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How to Pitch Your Idea to An Investor

At best you may only have a 30 minute window to pitch your idea to potential investors – make sure you get it right.

Greg Fisher

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PitchingIdeaToInvestor

The standard entrepreneur’s story reads as follows: You talk with your friends and family about your business idea for months. You then convince a colleague or two to join forces with you. You start creating some deliverables, set up a small office, and perhaps you even make some initial sales. But it soon becomes clear that to achieve your corporate mission, you’re going to need to raise some capital. Not just a few thousand Rand, but a few million.

I recently had lunch with GIBS MBA graduates, Rory Mackay and Michael Franze, who were at exactly this place in their entrepreneurial adventure. They had decided to create a new type of financial market in South Africa known as a prediction market. The concept has been successfully developed in other countries and they are hoping that it will take off in South Africa. They have already put over half a million Rand of their own money into the business but to give it a real chance of commercial success they need a large investment from an external investor.

They have spent the last month pitching their business idea to potential investors, showing interested parties their beta website and sharing their vision for how powerful a prediction market could be in SA. Their experience of walking the streets from one potential investor to the next has taught them a few hard lessons about the realities and intricacies of pitching a business idea.

If you are creating a substantial new business, at some point you are going to have to sell the idea either to investors, suppliers, customers or perhaps even potential employees. Presenting a new business idea in a coherent and convincing way is a core competency for a successful entrepreneur.

Below are some of the key lessons from my two MBA friends:

1. Getting It Right:

Start creating or delivering the product or service so that when you pitch it is not just an idea but there is some action. You have data you can modify or adjust and you can tell your audience about your experiences. The more tangible or real you can make your business idea, the greater your chances of attracting the interest of funders. Investors love to see development, they like to be able to see, touch and explore.

2. Find The Right Team, Support Or Backing As It Helps To Refine Your Pitch:

One of the most common tenets you’ll hear from investors is that they invest in teams, not ideas. You must try to pull together a team that maximises your chance of success. A good start-up team should have some relevant experience in the industry or some experience in launching a venture. If you have a gap or two in your executive team, admit it and talk about your strategy for filling those gaps.

3. There Must Be Heaps Of Blue Sky:

The risk to your funders is big if you fail, but they must realise how well off they will be if you succeed. The more sophisticated the investor, the higher the return they’ll want on their investment. But here’s a conundrum. As much as everyone needs to hear the projected numbers, and as necessary as it is for you to produce your financial forecasts, no one believes them. The classic mistake that entrepreneurs make is to say: “These are conservative numbers”.

Inherently financial projections are optimistic not “conservative” and there’s really no way to project into the future, particularly 24 to 36 months out. Be bold but retain a sense of realism.

4. Offer Three Clear Benefits:

When you are pitching, offer Three clear benefits, reasons or advantages, five is too many two is too few. The core question any entrepreneur has to be able to address in a pitch is: What’s the problem, and how does the proposed product or service solve it? It is critical for the entrepreneur to understand his or her business and be able to communicate its advantages succinctly in such a way that potential investors can remember them. For some strange reason people find it easy and meaningful to hold onto three points.

5. Have A Maximum Of 10 Slides:

In most cases you won’t have more than 30 minutes to convey your idea. Keep the slides simple and try to use pictures with as few words as possible to make the point. Apply the principle of less is more. Do enough to capture the attention of the audience and then let them ask you constructive questions.

6. Do the Mom Test:

If you can explain to your mom how you plan to make money there is a good chance you will. The best business models are simple and easy to understand. The business must have clear revenue streams and easy to understand cost structures which can be explained to investors in simple terms. Avoid technical jargon and complicated money making schemes.

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Don’t Make These 5 Mistakes When Pitching to Investors

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Greg Fisher, PhD, is an Assistant Professor in the Management & Entrepreneurship Department at the Kelley School of Business, Indiana University. He teaches courses on Strategy, Entrepreneurship, and Turnaround Management. He has a PhD in Strategy and Entrepreneurship from the Foster School of Business at the University of Washington in Seattle and an MBA from the Gordon Institute of Business Science (GIBS). He is also a visiting lecturer at GIBS.

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1 Comment

1 Comment

  1. Charles Muhigirwa

    Jan 16, 2013 at 18:34

    Thanks a lot Greg for this educative article on pitching businesses to prospective Investors. Wonderful work and I have learn lots of ideas.

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How to Guides

What Can A Business Loan Be Used For?

Read on below for what you can use these loans for.

Amy Galbraith

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Sometimes in the business world, you might need a financial helping hand. This is especially true if you are starting out as a business owner or building your business from where it already is. This is where business finance can be highly useful because you can use it for any number of issues that your business might be facing.

