As a startup, you have to bring a fresh perspective to get your business noticed. However, it will take more than a good idea to convince a potential investor to write you a check.
To capture the attention of people who can accelerate your business, and ultimately open their wallets, you must master your investor pitch. As CEO of the Future Founders Foundation, a Chicago nonprofit that empowers youth through entrepreneurship, I have worked with startups from inception to growth stage to help them hone their messages and best articulate their value proposition to investors.
After more than a dozen years of pitches that number in the thousands, here are the recurring themes that define a great investor pitch strategy.
Build a relationship with investors before you need investment.
The best funding relationships are ones that grow organically. Get to know potential investors before you need capital. Do your homework on them. Investors have different preferences in terms of business stage, industry and risk threshold. They also may have experience or passions in certain areas and only want to invest in those. Get them invested in your mission and vision first, and then show your progress over time. Establishing a relationship early-on minimizes your need to act out of desperation. You have more power to negotiate terms. Investors should offer more than money, they should become partners and open their networks to you.
Sales validate your business model and make you more credible.
The best form of capital is sales. Sales validate your claim that people want what you are selling. Having a notable client that is paying for your product – even as a pilot or in beta – will help attract other customers. It informs investors that market demand exists. Projections are important because investors want to see the upside potential, but projections are just that – an indicator of what could be. Having hard sales data that shows increasing demand is key.
Explain who your audience is and how you will reach them.
Marketing matters. If you cannot describe who will buy your product and how you plan to reach people, then you have not done sufficient research. Even more problematic? No one needs what you are trying to sell or you have not identified realistic ways to market to potential customers.
Know your numbers and return on investment.
Investors want to know that you have a clear business model and understand the finances of your businesses. Creating a financial structure is crucial but being able to articulate it is even more important. Investors need to know how your business will make money, in what timeframe and what the return on their money is before giving you funds.
Provide details about the potential investment.
Most startups are cash-strapped and could benefit from additional funds. Investors want to know exactly how their funds will be used – whether for hiring, marketing, product development, technology or something else. They will evaluate whether those expenses will lead to exponential sales growth and if the right time for their investment is now. The more you can clarify the use of funds and urgency of the investment, the more successful you will be.
Show that you are invested in your business.
Investors like to see that you have invested cash, not just time, in your business. That shows you have something to lose if things do not go well. Investors want to see that you are fully committed to your business. While it may make personal and financial sense to keep your day job and work on your business part time, investors want to see that you are dedicating all the time necessary to make your business a success.
Anticipate challenging feedback.
No matter how well thought out an investor pitch is, gaps or unanswered questions will exist. Investors will raise potential issues to test your knowledge and see how you deal with difficult situations. The most successful pitches are the ones in which the entrepreneur has anticipated questions and has answers for them. Even better is if you have already faced those problems and have overcome them. That shows commitment to an idea that will not be easily abandoned during a difficult time. Also know who your competition is and how your business is different from theirs. You also will be questioned on who your team is, how long you have partnered and what level of success have you achieved together.
Crafting a compelling pitch is hopefully the catalyst for a successful partnership with an investor who can elevate your business. The pitch is just the beginning. Make the time and effort to nourish the relationship as the investment cycle can take time.