might prove to be an attractive investment opportunity.
Assuming that your offering truly disrupts the market, here are some things to keep in mind while pitching.
- Avoid using jargon and avoid using a Top-Down approach. By that I mean, avoid describing how big the market is and what market share you think you’ll have, unless you have proven product traction. It is pretty foolish to talk about a 14 billion dollar market if you have yet to sell one software subscription.
- Avoid presenting a complex set of financial statements. Projections are only that, projections. Investors don’t want to hear about 5-year 10% projected growth rates, unless of course, you have large traction today. It isn’t sophisticated to say that in five years you’ll have ten million dollars in revenue if you only have three customers today. It is much better to talk about your customers today, your growth rate in the last six months and how the qualities of your offering make it so that your traction over the last few months has tremendously increased. The famous “hockey stick” projected growth chart only works if you can show traction today. Showing how word of mouth is affecting your growth can be very powerful as it shows viral growth.
- When it comes to presenting financials, I am amazed by the proportion of presenters who do not talk about cash burning rates. That is the equivalent of borrowing someone’s car and not letting them know where you are going with it. If you want my money, please let me know how you plan to use it. I want to know specifically what your funding needs are (people, product improvement, facilities) and how much cash you are using per month. This is the time to say, I am asking for $X to do Y.
- When describing your revenue model, be clear, simple and make sure to know your sales cycle. If you have several revenue streams, know which ones are more lucrative. Some investor lingo includes: margins, targets, number of users (software product), COGS, operating expenses, IRR, x-times EBITDA and x-return on their investment. For customer adoption, make sure you know the amount of dollars spent on adopting a customer.
- Risk mitigation. Very rarely do I hear someone speak about how they plan to mitigate risk. We all know that plans never go as planned. As such, the investor wants to hear about risks and mitigation of those. A clear identification of market opportunity always should be coupled with potential risks.
- I once heard a person pitch a motor that he planned to sell to manufacturers of low speed vehicles, ski boats, four wheel vehicles and airboats. The problem with his approach was the lack of focus with regards to his marketing strategy. While wanting to portray the versatility of his product, he ended up portraying his lack of knowledge about how to properly segment a market, pick up an entry point and notice how distribution channels work in his industry. Demonstrating small revenue numbers in different segments will make your potential investor walk away.
- When describing your offering, please avoid placing emphasis on the features of your product. Features don’t please customers. As people, we buy benefits not features.
- When describing your competitors, please be clear about your positioning in the market place. As Descartes would say, “Know Thyself” Is your product premium? At what levels do you compete? A product typically can’t compete at every level. If your product is software, are there high switching costs for your customer? Do you have partnerships? Are you dynamic? Scalable? Do you have IP?
- Go to Market Strategy. This step is somewhat of a bottleneck for many entrepreneurs. Here is where you show a clear understanding of product direction and how you plan to grow. Many products have complex distribution channels and partnership agreements. Here is also the opportunity to show that you understand how much money is required to move your product forward. This is also the place to show your current customer list and/or the established relationships that your company already has in place.
- Product roadmaps and timelines are very useful to present especially when the investment required is high. It is also a great way to show your traction overtime. Given than human beings are very visual, a linear timeline can be easily remembered especially when it is coupled with clear numbers and clear exit points.