When you apply for any business loans you should know what you want to use the money for. For example, asset financing is used to lease, hire or purchase new equipment or vehicles for your business.

Small business loans can be used to boost your business funds or for purchasing new premises. Interested in applying for business finance? Read on below for what you can use these loans for.

You can purchase inventory

If you sell products, the chances are that your cash flow can often be dictated by having to restock your shelves. But if you have a business loan, you can purchase more inventory to replenish your stock and stay in operation throughout the year.

Purchasing new inventory during seasonal dips, such as selling out of items during the festive season, can become expensive. This is where finance can come in handy. You can have the funds deposited into your company bank account and use it solely for restocking your shelves, allowing better management of accounts during these trying times. It is not a long term solution, however, to use a loan to purchase inventory can be helpful for small businesses just starting out.

You can upgrade equipment

Having outdated equipment will put you at a significant disadvantage to your competitors. This can be remedied by taking out business asset finance in order to upgrade your current equipment. You can lease, hire or even purchase everything you need to maintain your original business plan.

For example, a transport or logistics company can use this finance to improve their fleet, to upgrade their current trucks, or to provide new technology to drivers to help them navigate the South African roads. If you are a boutique design agency, you can use your loan to purchase new computers with the latest software so that your staff is always on the cutting edge of all trends. On your loan application, be sure to list what you plan on using the money for so that you have accurate estimations of your interest rates.

Keep your office operational

Keeping your office operational means that you need to pay for day-to-day expenses. This can include anything from replacing an old coffee machine so your staff stays caffeinated to paying the utility bills so that your office does not go dark when you need electricity the most.

This could be seen as starting capital for small business owners, which you can then supplement with more income or repay once your business starts to earn more and become successful. You could create a list of all of your needs, such as paying lights and water bills or fixing kitchen equipment and look for those that you need to focus on the most. For example, your staff could bring their own lunches into the office in case you need to replace the fridge or you could strike a deal with a nearby coffee shop to save yourself from spending unnecessarily on expensive coffee equipment.

You can boost your marketing budget

Marketing is not easy to understand for everyone. While you might have a brilliant business mind, your aptitude for selling and marketing your company might not be your strong suit. This can be helped by investing a business loan into a marketing company for your strategy, which can help build awareness about your business and make it a success.

You will have improved brand visibility and can reach customers in new and exciting ways. And you will also see a significant return on investment when reports and analytics come in showing your business’s performance. Marketing is an integral part of building a flourishing business, so using your loan for this purpose would not be a waste. Be sure to speak to your lender about whether this is an acceptable use of your business finance and what the interest rates would be.

Final thoughts

A business loan can be a sound investment, especially if you consider what it can be used for. You could look into purchasing new inventory for your shelves during a busy shopping period, or upgrade your machinery for your next big project. You can use the money to keep your day-to-day expenses from becoming overwhelming or boost your marketing budget so you can reach customers and build your business.

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How to Guides

Does Your Business Really Need Funding?

Strategy, risks, and opportunities.

Carl Wazen

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Businesses need capital to grow, and most small enterprises rely on external funding to meet this requirement. While accessing funding can be challenging for entrepreneurs, taking on the financial commitments of a loan should never be taken lightly. Many small businesses fail because repayment conditions are so onerous they impact cash flow, and business owners end up blacklisted, which dampens their future prospects.

First, ask yourself some hard questions

Before you decide to apply for that loan, cash advance or capital injection, make sure that your business really needs funding. Critically evaluate your business. Consider that you’ll ultimately need to give something back for that funding – an equity stake, or interest payments.

Determine how much the extra funding is worth to you, and what would happen to your business if you couldn’t get it.

Define your goals

The type of funding you need (and how you validate it in the application) is dependent on your short- and long-term goals. If you’re not currently on track to achieving your business objectives, determine what stumbling blocks or pain points are holding you back. Ultimately, you should be certain that the capital will help you achieve your objectives.

Related: Government Funding And Grants For Small Businesses

Evaluate your financial pain points

Next, determine which of the identified obstacles can be overcome with extra money. While most could, a loan may not be the answer. Entrepreneurs often use financing to temporarily plug holes, instead of fixing them. Without addressing the root cause of the issue, the business will continue to struggle, while also dealing with the extra debt.

It is also important to consider the nature of your requirements, and the impact this will have on finances. For instance, using a loan to hire more staff requires upfront funds before additional revenue can be generated. The same applies to sales and marketing initiatives.

Expanding your footprint as part of a strategic plan to grow your business also requires funding, but these are usually long-term loans that take more time to pay back. A thorough evaluation is needed to determine the potential return on investment and compare it to other opportunities.

