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Attracting Investors

How To Build A Winning Investment Case To Hook Investors

You need a pitch deck that will hook an investor. Here’s how you build it.

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In the past, it was necessary for entrepreneurs looking to raise finance to submit 100-page business plans. But modern-day investors demand, at a minimum, a well-crafted financial model and a pitch deck.

Increasing volumes of applications for funding and more sophisticated investors have driven this trend towards more succinct funding requests.

What does this mean for you? A new form of lure and bait is being used by hopeful entrepreneurs to reel in funders. Enter the deck.

At its simplest, a deck is a screening tool that serves as the key to your first meeting with a potential investor. It is not a comprehensive analysis that is bound to put off busy investors with limited time on their hands.

The purpose of the deck is to make the job of investors easier — and to make it impossible for them to say no.

Done properly, a great deck should explain why the problem you are looking to solve creates a meaningful market opportunity, why your solution will be able to solve this problem in a way that competitors and substitute solutions can’t, and why your team has created, or is able to create, a business model with matching unit economics capable of turning any future market share into tangible economic value.

Your deck should solicit sufficient interest from investors to yield follow-on meetings, conversations and discussions — opportunities for you to present your vision, and explain why investors are likely to profit from it.

Related: DTI Funding

DocSend, the sales enablement and analytics software provider, recently teamed up with Professor Tom Eisenmann from Harvard Business School to conduct research into the use of pitches and the factors that contributed to their success.

Core takeaways were:

  • Keep your deck to 20 pages or less
  • Contact 20 to 30 investors
  • Highlight your team slide — it is one of the three most viewed and important slides
    in your deck
  • Financial performance or forecasts will be the most used slide in your deck
  • Don’t insert deal terms into your deck. Investors want to structure deals according to their preferences.

Your deck should include information that addresses the topics below, and in the order set out to ensure optimal and logical informational flows:

  1. Purpose
  2. Problem
  3. Solution
  4. Why Now?
  5. Market Size
  6. Competition
  7. Product
  8. Business Model
  9. Team
  10. Financials

silicon-valley-tv-show

The following example is based on a fictitious company and is not unlike Silicon Valley, the acclaimed comedy series on HBO. Assume Peter Hendricks, founder and CEO of Pied Piper is on the road to raise finance.

Related: How To Start A Business With No Money

Using the construct and framework we’ve already set out, his story might look something like this:

1Purpose

“Pied Piper’s mission is to connect to the world through low cost, compression enabled data-driven interactions. We believe compression-driven, neural enabled networks offer opportunities for users and companies to interact more frequently, more cost effectively, and in a richer way than previously possible.”

Key Takeaway: Allow the reader to understand that the commercial vision drives your mission.

2Problem

“99% of the world’s data has been created in the last two years. Along with the growth and explosion of data creation, capital expenditure on infrastructure has had to increase to keep abreast. Given the frequency and volume of digitally-driven data enabled interactions daily, weekly, monthly and yearly, consumers and companies are spending unheard of amounts on data and Internet costs to enable product usage and enablement.

This results in:

  • Annual expenditure of R20 billion by data-heavy companies, and an estimated R82 billion by consumers using Internet-based applications and tools.
  • Companies and consumers spending about R60 billion more than they should on data and hosting costs, due to cumbersome infrastructure and ineffectual architecture.
  • Average users waste about three days annually waiting for files to load and data to buffer.”

Key Takeaway: Use data and numerical analysis to support your narrative. This will make your story more believable and justifiable. Remember, it’s all about justification.

3Solution

“Our ever-growing data and Internet bills, capital investments and consumer facing latency could be solved by flexible, well-crafted compression software that reduces file sizes through the entire data lifecycle. Reducing file sizes will reduce data needed to remit, thereby reducing data costs, while lessening the need for capital investments to support data storage and transmission. As such, we believe compression holds the key to unlock R45 billion in excessive consumer and corporate data spend, in addition to providing opportunities for these expenditures to be diverted from commoditised necessities to higher-yielding alternative investments.”

Key Takeaway: Without divulging product or situational information, craft a story about how the problem might be solved. Demonstrating the effect of such a solution numerically will emphasise your point about the seriousness of the problem to any prospective investor.

