by Ron Stein
Updated 7 months ago
As you read this, the debate is raging on. Partners are divided, founders against engineers, mentors against mentees. What is polarizing the business world? Startups and emerging companies versus investors.
You have an amazing idea or company starting to rock ’n roll and need a little help. If you can only get an infusion of capital — you’ll takeoff like a 26 ton jet launched off the flight deck of an aircraft carrier, reaching 165 mph in 2 seconds.
Unfortunately, every venture capitalist and angel investor you’ve pitched are not seeing it this way. They just don’t get it. The nonsensical questions they ask and the vague reasons given for the subsequent rejections are nerve racking.
Getting rejected is hard to take.
I feel your pain. I’ve raised millions, but it took giving over 100 pitches to investors of all sizes around the world in every setting imaginable. Including several five minute “opportunities” to make my case standing in front of a room full of hundreds of venture capitalists. It wasn’t any easier dealing with industry analysts when I was the head of investor relations for a Fortune 500.
Trust me, the lessons I learnt early in the fundraising process were not easy to take. Yet, once I listened to an advisor and checked my ego at the door, everything was much smoother. Jocko Willink, former U.S. Navy SEAL and author said it best, "If you get your ego in your way, you will only look to other people and circumstances to blame."
It doesn’t help if you, your team, and advisors can’t agree on how to approach investors. The short answer is learn how to anticipate what they're thinking and what they look for. Here’s a cheat sheet to help you think like an investor.
“You haven’t sold anything yet.” Not seeing traction is an issue, even for investors who focus on pre-revenue startups. If there isn’t traction in some form they’ll most likely pushback and pass, because these folks are not generous gamblers. Aside from paying customers, investors will size you up based on many other factors — market size, competitors and comparable companies, pilot customers, early partnership commitments, letters of intent, strong testimonials from authoritative voices in the industry, and the quality of the founding team and its advisors. But, none of this may be enough. So, sell the dream and you vision. You’re not just better, you different in a significantly big way. You and your team are all in and fired up. Don’t be shy. In fact, you should hit on these points no matter if you’re a startup or an emerging revenue generating machine. However, there are a few things you need to know to pull this off. Read on.
“Your total target market size is a lie.” OK, an investor will probably not phrase it exactly like this. This is code for “You’re confusing the size of the problem and an associated market with the size of your addressable market.” The key is the TAM or total attainable market and the way you present it. Investors hate top-down market stats that more than likely talk about a huge related market that’s not relevant to your product or service. Maybe you sell a new type of automotive interior freshener and pitch a total transportation market of a gazillion dollars. They will call you out on this because they know this number almost certainly includes steel, labor, spark plugs, tools, and so on. The first thing investors will think is that you’re lazy and trying to scam them. Do the work you need to calculate realistic numbers — the number of buyers you can reasonably win (attain) multiplied by what you’ll charge, who they are initially and what’s the next segment up the food chain you’ll go after, and how you’ll get these buyers to say yes. As part of the pitch, you’ve already pointed out that your offering is much more functional than what competitors have. So, not only can you attract most available buyers, your can charge a premium. Wow, you may have understated the the potential attainable market size! That’s the bottoms-up presentation investors want to see.
“The market isn’t ready for you.” Ready for what? Does that mean the market is already too crowded, there’s an uphill climb to educate your target audience, or perhaps the investors think it’ll take more cash than you’re asking for to make an impact in the near term and the market will pass you by. Be ready to demonstrate that you’re solving a big problem in a big market and validate it with numbers. And, not just a big problem, an urgent problem. Show that your offering is clearly unique from competitors, and your team has the chops to execute quickly. This applies to a truly new market category too — prove that you will disrupt the target industry with a go-to-market strategy and action plan that doesn’t require lots of education.
“This isn’t exciting enough for us.” Investors need to be fully absorbed by your vision and the big problem you’re solving. Have a compelling and concise story right out of the gate. And tell your irresistible story with gusto, showing the fire in your belly. No wimpy, confusing and boring presentations please. Doing your best William Shakespeare soliloquy is not necessary, just show tons of conviction and enthusiasm. Of course you’ve got to back that up with a clear strategy and go-to-market plan that has investors thinking, “This is powerful.” Let them know you and your team are 100% committed and moving forward at light speed. Think about hiring a pitch coach — it will be an excellent investment.
