The key to winning over a potential investor for your startup is thinking like one. If you’re an entrepreneur raising capital, you only get one chance to capture the interest of an angel or venture investment group.
There are a large number of entrepreneurs vying for a finite pool of capital. Understanding the critical elements of a successful pitch will help you beat the competition. While most angel investors are eager to provide funding, they also need to be confident they are putting their money into a winning company. Some 70 percent of investors do not get their money back. Armed with this awareness, your presentation should answer these five fundamental questions.
1. What makes your business special?
You must be able to quickly address what problem your venture is solving. You must convey there are no existing solutions available or, if there are, how yours is better. Explain the unmet need for the service or product, and how it will be of value to consumers. And most importantly, provide evidence that customers will embrace your product or service with enthusiasm (meaning they will actually pay for it). Startups that have paying clients already have an advantage here.
2. How big is the market, how fast is it growing, and how much of it can your venture service?
Many people lose their credibility because they overstate the size of their market. For example, if you developed a new encryption tool that protects data, the size of the market is not the US $75 billion that companies spend for cybersecurity. Instead the market size is the $1 billion spent on encryption software, and likely less than that depending on the product’s niche application—such as the type of data it protects and the market being addressed, for example health care or finance.
Even at under $1 billion, the target is substantial; therefore, you have to demonstrate your understanding of the nuances of the market. It is important to talk about how you will provide a service that is unavailable or disrupt how things are currently being done.
3. How will you introduce the product or service and convince customers to purchase it?
You need to talk to investors as you would your customers. A compelling sales proposition will strengthen an investor’s confidence that you understand customers’ needs. Be prepared to talk about the length of the sales cycle from potential customer to closing the deal, as well as the influencers and decision-makers in your market. Almost all investors ask how social media will be used to create leads and influence customers to make purchases. Be prepared with a social media plan.
4. How will you protect your intellectual property?
Piggybacking on what makes your venture special, you must also explain why you have a technological advantage over competitors or future copycats, and how you will protect it. This should be the more detailed part of your pitch.
Protecting your IP doesn’t necessarily mean having a patent. Software patents, for example, are viewed as suspect by investors because they can be difficult to defend against encroachment by big companies. But you must still have a thoughtful discussion on how you’re protecting your innovation. If there is no overt protection, and competitive advantage is predicated on the fact that you’re the first to market, then convey that. Talk about how your product or service launch will capture sufficient market share early on, placing your startup far ahead of potential competitors.
5. Is your team staffed to succeed?
The investor needs to believe you have a talented and experienced team that will fill critical roles. If you are lacking employees in one area, such as in marketing for example, explain that you are bringing in advisors to fill the gaps. And more often than not, startups have to pivot and change direction as they grow and receive customer feedback. Investors will be listening carefully to assess the team’s ability to process that feedback and its willingness to change course.
After you’ve addressed these points, the investor should be eager to learn how much capital you are requesting and in what form of investment, so read up on the many options.
The next question will be the process the entrepreneur used to determine the valuation of the startup before it has made money. It is okay to compare to similar startups. Finally, you will be asked to explain how you plan to use the capital, such as for market development or product enhancements, and what results will be generated due to the funding.
The truth is, this part of the pitch is a litmus test of whether the return on investment will be in the positive or negative. From watching the TV show Shark Tank, where entrepreneurs pitch their ideas to investors, you may think that you need precise numbers, yet most investors are probing your economic model rather than your math skills.
Remember that angel investors are business people first and investors second. Their questions are an amalgam of their market knowledge and collective business experiences. You will eventually gain the skill and poise to reposition your pitches to answer their questions. If all goes well, the investors will be inviting you back for a deeper dive into the details of your venture with a larger audience.
IEEE Member Ralph Sheridan screens startup proposals for Launchpad Venture Group, Boston’s largest angel investment group. He focuses on early-stage technology startups in clean technology and information technology security.