This article will explore how start-ups can create irresistible investment proposals.
Imagine you saw a tinned soup on a supermarket shelf, you might have seen something like it before, but possibly not the exotic flavour. You’re intrigued enough to pick it up and take a closer look. The packaging is poorly lined up, some ingredients are missing, the allergens are unclear and there are some spelling mistakes. It’s unlikely to get into your basket.
So I ask myself why, over 16 years of seed investing, and thousands (upon thousands) of investment decks, have I seen only a small fraction of investment proposals that have been thoughtfully constructed to sell the investment? With the right amount of information to give confidence and the creativity to instil some emotion?
Any pitch document should be aiming to make any investment proposals irresistible, and land in the investor’s ‘basket’ (their portfolio). So the ingredients of a compelling pitch to investors are the same as a compelling offer to consumers — differentiation, distinctiveness and price.
• Insight:It is difficult to create new ideas out of the same view of the world that everyone else has. A real innovation is usually born from some inspirational insight that uncovers a truly new need or opportunity.
Effective insight can paint an irresistible picture for investors. This can be qualitative insight — such as some quotes from a focus group or other potential consumers, and/or your personal ‘aha’ moment where you first appreciated the opportunity. The aim is to place your investors into your consumers’ shoes, so they feel the need. Ideally there will also be some quantitative insight — the size and growth of the potential market and, within it, the specific need being addressed.
Human stories, about consumers and their needs for example, create an emotional connection to the market. Supporting these with the rational numbers to illustrate market size and growth and the part of the market that is addressable then pulls an investor into the commercial opportunity.
• The big idea:If an investor has appreciated the market need, by now they are desperate to hear your answer. Again, try to create some emotion. Bring the idea to life as much as you can. Even a rough sketch will say much more than many words.
Describe how the idea addresses the market need, how differentiated it is from the competition and how protectable it is – patents, trademarks or proprietary technology or process. However, be careful not to publicly publish anything about an idea for which you are subsequently looking to file a patent request.
• The business model:Sometimes, and ideally, the way you are setting up to do business is a source of differentiation — the ability to do something cheaper, faster or better than your competitors. Your secret sauce might be your channels to market, production, logistics, price, promotion and/or partners.
At seed stage you are unlikely to have it all worked out, so explain the choices you have made and be clear about any assumptions made prior to experimenting with the reality. Any early evidence will add credibility, as will your plans for how to quickly validate outstanding assumptions.
• Brand and marketing:Particularly for consumer businesses, but also for any other, an investor will want to see your talent to excite your audience, articulate your proposition and stand out from the crowd.
This is much, much, more than just a logo. It’s how your business ‘shows up’ on the page and how well it is already showing up in the rest of the world (your website, existing product or service packaging etc). Even if your thinking on this is so far unsophisticated (or you have limited PowerPoint or Word skills), it costs no more to execute something well than badly (and there is plenty of online training available). Anything associated with your brand that is slapdash will signal that you are uninterested in how all people (customers, clients, new recruits, suppliers, other investors) perceive your brand.
Beyond the creativity it is also some rationale stuff like a marketing plan — how you will get the message out, through which channels and how much it will cost?
• The team:Regardless of how compelling the market and the proposition is, the business will fail without the right team. And this is the element of your business that no one can clone.
This is sometimes about experience. Investors will value a team with experience in their chosen market and someone experienced as an entrepreneur growing a start-up. A successful exit is most highly valued but any entrepreneurial battle-scars will add credibility.
But this is also about personality & behaviours. Curiosity, empathy, energy, resilience, tenacity and charm are some of the aspect we value. How can you demonstrate these on a page or when talking to investors?
It’s important to show how a team’s strengths add up to more than the sum of the parts. If there are known gaps in a team, or because there is just one entrepreneur, it adds credibility to point these out, with a plan for addressing them.
• The deal:If you are raising funding in return for equity and have a firm valuation for your business, then state the funding you are looking for and the valuation, i.e. to be clear about what equity you are giving up in return. It saves wasting anyone’s time. But you may be in early discussions and be looking for feedback about valuation — that’s fine, just make it clear this is to be negotiated. (In my next column we’ll look at setting a valuation).
• Financial projections:The deal now is only one part of the price to an investor. They are looking towards the potential future value to understand the relative value now and whether the difference justifies the risks and limited probability of success.
Any business looking for funding should have a three-year profit and loss account and at least a 12-month cashflow forecast. Highly capital-intensive businesses should also have a projected balance sheet.
That said, I rarely believe the numbers in a start-up’s business plan — it usually needs a few months of trading to put together a credible forecast. But I do look hard at them to understand that the entrepreneur has a good sense of finance, understands their commercial model and is ambitious whilst not deluded with an unrealistic level of growth. Then use the numbers to make my own projection of what might happen over the next five to seven years.
Whilst these are some components that should feature in any investment story, there is no ‘one size fits all’ answer. Every business has different strengths to highlight and should be getting across their own tone of voice. Indeed, nothing puts me off more quickly than seeing a business plan template pulled off the web and populated with words but no personality.
Maybe these points will help you move beyond a blank sheet of paper. If not, googling ‘pitch decks’ throws up various sites with lots of examples. it is useful to see what others have done — particularly when they have been successful. Although watch out for heavy tech and US bias. And some amazing businesses have funded despite their pitch deck, not because of it. You can sign up for crowdfunding sites and consider why is one campaign is funding and another not? Or ask experienced investors to share their favourite examples (without breaching confidentiality).
It’s helpful to have several versions of an investment proposal. You might have a one or two-page summary, a PowerPoint deck of a dozen or so slides, a full document and/or maybe a video — so you can target the occasion and the investor in the most appropriate way. However, regardless of format all but the shortest of summaries should address the points above and be dripping with personality and a brand tone of voice that brings the opportunity to life.