Evaluate if the strategic benefits will outweigh the mid-term cash flow risks.

Consider your options

Before making any financial commitment, first look for ways to optimise your operation to realise cost efficiencies within the business that can free up working capital to fund the fix.

If you determine that funding will address your pain points, by boosting inventory ahead of a seasonal spike, for example, consider vendor financing or supplier credit options before securing financing from a bank.

If you need to expand the business, look for ways to lower the associated costs. For example, franchising a new location to a competent partner can relieve you of some of the financial burden. A product-based business could perhaps generate extra income by selling via online channels, or through distributors or other retailers instead of a new store.

Related: The DTI Funding Guide You’ve Been Looking For: The What And How

Scenario planning

However, should you choose to proceed, before you sign any loan or credit agreement, make sure you consider all possible scenarios:

  • How long will it take before your investment starts covering the costs of your loan?
  • How will you manage repayments if your forecasted growth doesn’t materialise?
  • How can you pivot to reallocate resources if your plan is not working out as initially intended?

The bottom line

Before you start looking for funding for your business, critically evaluate if your business really needs it. If you decide capital is necessary to reach your goals, and you’re willing to take on the responsibility, carefully consider the type of funding that is best for your particular type of business and your specific needs.

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How to Guides

How Investors Choose Who To Invest In

Why entrepreneurs tend to focus on the wrong things when pitching to investors, and what investors are really evaluating instead.

Allon Raiz

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business-investors

The hypothesis of my book Lose the Business Plan was that great businesses are not determined by Excel spreadsheets and the all too predictable J-curve, but rather by the entrepreneur or entrepreneurial team and their ability to see opportunity, navigate obstacles and make things happen.

The truth is that entrepreneurs focus on the wrong side of the coin when meeting with an investor. They focus on the deep detail of the business plan and concentrate on justifying assumptions, predicting and overcoming objections, and emphasising market potential. Yet it’s my experience that the real decision on whether or not to invest in a company is more heavily weighted towards the entrepreneur or team rather than the business plan itself.

Once the ‘numbers’ stack (in other words, the business model makes sense) and the risks have been considered and appropriately mitigated, then the real decision-making can begin. The final decision comes down to four important characteristics of the entrepreneur himself or herself.

1. Is she honest?

You may have the best business plan in the world and you may have mitigated every possible risk but, if you are not someone the investor can trust, no deal will be made. I find that entrepreneurs often underestimate the importance of their reputations and, in today’s connected world, it’s so quick and easy to reference someone’s character.

Related: A Comprehensive List Of Angel Investors That Fund South African Start-Ups

Entrepreneurs who think about the short game and make morally questionable decisions for the prospect of quick profits generally find themselves in an ever-diminishing circle of people who will do deals with them. Your reputation is everything and you should guard it at all costs.

2. Does she work hard?

I am still not resolved around the cliché that you should work smart and not hard. (Perhaps I missed the memo or was asleep during the lecture that demonstrated how this is possible.)

In a world that is changing at an astonishing rate, in an economy that is becoming more and more competitive and in a business environment that is becoming ever more complex, it’s hard work to remain relevant and ahead of the curve for any extended period of time. Every quarter sees a new trajectory that needs to be investigated and navigated. In my opinion, this requires not just smart work but hard work, too.

It’s certainly true that investors like to invest in entrepreneurs who will take their investment seriously, who take their businesses seriously, and who are on top of their games.

3. Is she smart?

Smart does not always mean book smart but it definitely means street smart. It means having the ability to read a room, to see an opportunity, to learn new skills quickly and also being able to apply new learning’s to the business.

Investors look for investees who show agility when adapting to feedback from the market, from their competitors, from their staff and more.

4. Is she ambitious?

Investors do not like investing in ‘mom and pop’ operations. They seek the highest return on investment and that comes from businesses that can scale profitably. Scale is always relative to the investor’s perspective and not your own.

An investor with a couple of hundred thousand rand to invest will have very different expectations of the size of business he or she would like to invest in compared to another investor who has tens of millions of dollars. It’s important for the entrepreneur to authentically resonate with the level of ambition of their prospective investor, and be able to express that ambition through a coherent and cogent vision, as well as a plan to achieve that vision.

Remember, no one starts out as the ideal investee. It’s something that is built up over time and requires constant maintenance and curatorship. It’s essential to continually work on your reputation, to ensure that you are up to date with your industry, and to reassess your level of competence in your market. This is the only way to make sure you become and remain an ideal investee to a potential investor.

Read next: The Investor Sourcing Guide

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