Pitching to Investors
You and your business partner have been in business for 5 years when you decide to expand your company and are in need of more financing to take your dream from an idea to reality.
No matter where you are in your business, from start up to scaling, most businesses will need additional funding at some point. Unfortunately, as many as 13% of business startups fail because they run out of money.
How can you make a successful pitch so that investors want to buy in to your idea, your company, and you? Understand your company, your investors, and the process.
Let’s break it down.
Understand Your Company
Before pitching to investors, you should have a solid business plan. Then you have to take all that information and reduce it to a 30 second elevator speech that succinctly describes your idea or product so that investors want to ask more questions. Keep it short. The three elements in your elevator speech should be what you do, what problem do you solve, and how are you different.
Use some good old-fashioned storytelling techniques that let position your company as the protagonist that is overcoming an adversary; that is the problem that you are solving for customers.
For example, Grass is Greener is a landscape company that uses a proprietary water irrigation system when installing grass that never allows it to dry out or die. Most homeowners end up spending thousands of dollars over the lifetime of their home ownership trying to keep their grass healthy and green. Grass is Greener solves all that once and for all.
Part of understanding your company is knowing your market. When pitching to investors, make sure you cover the competition, the market share that you and your competitors have, and any obstacles you may encounter with a SWOT analysis. Being upfront and transparent will earn you points and trust. How are you going to attract customers and earn a profit given your market and competition? What is your business model?
Know your revenue model or business model, which is just how your company plans to make money and be profitable. Will you be charging commissions on every transaction like Airbnb, charge for subscriptions like online magazines, or will earn your money through advertising, like software apps that provide their app for free to the consumer.
Most importantly, know your financials….Key metrics that you need to know are valuation of your company, market statistics: current users and market forecasts, and profit margins; cash flow; return on sales; sales forecast; and liquidity ratios such as debt to equity, current ratio and working capital.
Understand Your Investors
Some investors want to be involved in your company by having a seat at the table in exchange for their money. Others would want to be completely hands off and are satisfied to get a quarterly report. And then there are those in between, who are on hand to provide guidance when it is asked for. It depends on what the company needs and the expertise of the investors.
At the minimum, you should know what other investments your investors have, their work history before becoming an investor, their areas of expertise, whether they new or seasoned, and their personalities. Get to know them as much as you can before going in for the pitch.
Understanding the Process:
It’s a good idea to understand the fundraising process as a whole. Following is a hypothetical case study that follows the process from conception to fruition.
Idea Stage. You are the founder of the company and have a great idea for a new start up.
Co-founder stage. You seek out a partner where each of you does 50% of the work. You both contribute to a business plan. You take care of the market research, SWOT analysis, and research the target market. Your co-founder does all the financials, including ratios of profit margin,You decide to approach family and friends for some funding.
Family and friends. Your family and friends are usually the ones that invest before anyone else at the lowest price. Your brother-in-law decided to go in at 20% while you put another 20% aside for an option pool, stock set aside for future employees.
You and your partner own 37.5% each, your brother-in-law owns 15%, and the option pool has 10%.
Seed Round. You and your partner realize that you need more seed funding in order to invest in new equipment that will allow you to take on more clients. You approach angel investors, who are investors who are valued at $1M or have the capacity to invest $200K annually. They are accredited and use their own money.
Rochelle is an angel investor who decide to come in at 15% ownership. You and your partner decide to reduce your ownership by 5% each, your brother-in-law reduces his ownership by 2.5%, and the option pool is reduced by 2.5%.
You and your partner now have 32.5% each of the company, your brother-in-law now owns 12.5%, the option pool has 7.5%, and the angel investor has 15% ownership.
Series A. After 5 years of operation, you decide to turn to venture capitalists for more funding in order to Expand your operations. Venture capitalists persuade other people to invest their own money into funds, starting at $500,000.
You also have a group of employees who decide to exchange a portion of their salary for some stock valued at 3.8% of the company. And a group of venture capitalists decide to support your vision with an investment that is exchanged for 29.5% of the company.
IPO offering: After each splitting the pie again, you and your partner now own 26% each, your brother-in-law owns 5.4%, the angel investor owns 7.4%, the option pool has 1.9%, the employees own 3.8%, and the venture capitalists own 29.5%.
There are several more series of funding until you decide to do an Initial Public Offering (IPO), and initial public offering that allows anyone in the world to invest in your company. You approach investment bankers who do the IPO paperwork and sell a lot of your stock in exchange for 7% of the IPO.
Part of the process is having an exit strategy. This is something that investors are interested in knowing, as they often want to turn a profit and look for new opportunities.
Are you going to sell all your shares to a new entrepreneur? Go public with the company? Sell to venture capitalists? Franchise? Do you have a succession plan? Succession planning is all about reducing risk. Having one shows that you’ve thought well into the future and are committed to keeping it going, even when you’re not the one running it anymore.
Practice your elevator pitch and know what value you are bringing to your customers and investors. Have a solid business and marketing plan and be ready to answer tough questions. Good luck!
-Shira Kalfa, BA, JD, Partner and Founder
© Kalfa Law 2021