by: Robb Moore, CEO of ioSafe
As the newbie entrepreneur on the SARTA VentureStart team, I thought it would be appropriate to help some of my fellow entrepreneurs learn from some of my mistakes while pitching my company to investors. Below are five dumb things I’ve done. I hope these nuggets will save you a little time in your path to financial freedom!
1. Pitching Approach: Pitching the Product vs. the Business
I’m an engineer to the core. I love technology. I love MY technology. I love MY ideas. I think MY ideas are fantastic! I think MY ideas are worth billions. Newsflash – there is no shortage of wonderful ideas. Ideas flow from everywhere from everyone. The investor drinks from a fire hydrant flowing with people and their fantastic ideas.
The investor wants to buy the “business” not the product or idea. The “business” is what you’re selling to the investor – not the actual product.
To an investor, you’ll need to quickly explain the elements of what you’re selling to them: the product, the market, how money is made and the plan. Music to an investor’s ears – “I sell patented software for $1000 at 80% margins to medical doctors. I’ve sold the software to 20 doctors in various medical fields who all love it. I need $1M dollars to properly target the 500K doctors possible and grow my team to reach cash flow positive in 9 months. Applications for this software exist in every industry with regulatory implications.”
Notice that the preceding description completely lacks what the software does or how it works. It almost doesn’t matter! It could be software to optimize the doctor’s toilet breaks. The investor cares more about the business than the product.
2. Valuation Expectations: Entrepreneurs on Mars
Setting a valuation is always tricky. You’re on Mars. The investors are Earth based creatures. You see your business as worth billions. An 8 figure valuation like $30M seems pretty reasonable if the business ultimately sells for $300M right? 1000% return on their money seems like a great investment. I thought so too. It doesn’t work that way.
The sophisticated Angel hears the valuations from naïve entrepreneur valuations all the time. The investors love us (for the creativity) and hate us (for our ridiculous view of the business world).
If you’re pre-revenue, your business is probably not worth $30M. The investor, in today’s market, can find public companies (i.e. liquid stock) which have $20M in revenues, $5M in profits, growing at 30% per year with a $30M valuation. Do you stack up against this? Why on earth would they invest in your company with no revenues, illiquid stock and negative cash flows?
Ultimately your business is worth what people will pay for it. Consider all the opportunities for the investor and set your expectations to be aligned with the investor’s expectations. Businesses that get funded by Angels or early stage VC’s typically fit into a pre-determined box. If you don’t fit in the box, you won’t get funded. Find out what the box looks like and pitch to the proper group. An Angel’s box might be $300K investment, $1,2M valuation to own 20% of the company. An early stage VC box is bigger. Many times the box only includes software businesses and not services or hardware businesses.
I didn’t get funded by an Angel or VC. I didn’t fit. Don’t despair though….there are other ways to fund the business if Angel/VC money isn’t right for you at this time. I’ll have to cover that in “Five Things I Did Right!”
3. The Valuation Trap: Answering the Question Wrong
A sophisticated investor will ask “What sort of valuation are you looking for?” It’s a tough question to answer and a potential trap! Tread carefully. While pitching in front of 50 investors, an investor asked me that exact question. I confidently answered with “$30M” and half the investors chuckled and the other half gave their buddy that “raised eyebrow what’s this guy smoking” look. Whoops. Answering with too high a number is an immediate turn off and investors will walk away. Answering with too low a number means you’re selling your fantastic company for peanuts.
The investor wants you to answer this question as soon as possible. I would too if I were the investor but I’m not…yet. Be careful not to push the investor away with a ridiculous valuation nor set low ceiling too early from where negotiations move downward. Build a relationship with the investor, get a second meeting – make them believe in you and your business. Then talk specifics about valuation. Do your best to get them to float their thoughts on the valuation first.
Here’s my answer to the valuation question: “I’m very interested in setting a fair valuation for my business. I have reasonable expectations and would love to talk to you more about your thoughts on valuation.”
4. If I Build It, Buyers Will Come: Wrong!
This is a classic entrepreneur fallacy and a mistake I’ve made many times over. Getting a customer to part with their money is always very hard. People are pounded with special deals and offers every minute of every day.
Understand your market and sales challenges better by actually trying to sell something. I’ve spent too much time and money on R&D before trying to sell it to someone only to learn that the product is wrong or the sales channel is broke.
While pitching your company, you’ll come from a much more powerful position if you’ve actually sold your widget for “X” dollars at “Y” margin to a scalable market target. Don’t fall into the classic thinking that customers will simply gravitate to you while throwing dollars your way.
5. Too Much Info: Worthless Power Point Presentations
95% of all presentations from entrepreneurs, including my own, have way too much info. Having more than 5 words on a slide will force the investor to read the slide instead of hearing you. Having 50 words on a slide will cause the investor to ignore everything on the slide. The slide will look like a panel of gibberish with too many words. Pictures are always good. Understand your goal when you’re pitching the business. Your goal is to get the investor excited about your business’ potential to make money! Lots of money! Make the investor want to meet you after the presentation.
For the record, my current slide deck still has too many words. I’m working on it – constantly. When I read from a congested slide deck, my presentations come off flat and uninspiring. When I talk about my company with no slide deck, the passion comes through and the response is always better.
Obviously there’s a balance of too little or too much information. Work hard to boil your presentation down to what excites the investor (the business) – not what excites you (the product). Set a goal of one word per slide and see if it’s possible. Watch a Steve Jobs presentation on YouTube to get the idea of what I’m talking about. Make this your goal. (Steve – if you’re reading this – nice work. Get well soon.)