Related: Funding And Resources For Young SA Entrepreneurs

4Why Now

“We believe data and Internet services are becoming increasingly commoditised, thereby reducing corporate and consumer willingness to pay outrageous amounts for data consumption. Furthermore, we believe the current problems with data consumption will be compounded by the growth in mobile adoption and additional subscription for communication and social media applications. The congruence of these events and occurrences will create a large and rich opportunity for compression based applications that will reduce file sizes, slash data costs, and improve security.”

Key Takeaway: The purpose of this section is to explain why market and technological conditions are, or will become, conducive to companies and consumers using your product, or products/services of a similar nature.

5Market Size

market-size-for-a-product

“By looking at our core target markets, we currently preside over a R3 billion market opportunity.”

This estimate is based on the following supportive factors:

  • Our target corporate clients are media, financial services, medical and telecommunications companies, and we have segmented our consumer target market according to age and smartphone adoption.
  • In South Africa, we are currently targeting users aged 18 to 40, LSM 6 to 8. Given the application of our technology, we expect these users to be moderately tech savvy. Based on this segmentation, we estimate
    a primary population of 4,5 million potential users.
  • From a corporate perspective, three media companies, two medical companies, four financial services companies and two telecommunication companies have a need for our product, and are willing to subscribe to our offering.
  • Based on our business and pricing model, we estimate our corporate cluster to be valued at R2,5 billion, and our consumer cluster R0,5 billion, based primarily on advertising opportunities.

Key Takeaway: You will often hear entrepreneurs say: “If I can just get 1% of this market, we will generate billions in revenues.” That is top-down analysis and investors will tear that line of logic apart. Always use bottom-up analysis. No matter how hard it is to find data or information that relates to your external market, reverse engineering defensible numbers is more often the wiser and more defensible route. Bottom-up analysis allows for an articulation of the number of customers in the market for your product or solution (defined according to the problem identified and the number of people or businesses experiencing the problem and in need of a solution), multiplied by the potential revenue in serving each customer individually.

6Competition

“We believe Pied Piper is deeply differentiated from competing offerings, thus enabling us to capture market share more easily and directly than some of our competitors. We believe our freemium model will allow for wide adoption, with additional attractiveness driven by our wide product and service capability. While our competitors are only able to compress specific segments of data, the Pied Piper platform allows for data and informational optimisation across all categories.”

Key Takeaway: Use a series of tables or matrices to measure relative offerings from competitors or substitute products in highlighting the unique characteristics offered by your product or service. Your competition slide should state simply and convincingly why your product solves the problem in a way that competitors can’t. You should cover the following areas in your matrix analysis: (1) Price (2) Distribution (3) Funding raised (4) Business model (5) Key product features.

Related: New Ways SMEs Can Find Funding

7Product

Outline what your product does.

Key Takeaway: Closely tie your product story into the PSM (problem, solution and market size). Explain why your product is able to solve the problem outlined without repeating your solution narrative. Your product story should be a molecular analysis of your technology, explaining why it constitutes a viable and defensible solution. Moreover, your product narrative should be packaged and told in a manner that resonates with your market and opportunity analysis inasmuch as it must fit the customer base outlined, and the budgets from which potential customers will subscribe to your offering.

8Business Model

“Our business model is two-fold and relates to our key target breakdown according to consumers and companies.

  • We plan to deploy a SaaS based model for companies, where they pay a tiered amount of R1 million monthly, which will increase in line with utilisation. This allows us to align our interest with that of our clients, allowing us to benefit alongside them from the success of our product.
  • For consumers, we will deploy a freemium model to provide users with free access to our platform, allowing for low costs of acquisition and registration of a large base of potential users. We plan to use this base for cross-selling and up-selling of additional product and platform features, thereby monetising our consumer-based users.

Key Takeaway: The business model slide is a bridge to the information set out in your financial analysis. State and explain how your business proposes to monetise its offering, carefully setting out the underlying unit economics and key value drivers. Astute investors are always on the lookout for untenable business models, so be sure to know your key value drivers.

9Team

Richard Hendricks — CEO

  • Experience: Software developer for Hooli
  • Education: Computer Science degree from Stanford University.

Jarred Dunn — Business Development

  • Experience: Senior Vice President at Hooli focusing on strategic markets
  • Education: MBA from Stanford University.

Erlich Bachman — CMO

  • Experience: Founder of Aviato
  • Education: Computer Science degree.

Betram Gilfoyle — CTO

  • Experience: Full stack software developer for a number of successful start-ups and corporates
  • Education: Bachelor’s degree from University of Montreal.”

