Entrepreneurs who are looking to attract investors need to develop and pitch a plan -- preferably written -- that answers every potential investor question about your startup before it is asked. You may be quick on your feet with answers, but if investors have to ask any of these questions, you raise the specter of hiding something, or of not being astute enough to know what’s important.
Either of these qualms can ultimately sidetrack your startup as not worthy of investment, so it pays to do your homework on what you say and how to communicate effectively. As a startup advisor and investor, I recommend a pitch deck with about 10 slides backed up with a written business plan of approximately 20 pages, both containing quantified answers to the following key questions.
1. What is the business problem you are solving?
This may seem obvious, but I still hear too many “solutions looking for a problem.” Just because your technology is exciting and potentially disruptive doesn’t mean you are ready to build a business. Investors want to hear about customers with money who have a painful problem that you can solve now.
2. What is your specific solution and value proposition?
Investors are looking for a concise description of your product or service without technical jargon or fuzzy marketing terms with value quantified in customer terms. This is also the place to first mention patents and any other differentiators that put you ahead of competition.
3. How big and growing is the total market and your target segment?
Investors will be looking for a sizing validated by industry analysts large enough for good investment returns. They like billion-dollar markets with double-digit growth rates. They expect to see focus, and evidence that your data is based on market experience and expertise.
4. How does your business model make money?
Good causes such as feeding the world’s hungry may help your marketing but may not sustain a business. The business model has to clearly define who is your customer, market penetration expected, how much customers pay versus total costs and the investment required to sustain cash flow.
5. Who are your competitors, and how do you win?
Every new offering has competition and alternatives, so it’s not credible to claim no competitors. Name the three top ones, and present your sustainable advantage as well as barriers to entry for new startups. Don’t degrade competitors, but use their specifics to highlight your advantages.
6. What are your specific marketing and sales plans?
Here I would expect to see a timeline for rollout, with specific milestones and partnerships. You need to identify pricing details, sales channels, strategic partners and a customized marketing plan consistent with your industry and target segment. Highlight elements of traction you already have.
7. How is your team uniquely qualified for this venture?
A highly investable team has prior experience in the same business domain as well as credentials and skills in their roles. Investors invest in people more than the idea. As a team, they cover all key skills required. Include advisory board member qualifications and key industry connections.
8. How big is the funding request, and how much equity will you give?
Since investors are buying a part of your company (not your product), this is the most important question, and is one often not answered. Justify funding requirements, use of funds and specify a current valuation estimate. Quantify founder investments, both cash and sweat-equity.
9. What are your forecasts for revenue, expenses and cash flow?
Forecasts are evaluated as a level of commitment and a measure of your business savvy. Numbers should be aggressive, but not irrational, based on market size and conditions. I ask for five-year projections, since that’s the average time before investors can cash out.
10. How much and when do you foresee investors getting a payout?
Technically, this is your exit strategy, usually a merger and acquisition (M&A) or initial public stock offering (IPO). If you don’t plan a liquidity event, you won’t find many investors interested. Find a comparable company to show potential sale value and return on investment (ROI).
The best answers are not the longest ones or the ones with the most graphics. Serious investors who have heard a 1,000 pitches and read hundreds of plans are most impressed with founders who make the right points in the shortest amount of time with the least prompting. The only question you want to hear is -- “How soon can I sign up?” It’s really not that difficult.