One of my grown children called me the other day to ask if I knew of
anyone who could help review a business plan for a startup technology
company. Rather than offer a referral to someone else, I thought it
would be easier to provide some fatherly advice and craft the following
list of 8 mistakes that entrepreneurs often make when pitching to
investors. During the last 15 years living and working in Silicon
Valley, I have been a partner in a technology venture capital fund and
most recently an angel investor. Before that I was finance and M&A
lawyer for 20 years. So I thought my “fatherly advice” would be well
received. Imagine my surprise when I received this email the following
day: “Dad, I asked you to introduce me to someone who knows something about startups, not give me advice!”
Rather than waste my carefully considered advice, I offer it instead to you:
1. The Elevator Pitch Is Longer Than One Minute
If your “elevator pitch” is longer than one minute, you
will have a very difficult time raising money because you will not have
enough time to make a compelling investment case. This opportunity will
likely arise in an elevator, at a cocktail party, or ever so carefully
wedged between small talk with friends and their acquaintances. So you
must make the pitch short and to the point, and make sure it showcases
your knowledge.
The only way to accomplish all of the above is to have a well-crafted
pitch that takes no longer than a minute to deliver in an unhurried —
but practiced — manner. Any longer and the potential investor will most
likely have moved on either physically or mentally. Needless to say,
this is not easy. You must be able to condense all of the information in
your PowerPoint presentation (see 2 below) and business plan (see 3
below) into a brief summary.
2. The PowerPoint Presentation (aka “the Deck”) Is Too Long
Professional investors, such as venture capitalists and serious angel
investors, do not have long attention spans. The reason is not
necessarily that they have attention deficit disorders but that they
need to consider, evaluate, and choose among so many startup investment
proposals that 30 minutes of uninterrupted time is all you can
reasonably expect to have to present your proposal.
If you have been successful in the elevator pitch, you must be able
to present a slide presentation in about 15 minutes, then leave time to
answer questions within another 15 minutes (see 8 below). Although you
may be granted more time, you must also prepare for the possibility of less
time, so you need to ensure you get your main business points across
before the investor conveniently excuses himself due to a “prior
commitment.” Bottom line: 15 minutes of presentation means no more than
12 to 15 slides.
3. Not Having a Factually Supported, Well-Written Executive Summary
At the end of the day, the key to raising money is to have a
carefully thought-out summary of the investment proposal (aka “the
executive summary” or, the longer form, “business plan”).
When raising money, you need to interest VCs or angel investors with
the elevator speech and PowerPoint presentation, but you only close on
the money after the investor reviews, questions, and buys in to your
entire business plan. So you must spend a significant amount of time
drafting a coherent and persuasive executive summary or business plan
that sets forth, among other things:
- the problem that the startup will be solving
- the size of the market the startup will be addressing
- a sustainable competitive advantage
- the expected revenues and costs of the startup that are supported by realistic and detailed assumptions and projections
- a description of the startup’s management team
- the exit for the investors (see 4 below)
The best elevator speech in the world will not result in any money
unless you can deliver an analytical and believable business plan
explaining how an investment in the startup will make its investors
rich.
While there are a few experienced entrepreneurs out there who can do
this in an evening, you should plan to spend weeks, if not months,
perfecting a business plan — otherwise the time spent on the elevator
speech and PowerPoint will have been wasted.
4. Overlooking a Realistic Exit Strategy for Investors
An entrepreneur’s thinking process is often to make the world a
better place, create a long-term business that will keep him or her
engaged and richly employed, and bequeath a legacy that will take care
of the entrepreneur’s children and their children. In contrast, the
investor’s thinking process is usually “How do I make a lot of money in a
short to moderate time frame (3 to 7 years)?” Guess whose thinking
process controls whether the entrepreneur closes on an investment?
Therefore, you must ensure your PowerPoint presentation and business
plan address how the investor will make money (aka “the exit”) from
investing in your business proposal. Many entrepreneurs never address
this basic need of investors. To avoid this oversight, you must be
prepared to answer an investor’s questions about how the investment will
be monetized through, among other things, licensing agreements with
larger companies or a strategic sale of itself to a larger company, not
just an IPO scenario in which you see yourself becoming CEO of a Fortune
500 company (something that almost never happens).
5. Asking for a Non-Disclosure Agreement
Almost all entrepreneurs are convinced their business idea will
result in enormous wealth and, therefore, is at risk of being stolen by
an unscrupulous investor. So their first thought is to have the
potential investor sign a “bulletproof” non-disclosure agreement
(“NDA”). But for many professional investors, such a request is a
non-starter, meaning there is no longer any reason to see the 12-slide
PowerPoint or incredibly detailed business plan.
Unless the entrepreneur has a business idea on the order of “Son of
Google,” most professional investors, including both VCs and serious
angel investors, will not sign an NDA because they know that there is a
strong likelihood that they will have seen the idea before and will
likely see it many more times in the future. Consequently, they cannot
sign a document that will surely lead them to a lawsuit in the future
from either this particular entrepreneur or another one.
6. Submitting Investment Proposals “Over the Transom”
Raising money is all about building credibility with
investors. No investor wants to invest in a deal that nobody else is
interested in pursuing. Investors are very herd-like and often need the
validation of others investing with them before they will “pull the
trigger.”
Given the herd mentality of investors, you should never attempt to
raise money by purchasing or collating a mailing list of VC firms or
angel investor groups and then just mailing a proposal in the hopes
someone will contact you to set up a meeting.
This is not to say that there are not many entrepreneurs who, in
fact, do mass mailings. My point is that such an approach is likely to
be D.O.A. Venture capitalists and serious angel investors are often
deluged with unsolicited proposals, which sit in slush piles waiting to
be opened. The only real reason they might be opened is because a friend
or professional acquaintance has alerted the investor that the proposal
deserves a read. In other words, someone has acted as a reference or
provided a recommendation, preferably before the proposal has been
delivered. Only then do you have a serious chance at receiving that
special phone call.
7. Discussing Valuation Too Early On in the Negotiations
The courtship ritual of most couples does not start with a discussion
of how much each person will be worth seven years from their first
date, and how it will be divided between them if and when they part. And
neither should an investment presentation begin with a similar
discussion.
The reason an entrepreneur often seeks an investment from VCs and
experienced angel investors is to get a reliable indication of the value
of their startup, which is what experienced investors do for a living.
So there is no real point in preempting the process by insulting the VC
or angel investor with an unwarranted starting point for a valuation.
As some would say, you should just “let nature takes it course” and
wait for the investor to begin the discussion of valuation and pricing
with a term sheet. Any other approach risks an early termination of
negotiations.
8. Failure to Listen
You need to “leave your pride at the door” when making an investment
presentation and be open to the investors’ suggestions. The fundraising
process can be grueling because experienced investors tend to ask
numerous questions that likely have been posed to you before, questions
that test your business model and technology platform so all parties
might realize the best way of structuring an investment.
Most of the time, the questions are offered in the spirit of openness
to justify the investment of such a large sum of money. But rather than
viewing the questioning process as an exploration of alternatives by an
investor who is obviously interested in the startup (otherwise why else
would the investor have met with the entrepreneur in the first place?),
some people reactively resist suggestions to consider changes to their
business model or technology platform. Such a reaction is likely to
cause a thoughtful investor to move on. You should instead take the time
to consider the investor’s questions and suggestions, and view the
process as useful insight into his or her thinking.
I end with number 8 because such a “failure to listen” was the chief
mistake made by my own child. But I guess my own mistake was forgetting
that children never listen to their parents either.