“We sense trouble in paradise.” This is simple — know what makes you special, share the hope, forget the hype. Aside from the hard metrics and a sense of confidence investors look for, their radar is scanning for subtle clues about possible cracks in the foundation. Experience and gut feel rule the day. Presentations that are way too slick will have investors asking themselves if the company is more fluff than substance. On the opposite end of the spectrum are amateurish looking pitch decks, executive briefing sheets, and websites — too much text, a disjointed flow, or distracting graphics — that fail to drive home what makes you special. Bad presentations and materials that are unable to communicate a captivating message and value are turnoffs. Also, over-promoting and over-promising will backfire — which includes your approach to the fundraising process itself. Deep down investors start wondering how smartly you’ll go to market and conduct business; what over the top claims you’ll make to buyers; and how you’ll spend their money. Build trust and confidence starting with the first contact with investors.
“Your business isn’t sustainable, large existing players will eat your lunch.” here, investors are thinking about two big issues: business model and defensibility of the company’s secret sauce. Business model worries are all about how you make money. Investors may question if your customer targeting is correct, express doubt about the up-sell potential of add-on products, whether there’s enough, or any, reoccurring revenue streams, and fret over distribution and operations costs. After all, existing companies have the advantage of scale to reduce costs across the entire supply chain along with the cost of sales. Investors may also hit you with concerns that an established company will create a similar solution and crush your company.
Be prepared to address any potential uneasiness about these issues head-on. Show precisely how you’ll drive revenue and control costs. Walk investor through your model and why the market will accept the pricing (huge value) relative to the competition. Clear and concise “evidence” in the form of independent reports and quotes from strategic partners, existing buyers, and industry influencers will go a long way. Finally, if you don’t have any patents, speak about your intellectual property and trade secrets like this: “Sure, a large competitor with the resources may be able to eventually develop something similar, but by the time their engineers figure how we did it, the market will have passed them by.” Heck, maybe the’ll buy your business for big bucks just to get their hands on your yummy secret sauce and market share — that’ll make investors happy!
Investors are people too. Some investors are full of themselves and others are just plain cruel. Yet many are reasonably nice business people and don’t want to make their rejection too painful. Many times, turning you down is is couched in vague terms like, “This is too early for us” or, “It’s not a good fit for us” or, “The opportunity isn’t big enough / or is too small for us.” Many times circumstances unrelated to you or market can prevent a ‘yes’. For instance, investors may not be sure how a deal with you will fit into their portfolio, existing time commitments, and their personal interests. Many investors don’t want to tell you the truth because it’s hard for them to deliver bad news — yes, they can be empathic to what you’re going through. This is a signal that you will not get much more of a reason out of them. You should ask for feedback when you get a no, but when you get answer like these it’s time to move on.
There’s no magic bullet because every investor has their own criteria. Doing your homework upfront will help.
Zero in on people and firms that invest in your industry segment and type of technology. These investors want to be convinced that you have a deep understanding of the market. They’ll look for a relentless passion to interrupt the industry you operate in and the lives of the people that industry serves. Execution ultimately matters — help investors believe that your team is working in concert with one another toward a clearly articulated vision to turn the story into reality.
Prove that your business is uniquely positioned to grow because of a competitive advantage.
Ron is the founder of FastPath Marketing and More Customers Academy. He works with tech-enabled companies, helping them find the fastest path to revenue with executive advising, business development coaching and consulting, as well as marketing and selling training. As an accomplished tech industry business leader and entrepreneur, Ron has served in top-level sales, marketing and business development roles ranging from emerging companies to global tech giants, including as the CEO of a venture-backed wireless startup. Ron is on the advisory board of the University of Florida’s two internationally recognized tech business incubators and writes a popular column on how to grow revenue in the award-winning Florida Trend business magazine. Learn more at www.FastPathMarketing.com. Ron can be reached at 727-642-4246 or by email.