As an occasional angel investor, I always ask for a business pitch to get me in the mood. I’m still amazed at how many technical entrepreneurs don’t have a business pitch, and offer me their product pitch or product spec instead. I’m a technologist, so I always love to learn about the product, but every investor needs to make sure you have a business, as well as a product.
As a technology buff, I’m all too sensitive to the common investor complaint that technical people often end up selling yet another “solution looking for a problem,” because they are so impressed with their technology. Unfortunately, customers look for value in solving their problem, and new technologies alone scare them, so these solutions don’t get bought by customers or funded.
In reality, there isn’t much overlap between the business pitch I expect, versus a product pitch. Certainly, a slide or two needs to carry over describing the product and features at a high level. Beyond that, the why and how of the business are more important to investors than the what. Attracting business investors is as tough as attracting customers, but it’s a different challenge.
Investors are looking for motivation to buy a chunk of the business, not the product. Thus using product features to attract investors won’t work. Here are the unique business elements that I expect to hear as a potential investor:
- Target market size and growth projections. Most investors won’t be interested unless you can show them a large market (billion-dollar opportunity), with a double-digit growth rate. This implies high odds of a scalable business, simply needing an investment to lead to success. Of course, you wouldn’t include this data in your customer product pitch.
- Business model showing costs, pricing, and margins. Potential investors love to see gross margins in the fifty percent range or greater, with recurring revenue through subscriptions, follow-on sales, or services. Online and e-commerce businesses are especially attractive here since they are instantly worldwide and not people-intensive.
- Team skills depth, domain experience, and track record. In my experience, the team’s credentials are more important to the business than product features. Customers may be attracted to product features, but investors look harder at the team (bet on the jockey, rather than the horse). Solo entrepreneurs have a hard time finding an investor.
- Intellectual property and sustainable competitive advantage. Patents, trade secrets, and trademarks are very attractive to investors since these are not easily overcome by competitors. Your solution may include leading technology, but if available to competitors, the lead won’t last. “First to market” is not sustainable with normal startup resources.
- Customized marketing strategy and realistic sales plans. “If we build it, they will come” and “word of mouth” are not credible marketing strategies these days. I would expect to see specific plans for distribution, partnerships, and sales channels, as well as the use of social media and conventional marketing, with budgets for the major elements.
- Five-year financial projections of revenue and expenses. Of course, investors want to see a positive return on their investment, with timeframes and growth expectations. These are not meant to be an accuracy test, but a check on your commitment level, understanding of business norms, and an assessment of company valuation over time.
- Specific investment size request and equity offered. Every investor pitch must include the size of the desired investment, followed by the percentage of equity offered, thus supporting a realistic valuation today. Equally important is a projected use of these funds in scaling the business, including time frames for future investment requirements.
- Discussion of likely liquidity events and exit strategy. Since startup stock has little market value for several years until the company goes public (IPO) or is purchased (M&A), investors want to hear your strategy for offering them a good return on their investment. Examples of similar events in your industry are especially helpful.
Creating a great investor pitch is probably more difficult for technical entrepreneurs than creating a great product pitch. But it’s critical to have one. Just as a great business can’t exist without a product, a great product won’t survive without a business to sell it. It’s up to you as an entrepreneur to create both, with the ability to pitch either one, to the right people.
