For companies seeking outside investment capital, the starting point is to develop and hone an effective pitch. The goal of the initial pitch is to get the potential investor interested enough to have a more in-depth discussion, which will hopefully lead to a term sheet and eventually to funding. Accordingly, there is little an entrepreneur can say in an initial pitch that will close the deal right then and there. However, there are a number of mistakes an entrepreneur can make in an initial pitch that could be red flags for the investor, and this article focuses on a few of the most frequent.
Pitching the Wrong Investor
The first mistakes actually happens before the pitch. Never pitch an investor who demonstrably has no interest in that business. Many investors have a specific investment thesis focused on a particular stage, a particular industry, a particular geography or other characteristics. It is usually fairly easy, either through research or conferring with people who know that investor, to find out what those are; many investors have them available on their website. Pitching an investor who would not invest in the business even if they liked it is a waste of everyone’s time.
Never tell a potential investor that the business has no competition. Every viable business has competition. When an investor hears “no competition,” it usually means one of three things, none of which are good for the entrepreneur. First, it might mean that the business model isn’t viable; in other words, the reason there is no competition is because it’s not a good idea. Second, it might mean that the market for the idea has not yet developed. Being too early into a market is often just as big of a problem as being too late, because educating the market is difficult, time-consuming and expensive. Lastly, and most commonly, saying that there is no competition often means that the entrepreneurs either have not done their homework thoroughly enough or lack an understanding of the marketplace.
Showing a Small Market Opportunity
Professional investors want to invest in businesses that have a large market opportunity, because a large market opportunity is the only way for a business to scale into the sort of return on investment that those investors are seeking. If a pitch shows too small of a market opportunity, those investors will not want to invest, even if the business might be a good one. If market opportunity really is a small one, then the business may not be the type that is appropriate for professional investment, and the entrepreneur should consider other paths to raise capital. Otherwise, think carefully about the actual market opportunity and how to describe it in the pitch.
Savvy investors understand that projections are not guarantees. However, they expect the projections to be rational and based on reasonable and verifiable assumptions. Pitches that show unrealistically rapid growth or profitability fail to pass the “smell” test and may turn off a potential investor. Give very careful consideration to those numbers.
A good pitch is nothing more than a good start, but a bad pitch can be a quick ending for a potential investment.
Chris Sloan leads the Emerging Companies Group at Baker Donelson (Nashville, Tenn.), where he is a shareholder, focused on startups and other emerging businesses. He counsels early-stage, high-growth companies with business planning and formation, venture capital funding, drafting and negotiating vendor and customer agreements, strategic contact negotiations, mergers and acquisitions, intellectual property protection, and other general business law and IP law issues. He often serves as outside general counsel for these companies, and ushers them into the next phases of their businesses. Sloan may be reached at (615) 726-5783 or by email at email@example.com.He may be followed on Twitter @casloan.