Sooner or later, you will probably start thinking about attracting investors to help grow your company. You will need more money when you run out of personal funds or friends and family willing to help.
Before you start reaching out to potential investors, it’s important that you know what you are doing. You could create more harm than good by doing a poor job pitching your business.
To help you get started, we met with Tara Spalding to gather tips for pitching to investors. A former Silicon Valley entrepreneur, she is now the president and founder of Hen House Ventures, a startup incubator based in Salt Lake City that has helped almost 40 startups raise $30 million since 2012.
Below are five myths about pitching to investors, according to Spalding. Keep these in mind before you start raising money. You are much more likely to find success and get the funding you need. As you will see, pitching to investors is much more than having a slick presentation.
Myth: Investors love spam and cold introductions.
Fact: Most investors will blacklist you without a warm and trusted introduction.
When you start to pitch to investors, you might consider emailing everyone possible, whether you know them or not. If you think this will get you attention, you would be wrong. This can be the worst way to contact investors because they want to work with people they know and trust. “Spamming never works,” Spalding said. Unsolicited pitches can be a red flag, or at least annoying, to investors.
Instead, you will want a much more personal approach, Spalding explained. That starts with creating a narrow list of people and organizations. “The most important thing is to create a target list of the VC firm or investors,” she said. Create this list before contacting anyone. It will make your efforts more effective and help you waste anyone’s time.
To decide what investors to target, look at their portfolio of companies, typical deal flows, and trusted sources who might be able to provide a warm introduction. Prioritize accredited investors that have a good reputation.
When you first contact investors, plan an initial 15-minute pitch and 5-10 minutes of discussion, Spalding said. You must make a good impression or you may never hear from them again. After the first meeting, follow up on any questions asked and next steps. Work quickly to see if there is a good match or not. “The sooner you can find out if there is cohesiveness or not is better for everyone,” Spalding said.
Myth: All investor pitches should be the same.
Fact: Pitches must match each investment thesis.
Don’t treat all investors the same. Don’t present them all with the same pitch. Treat every investor and circumstance as a unique opportunity to make a connection, build a partnership, and – if you are lucky – raise money.
One place to start is to make sure that your pitch matches the investment thesis of the person or company you are targeting. This is basically how they invest their money. You can look at their website, past deals, and any other source to find out. When doing this research, ask: Do their investments have a theme, such as specific industries or causes? Do they target a similar investment stage? Stages include friends and family, angel, seed, series A, and series B. And what is the investment fund lifecycle? Depending on the stage in the lifecycle, the investor may be more or less willing to invest in your company.
Lastly, make sure to have a variety of pitches for different investors and circumstances, Spalding said. Have a teaser (5-10 minutes), intro (15-30 minutes), and a deep dive (1-2 hours). Then use whichever one is most appropriate for the situation. Also, strongly consider customizing the content of each pitch you make, and make sure to keep track of who got what pitch.
Myth: Investors care about the problem your company is solving and how innovative your solution is.
Fact: Investors are persuaded by market size, market timing.
You might be tempted to talk in-depth about the problem your company is solving, why you care about it, your product, and how unique it is. “This is the time suck that entrepreneurs get hung up on,” Spalding said. Instead, keep that information brief and focus on what investors care about most. “They are looking for a place to put money to get a higher return on their investment,” she said.
Investors are most interested in at least three topics. First, they want to know about market size. They want to know that you have a large, growing, or new market with a lot of sales potential. Second, they will want to know that you are offering the right product at the right time. Third, they will need to know that your plans will be profitable. They want to know if your business can consistently grow and make money.
What type of profit investors want to see is changing, Spalding noted. In the past, many investors looked for “unicorns,” or companies that could quickly grow to a $1 billion valuation. But many are now looking for “camels” that balance stability and growth.
Myth: Put your energy into the pitch deck. It’s what makes investments happen.
Fact: Clearly explain how you make money, prepare for due diligence, and ensure funding readiness.
Your pitch deck is the last thing you should create. Before that, make sure you have a good product, strategy, and numbers to back it up. “No matter how ugly your slide deck, if your financials look good, you are going to get a deal,” Spalding said. “Simple slides work as long as the business model is solid.”
Sometimes, having an elaborately designed pitch deck can be a turnoff, she added. It can tell investors that you are good at marketing, but maybe not the financial aspect of your business, which is what they are focusing on.
Investors will be looking at a variety of financial information when evaluating your pitch. Some of the most important include your profit plan, a clean capitalization table, deal terms, and an exit strategy. “Investors are looking for exits,” Spalding said. For help on these things, look at successful companies in a similar stage or industry as yours, and see what worked for them.
Myth: Due diligence phase = Done deal!
Fact: Most investment contracts fall apart after 30 days.
Don’t make the mistake of thinking a deal is complete too soon. It’s only done when you cash the check, and you have the money in the bank. It’s definitely not done after a verbal agreement and not even after an investor has completed the due diligence process, which involves reviewing your financial records. “I have been in many deals that have fallen apart,” Spalding said.
Deals fall apart for a lot of reasons, including inaccurate information, legal issues, failure to meet sales and marketing projections, negative references, conflicts of interest, disagreement of ownership, and exit terms. Unfortunately, deals are more likely to fail than succeed, so be ready for it.
You can get yourself into a lot of trouble if you start spending money before you have it. If it never arrives, you will be responsible for covering those expenses without investor support. Even if you could, you may not want to confront the investor. “What are you going do to an investor, sue them?” Spalding said. “You can’t, and it sucks.”
Common Intro Pitch Deck Slides
Even though you will want to customize your pitch for every investor, you can use a common structure that covers all the topics they expect to see. Spalding offered this outline to get you started. Add or subtract sections depending on the context and time you have with an investor:
- Big idea/Impact
- Product Value/ Use
- Competitive Differentiation
- Market Potential
- Business Model
- Go-to-Market Plan
- Investment Ask
Are you ready for more information? Spalding offered these resources to help you learn more about the topics above and dig deeper into the subject of pitching to investors:
- Hen House’s Deck to Deal, a self-paced course and tools to help design your pitch deck and prepare for diligence
- Guy Kawasaki 10 slide template
- Investment thesis strategy simplified from Capital Exploits
- 7 steps for pitching your startup remotely and landing investment while everyone is working from home from Business Insider