Decoding the Investor Pitch for Small Business Owners
As a serial entrepreneur and retired COO of a small business finance company, I am most often asked WHERE business owners can obtain financing. Most of these folks believe that if they are pointed in the direction of capital, they can knock on the door and simply ask for it. There is a profound lack of understanding about the fact that how one presents their investment opportunity (their business), along with how well prepared they are for this presentation, can significantly affect the outcome in their quest for financing.
I’m not going to talk about the creation of a solid and understandable business plan, or possessing professionally prepared financial statements and projections. My goal is to decode some of the subtleties of the pitch you must make to investors.
The process begins long before you get in front of investors, fund managers or investment bankers. You have so much that you wish to convey and understand the concept of the “elevator pitch” that you were taught in business class, but now the game is real and you are going out there to raise money.
Over 40+ years in business – as both the person pitching a deal and someone being pitched to – I’ve learned some very valuable tools from being beaten up by the best and, ultimately, obtaining financing for my businesses…including an IPO.
It’s fairly universal and simple – all developing businesses need capital to start and grow. The initial investment may have come from your savings, friends and family, or an Angel Investor – it doesn’t really matter. But once you’ve broken free from that close orbit, you need to learn ways to negotiate the new frontier of obtaining capital in a highly competitive world.
When I first started out, I thought I would go in front of a potential investor with nothing more than my smiling face and enthusiasm and convince them to write a check for my budding venture – just because “they got it”. Not so. I met a lot of people who were very nice and some not so. None of them saw my vision and I ended up raising zero dollars to start my new venture. As with most entrepreneurs in this position, it was ultimately my home equity line and family members who put up the seed round to get me going. Nice to be in business, but I learned nothing about raising money from outside investors. That came later when I built out a multi-unit restaurant chain and was convinced that the way to grow exponentially was to “take it public”.
We were lucky that our Investment Banker was well versed in our industry and that the partner in charge of our offering was patient and an excellent coach. My partner in this venture thought of himself as a PT Barnum type promoter and salesman who would ramble on for days if allowed to but was lazy when it came to facts and financials. He would talk about the showbiz aspects of this great casual theme restaurant concept that we created and all the sizzle but not the steak. Keeping him on the rails was a task for the banker in charge, which frustrated him to the point where after one presentation he blurted out – “just shut up, and speak only when I tell you to, then stop and say nothing else”. I originally thought that the colorful way my partner told our story was a plus not a minus. I was wrong.
To paraphrase Franklin D. Roosevelt, it is far more valuable to “Be sincere, be brief, then be seated”. Professional investors see hundreds of business plans, many of them with interesting ideas or strategies, but unless there is something that grabs their interest they will not want to hear your life story. The idea of the classic elevator pitch applies. How do you get the investor interested in just a few short minutes?
One of the prime directives that I learned was not trying to accomplish a major data dump or an expert level understanding of my business model in my first pitch to a potential investor. My goal was to get a next meeting, not close a deal. A few years ago, I was introduced to an interesting concept for effectively communicating your business vision, which after I heard it produced one of those silly “ah ha” moments as it was quite obvious.
A young professor at Columbia University named Simon Sinek, introduced a unique concept in communicating their vision. Simply put, he argued that businesses shouldn’t be presenting what they do or how they do it – they should start the discussion with WHY. Presenting WHY this business is important and an outstanding opportunity for investors focuses them on WHY they should take their time to listen to you. At first it may seem that return on their investment answers the “why”, but most investors are seeking more. Does your why statement express what makes your business unique, scalable, market ready or any other trait that should arouse the interests of the investor? You may want to get down to the details of how you make the sausage, but the investor wants to know why this sausage is so special that they should listen to your story. If they like what they hear – you will get invited for a follow-up meeting. Goal accomplished.
Trying to get a sense for what hot buttons can trigger interest in a particular investor are key to a successful pitch. Listen as much as you talk when going to pitch – as you may have to change strategy on the fly. The return on investment is always attractive, but what other features of your pitch make your business attractive? Is it technology? A large underserved and growing market? Is your process patented? Is there a grand obstacle to entry for competitors? Feel them out and things they say will lead you in the right direction.
Your presentation can also set the tone for success. Confidence is good. Arrogant, know it all attitudes often go down in flames. Too often, presenters try to sell the opportunity too hard as opposed to making the investors “feel” that the business has real potential.
Being succinct and focused is another prime element. Tell the story beginning with why this is important without rambling all over the place. A beginning, middle and end to the story done as briefly as possible. Details can be added but your goal is to get to a second meeting where you can take a deeper dive. Make sure your representations and projections are accurate and realistic because you are done if you can’t defend your presentation. You cannot be oblivious to the facts, so know what you are talking about and if you don’t know – say so.
Many investors want to determine if you see the potential flaws and weaknesses in your business and if you actually thought it through. Be honest and transparent because truthfulness and candor are valued. Along the same lines investors will typically ask how much money you have put into your business. They want to know hard dollars not sweat equity. If you haven’t put any cash in, you need to honestly explain why. Many investors believe that founders must have skin in the game in order for them to back you. After all, if you don’t believe in your business enough to put hard dollars in – why should I?
Two other key elements may trigger strong responses from investors. The first is having a realistic valuation for your business. What is the basis for your belief that your company is worth X? Don’t pull it out of the sky. Your assumptions should be tied to comps in your industry that reflect revenues, earnings, time in business – not pie in the sky assumptions. In an early-life negotiation on valuation I had a go round with an investment banker. He gave in on my price but came back with some very aggressive terms that yielded far more to his side than I anticipated. He said, “OK, your price, but my terms”.
Most important to any investor is the management team. If you are a startup or have a small company, investors are really getting behind the management and growth of a good idea. If you have an experienced management team that can deliver results…you win. If someone on the team falls short, don’t be surprised if a condition of investment is the replacement of that person. This could also include you, as the head of the company. To grow your equity, they may want you to step aside for a more seasoned executive. Not common, but it has happened.
You should hope for an investor that will be eager to work with you and for the benefit of the business, not just themselves. It’s not just money that you are seeking, but also support, experience and connections to help grow the business. You need to come to grips with control issues and shareholders rights and remember that your new investor will be with you for a long time, so choose wisely. When working with investors it’s a good idea to remember the Golden Rule of business… “He who has the gold rules”.