Key Takeaway: The purpose of your team slide is to demonstrate why you and your core team comprise the necessary skills and experience to make your venture a success. Provide a short description of the backgrounds of your key team members and their skill sets, linking these to their current roles and responsibilities within your business. Such competencies should relate to critical and important areas of your business or your key success factors. Think carefully about critical areas in your business, key human resources needed, and why your current team fills such gaps and requirements.

10Financials

“Pursuant to our go-to-market strategy, we aim to achieve the financial performance set out below:

  • Break-even is at R12 million in revenue, equating to one corporate customer or about 0,48% of the total market.
  • With an investment of R10 million, we believe we will reach a valuation of R400 million in five years, thereby offering a 10X return on our valuation of R40 million today.”

Key Takeaway: Slides on your financial performance or outlook should not go into detail that you can’t justify and defend. Ideally, your financial slide should set out any historical financial performance (for those of you in the seed or pre-seed stage, you probably don’t have any past financial information – don’t worry), with a reasonable outlook for future prospects.

Thus: Last year’s financial performance, if relevant, with a two-to-three year P&L and cash flow outlook. Your finance slides should also include a robust break-even analysis across a series of different scenarios. If you are not familiar with break-even tables, get someone knowledgeable to assist you. (Break-even analysis is crucial to understand, as most investors would want to unpack this early on. Investors use break-even as a simple metric to unwind applicable risks, determine the number of customers you would need to acquire or products you would need to sell, and test the reasonability of your required customer base relative to the size and dynamics of the relevant market.)

business-investment-advice

In closing, your deck should be short, to the point, and relevant for investors looking for 10X growth in their investment.

You will therefore need to explain why the market is large enough, why your product actually solves a problem, and why you will be able to turn any investment into a real financial return.

Lastly, make sure you understand your business and materials thoroughly, as investors are sure to probe deeply. Nothing will end your meeting faster than a wrong number, a misunderstanding of your business, or if investors sense that you are waffling.

Nicolaas Botha heads up Growth at En-novate. He has extensive experience in public and private market M&A, having worked within a leading global investment bank, Africa’s premier law firm and South Africa’s top rated venture capital firm. info@en-novate.co.za

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Attracting Investors

6 Great Tips For A Successful Shark Tank Pitch

Whilst most of us are unlikely to appear on television shows such as Dragons Den or Shark Tank there is a lot we can take out from watching these programmes.

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Whilst most of us are unlikely to appear on television shows such as Dragons Den or Shark Tank there is a lot we can take out from watching these programmes. Entrepreneurs will often need to promote their businesses to prospective customers, lenders, investors, employees and even suppliers.

All stakeholders would like to know with what and whom they are dealing. They will need to assess risk and will try and evaluate the business against others who are competing for those same funds.

1Know Your Product

You should be able to describe your business within 60 seconds, in a confident and positive manner. Let the stakeholder know what particular problem your business solves which makes it viable and attractive.

Your brand and how you intend to develop it is important in determining whether they will invest or lend you money. Share critical information with them such as large customers, patents and trademarks and details of forward orders.

If you are looking for funding or investment, make sure you have the relevant paperwork to back up what you are saying.

Related: 10 Tips From The Dragons Of Dragons’ Den SA

2The Numbers

You must have your numbers at your fingertips.  A true and successful entrepreneur will know his numbers instinctively and be able to recollect and present them convincingly. Stakeholders want to know your turnover (sales) over the last couple of years, your gross profit and net profit.

Investors want to know what they are investing in and whether there is strong potential for their money to grow. Lenders will want to assess their risk — how are you going to repay the money? Moreover, you as the business owner, need to be sure that you will be able to make the required repayments.

You must know what your margin is, as this will largely determine your viability as a business. Margin or gross profit is the difference between the selling price of the goods and their cost and is usually expressed as a percentage.

3Know What You’re Asking For

asking-for-business-funding

Be clear as to the size of the investment you want to give away and how that determines the ‘valuation’ of the business. Therefore, if you wish to raise R200 000 for 10% of the business, that means you value the business at R2m — be sure you can back that up or you will get taken apart.

4Have a Business Plan

The best way to fully understand your business is by way of having a detailed business plan, which has been prepared whilst working through every facet of your business, from the original idea to the finished product.

