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.