Karen McCormick, CIO at Beringea, explains how tech entrepreneurs can communicate their business idea to an investor in five simple ways.
Every entrepreneur, startup, and small business knows the power of a great elevator pitch. Typically about 60 seconds long, it transmits a message that is completely accessible to anyone who is listening, no matter how complex the idea really is.
A great elevator pitch will catch the attention of all the right people, from potential customers to business partners. It can also secure you a meeting with an investor.
At every stage of a business’s growth, the right investment – whether angel, venture capital, or private equity – has the capacity to catapult your idea to success.
However, while an elevator pitch is always helpful – and sometimes, essential – in securing meetings with investors in the first place, it’s also crucial that you consider how you expand on that introduction to become a genuine prospect for investment.
In order to seal the deal, you’ll need to show that you’ve got the experience, strategy, and financials to back your idea up.
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1. Define your accomplishments
As a growth capital investor, a lot of the businesses we see have significant revenue – and possibly profit.
These are great indicators of success, but there are plenty of other accomplishments you should emphasise. Do you have a product in beta or other trials? Do you have any clients, test or otherwise? Does your management team have great credentials in directly relevant fields? Do you have research, test results, or testimonials?
Management teams often focus on the market opportunity and how big the business could become if it just captured a certain percentage of the market, but evidence of real accomplishments to date will be far more likely to convince an investor.
2. Use comparables to validate business plan
To show an investor you won’t just burn through their cash, you need to prove you have a realistic business plan. Show you’ve thought about your route to market and how your product will actually sell.
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How will you go from selling no units to a million? Is the itch you’re scratching for your customers irritating enough that they’ll pay you enough for you to make a good margin? Doing your research really pays off when discussing financials; include examples of companies that have previously succeeded or failed in your space.
You should be able to justify your numbers from the bottom up and top down. Have there been other similar companies that grew at the same pace, and how did they do it? How much did they have to raise or spend to get there? It’s absolutely fine to talk about breaking the mould and doing things differently, but if you’re struggling to find examples of other game-changers that can support your projections, you may find it difficult to get buy-in.
3. Have a well thought-out exit strategy
Regardless of how innovative or interesting your idea is, you need to convince an investor that your company is likely to deliver the returns they are looking for – typically more than three times the amount they invest, often exponentially higher.
Many venture funds have a ‘return the fund’ strategy, where each investment has to have the potential to deliver a return equal to the entire fund size. Others will focus more on sustainable growth and profitability. Make sure you understand different fund strategies and align your exit projections accordingly.
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You should also have a strong point of view on the exit strategy itself, and have done enough research to understand the likely outcomes. What other companies similar to yours have had exit events? Who did they sell to? Who are the likely buyers? What revenue and profit multiples have been paid in the previous sales? Why will the potential buyers be interested in your business – what will it add to theirs? Be cautious about focusing on an IPO as your exit strategy; they can sometimes be challenging for investors given the costs of listing, the lock-in periods required, and uncertainty around market liquidity. It’s also good to have thought through the strategic acquisition potential.
One other consideration is your personal exit target – how much money would you sell the company for personally? Make sure the answer to this question delivers the investors the sort of returns they are looking for, or you’ll have a misalignment of interests.
4. Know the VC you’re pitching to
This may seem obvious, but ensure that the firm you’re pitching to has a particular interest in your chosen field. Take the time to research the firm and its partners before you pitch, so that you’re able to demonstrate that you would fit well into their portfolio. It’ll be invaluable to you to work out who the investor has previously done business with, and who they haven’t: you can usually tell this by checking out their LinkedIn connections.
When presenting, you should identify the partner with a specific interest or any operational experience in your field, and acknowledge this during your pitch. Be ready to pitch at a relatively simple level, but also ready to jump into the granular detail. It’s likely that there will be partners at the firm who understand your space very well, and others who are less expert.
You should also always be ready to demo or show the product when asked. If you’ve made it through the door for a meeting, it’s likely that the investor already believes in the market; now they want to see for themselves what makes your product different. A live demo is always more convincing than a description or snapshot.
5. Have alternatives options
Don’t put yourself in a position where you have no alternative but to take whatever is offered to you, even if it means you scale back your ambitions.
This makes a huge difference; both when you’re presenting to the investor, and when it comes to negotiating.