As the business owner, you need to live this business plan and be able to use it as your daily guide to success. Develop it, change it where circumstances require it, but most importantly know it and understand it.

In this way, you will be able to deal with most of their questions, be they about marketing, research, international expansion etc. It is also a good idea to know your competition and what they are up to.

Related: Dragon’s Den Polo Leteka Gives Her Top Tips To Attract Growth Capital

5Sell Yourself

In most interactions, you the entrepreneur, are selling yourself. Whether it is an investor, lender, customer or prospective employee, it is their impression of you and your capabilities which ultimately determine whether they want to work with you.

Be confident, defend your position where required, as you will need to parry some blows but do not behave arrogantly.

6Learn From Your Mistakes

Many entrepreneurs who have presented to the Shark’s Den and not been able to garner investment have turned their business into great successes. You need to be able to learn from the experience, and if rejected, bounce back even stronger.

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Attracting Investors

3 Things You Must Have In Place To Get That Start-up Bank Finance

If you’re planning to secure funding for your start-up, you need to put the right foundations in place.

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The South African landscape for raising finance is tough for any business, with stringent lending regulations. Here are three areas to focus on as you set up your start-up to ensure you’ll qualify for a loan or equity funding.

1Securing a Market

Most SMEs I have mentored or advised start with expressing how big the total market size is for their product or service, but, while this is important to understand, the big question is: What percentage of that market will you attract and how?

Look at the ‘how’ first and work your numbers backwards. For example, if you secure a R10 million contract to supply an item that has a market size of R37 billion you are capturing only 0,03% of the market. However, if you’re able to cover your monthly expenses (including your loan repayment) and make a profit, that’s what counts. You should be able to show this contract or letter of intent to procure, which shows how and where you will find this market.

Related: The One Question You Must Be Prepared To Answer When Pitching Investors

2A Strong Team

When you’re starting out you’re likely to be the sum total of your team. If you’re going down the entrepreneurial journey alone, make sure you have identified who will mentor and guide you through the areas you don’t have competencies in and cost this into the business start-up and running costs.

Focus on who in the business is going to:

  1. Sell and market: Do they have the necessary skill, network, product and market knowledge?
  2. Control the money: Are they financially savvy and can they make sure that money is being used for the right things?
  3. Operate: Who has done this before? Can this individual manufacture the product or arrange the supply of goods or services, ensure quality control and sound human resource management?

3Compliance

Formalising your business is costly but necessary. If you don’t have a formal entity, shareholders agreements, loan agreements, financial statements, management accounts, tax compliance and so on, you will come short when looking to raise finance.

Understand these costs upfront and include them into your start-up budget — this will save you a lot of pain in the long run.

Related: 3 Ways For Social Entrepreneurs To Access Fundraising

The truth is that finance is available for women who have the right business ingredients just as much (if not more — in the South African context) as it’s available for men and just as with men. And, resources such as these help to unpack and guide the core fundamentals that are needed to make business bankable/fundable.

Then it’s all about implementation and staying on track to translate all that you’ve done and all that you wish to do in a bankable business plan, and approach the relevant funder for your needs. The right business mentor can certainly help you on that journey.

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Attracting Investors

If You’re Trying To Raise Money, Doing Any Of These 9 Things May Scare Off Investors

Avoid these mistakes and funding could be yours.

Dave Lavinsky

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Most new and existing businesses can benefit from outside funding. With such funding, they can grow faster, launch new initiatives, gain competitive advantage and make better long-term decisions as they can think beyond short-term issues like making payroll.

Unfortunately, though, most entrepreneurs and business owners make several mistakes that prevent them from raising capital. These mistakes are detailed below. Avoid them and funding could be yours.

Making unrealistic market size claims

Sophisticated investors need to understand how big your relevant market size is and if it’s feasible for you to eventually become a dominant market player.

The key here is “relevant” and not just “market.” For example, if you create a medical device to cure foot pain, while your “market” is the trillion-dollar healthcare market, that is way too broad a definition.

Related: The One Question You Must Be Prepared To Answer When Pitching Investors

Rather, your relevant market can be more narrowly defined as not just the medical devices market but the market for medical devices for foot pain.

In narrowing your scope, you can better determine the actual size of your market.

For instance, you can determine the number of foot pain sufferers each year seeking medical attention and then multiply that by the price they might pay for your device.

