The Four "Hows" - What Investors Need to Hear
Investors that are active in VC have already made the decision to allocate capital to that area. They already know the risks and the approximate time it's going to take you to get them their money back. They have a range in mind of how much they expect to make in terms of returns. Given all this, if you have a great business plan, getting money from a genuine VC guy should be easy. So why do so many entrepreneurs fail to click with investors?
I have a few ideas as to why. I've seen some God-awful pitches to investors over the past few years. And I'm not talking about the pitches involving fundamentally bad ideas... I'm talking about the meetings that had great ideas, technologies, and massive potential customer bases at their core, but failed to turn these good ideas into millions of dollars in invested capital.
How did these teams fail to translate these ideas into capital commitments from investors? The first reason is usually obvious within the first few minutes - a failure to establish trust, show basic courtesies, or lay the ground rules for respect.
Entrepreneurs, venture guys are your future partners, not your future employers. During minute one of that meeting, we're all equals - you've got the big idea, we've got the money. But fundamentally, we're all stuck here on an increasingly crowded spinning ball together and showing basic respect is important. And when it comes to introducing yourself, don't feel a need to embellish - when a VC partner taps on his iPhone during a meeting, he's probably not texting his significant other - he's far more likely to be doing research on the claim you just made for you, your product, or your lack of competition.
Let me add the second-most obvious problem I see at these meetings: a failure to understand the difference between what you think the product is (the product on your web site) and what the investor thinks your product is (the equity.)
Entrepreneurs that spend 55 minutes of a one hour pitch talking about how well they are engineering the product on their web site to match the needs of the consumer and two minutes talking about how they intend to engineer an increase in the value of their equity have completely failed to understand the basis of the meeting. Yes, it's nice to know what is being sold so we can quantify the addressable market and understand the risks... but product engineering is just a subset of a larger execution plan involving the product that is your equity.
Explaining how you intend to [filter plastic from the ocean], turn that into [eco-friendly life-jackets], and sell that product to [eco-friendly public swimming pool operators worldwide] should take up five minutes of your pitch. Explaining how much money you need and what you intend to use it for should take up another five minutes. Explaining your execution plan - how you will take the investor's money, scale the business to 10x your nearest competitors' share in five years, and then how you intend to sell the business and get the investor their money back, plus a massive VC-style return, should take up the bulk of your pitch.
Then you should stop, and simply sum up your offer as follows: I'm looking to give up 20% of the business for [USD1Mn]. If all goes well, I expect to be able to get us to an exit and return you [USD25Mn[ or [25x] your money within five years.
The investor, if interested, will at that point have questions about the risks you will face. Keep it short and snappy and show that you've thought through the bigger issues. Don't get into the weeds - spending 15 minutes on a litany of low probability risks has a way of sucking air (and investor interest) right out of the room. Survive this, and if the investors are still interested at this point, they will start asking you deeper questions about your background and your team, and questions about board representation, shareholder rights, and who your other interested investors are.
A few other tips: don't over-provide the disclaimers. There are risks - we get it. But we're in the room listening to you because we're interested in turning our 1x into 4x. Focus on that and show us that you've thought about the most obvious ways our 1x can go to zero, and that you're the kind of person we can trust to call us if things start going pear-shaped, and you will achieve much more in a meeting with investors than using 55 or 60 minutes to show a thousand different ways your product can be customized.
In a meeting with investors, the product you are selling is your equity. Start with establishing trust and respect, then move on to competence and detailed plans. And then while there is still time to "talk terms", focus the meeting back on the four "hows": how much money you need, how long you'll need it for, how you intend to get it back to us, and how big the multiple is that we're all going to make when you exit.
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