Failing to respect your competitors

competitors

Oftentimes companies tell investors they have no competitors. This often scares investors as they think if there are no competitors, a market doesn’t really exist.

Almost every business has either direct or indirect competitors. Direct competitors offer the same product or service to the same customers. Indirect competitors offer a similar product to the same customers, or the same product to different customers.

For example, if you planned to open an Italian restaurant in a town that previously did not have one, you could correctly say that you don’t have any direct competitors. However, indirect competitors would include every other restaurant in town, supermarkets and other venues to purchase food.

Likewise, don’t downplay your competitors. Saying that your competitors are universally terrible is rarely true; there’s always something they’re doing right that’s keeping them in business.

Showing unrealistic financial projections

Businesses take time to grow. Even companies like Facebook and Google, with amazing amounts of funding at their disposal, took years to grow to their current sizes.

It takes time to build a team, improve brand awareness and scale your business. So, don’t expect your company to grow revenues exponentially out of the gate. Likewise, you will incur many expenses while growing your business for which you must account.

As such, when building your financial projections, be sure to use reasonable revenue and cost assumptions. If not, you will frighten investors, or worse yet, raise funding and then fail since you run out of cash.

Related: Top 5 Personality Traits Investors Look For In An Entrepreneur

Presenting investors with a novel – or a napkin

napkin

While investors will want to meet you before funding your business, they will also require a business plan that explains your business opportunity and why it will be successful.

Your business plan should not be a novel; investors don’t have time to wade through 100 pages to learn the keys to your success. Conversely, you can’t adequately answer investors’ key questions on the back of a napkin.

A 15- to 25-page business plan is the optimum length to convey the required information to investors.

Not understanding your metrics

How much does it cost to acquire a customer? What is your expected lifetime customer value?

While sometimes it’s impossible to understand these metrics when you launch your business, you must determine them as soon as possible.

Without these metrics, you won’t know how much money to raise. For instance, if you hope to gain 1,000 customers this year, but don’t know the cost to acquire a customer, you won’t know how much money you need for sales and marketing.

Likewise, understanding your metrics allows you and your team to work more effectively in setting and achieving growth goals.

Acting like know-it-alls

While investors want you to be an expert in your market, they don’t expect you to be an expert in everything. More so, most businesses must adapt to changing market conditions over time, and entrepreneurs who feel they know everything generally don’t fare well.

A good investor has seen many investments fail and others become great successes. Such experiences have made them great advisors. They’ve encountered all types of situations and understand how to navigate them.

If you’re seeking funding, acknowledge such investors’ experiences. Let them know that while you are an expert in your market, you will seek their ideas and advice in marketing, sales, hiring, product development and/or other areas needed to grow your business.

Related: Stand Your Ground When Looking For Investors

Focusing too much on products and product features

When raising funding, you need to show you’re building a great company and not just a great product or service. While a great product or service is often the cornerstone to a great company, without skills like sales, marketing, human resources, operations and financial management, you cannot thrive.

Furthermore, if your product has a great feature, be sure to specify how you will create barriers to entry, such as via patent protection, so competitors can’t simply copy it.

Exaggerating too much

When you exaggerate to investors who know you’re exaggerating, you lose credibility.

One key way to exaggerate is with your financial projections as discussed above. There are many other ways to exaggerate. For instance, saying you have the world’s leading authorities on the XYZ market is great, but only if they really are the world’s leading authorities.

Likewise if you say it would take competitors three years to catch up on your technology, when investors ask others in your industry, they better confirm this time period. If not, your credibility and funding will be lost.

Lacking focus

What do investors care about? They care about getting a return on their investment. As such, anything you say that supports that will be welcomed.

For instance, talk about your great product that has natural barriers to entry. Discuss your management team that is well-qualified to execute on the opportunity.

Talk about strategic partners that will help you generate leads and sales faster.

But, don’t go off on tangents that don’t specifically relate to how you earn investors returns, like the fact that you’re a great tennis player.

Likewise, conveying too many ideas shows you lack focus. For instance, saying you’re going to launch product one next year, and then quickly launch products two, three and four, will frighten investors. Why? Because they’ll want to see product one be a massive success before you even consider launching something new.

Investors have two scarce resources: Their time and their money. Avoid the above mistakes when you spend time with investors, and hopefully they’ll reward you with their money.

This article was originally posted here on Entrepreneur.com.

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