No, it’s not really the format, the pictures, or the design … although those help. Ugly, confused, or disjointed is never an advantage. But what makes a successful pitch in a pitch presentation to investors is not the cosmetics; it’s the content.
Question: Is there one unique piece I’d seen in a successful pitch that made angel investors immediately interested in a startup? No, not really. No one unique thing comes to mind. But here are five things that I’ve seen that make for a successful pitch. Important, but not unique.
A line chart showing very fast — geometric, viral, hockey-stick — growth in subscriptions to a SaaS or website product.
A strong expression of commitment from a powerful distributor, with guaranteed minimum sales.
Substantial non-dilutive funding from a government agency funding research and development.
Strong evidence (patent along with real-world validation by some credible sources) of innovative technology that makes disruption of a big market a reasonable hope, and will offer barriers to entry.
An unusually strong group of co-founders with known successes already and a good match of skills to what’s needed.
If you do, then next, make sure your business is a good investment. Read up on what makes a business a good investment. It’s about the team, the growth potential, ability to scale, traction, etc. Many great businesses are not good investments. Read Do you have what investors want and angel investment self assessment.
Wait until you’re ready. Don’t seek investors before you have a team in place, milestones met, numbers to show, good evidence of traction and validation. Investors invest in businesses, not plans, and definitely not ideas. Sometimes they invest in people, like known startup successes with great track records; but if you were one of those, you’d know it.
Know the basics. Understand the normal process. Research investors near you, interested in your industry, and target specific people and groups. Never spread cold emails all over the map.
Investors invest in your business, not your pitch. What they buy into is the business, the facts, the achievements; not the pitching. If you don’t have milestones met, progress made, concrete numbers to show, then don’t waste your time. You need an intro or profile or summary first, and then a pitch, and, if they are still interested, a business plan for due diligence. But don’t ever mistake the plan, profile, and pitch for what matters. You tell them about the business.
Do a lean business plan first, before the profiles, before the pitch. It’s for you, not the investors. It’s just bullet points, milestones, metrics, and projections. You need to know how much you need, and what you’re going to spend it on, before you start. Review it and revise it. A pitch without a plan is like a movie filmed without a screenplay. Don’t sweat the big plan with all the summaries and descriptions, at least not at first. Maybe not ever. But have a plan, keep it fresh, review and revise often.
I was asked recently for a list of things that annoy me in angel investment pitches from startups. I’ve done this before, so there will be some duplication here. But here is my top 10 pitch fails list.
Profits. Talk of profits, overestimated profits, the failure to understand that investors make money on growth, not profits; startups with high growth rates are rarely profitable; profits in high-growth startups stunt growth and reduce the odds of successful exit. That’s why you need to spend other people’s money, right?
“I don’t need no stinking projections.” Surprises me how often I’ve seen it. “We all know,” the pitcher says in a cynical tone, “that all those projections are useless.” And dismisses the idea, often with a wave of the hand. Or sometimes it’s a holier-than-thou tone. But no. I need you to think though unit costs, realistic volume, the conceptual links between marketing spend and volume, what it takes to fund growth. I want to know that you know, roughly, that you’re growth will take a ton of marketing spend, and that when you get to $20 million annual sales you are going to have a big payroll and overhead.
Expecting me to believe your numbers. You’re damn right I want to see them, but don’t expect me to believe them. I use them to guess how well you know the nuts and bolts of your business. But at the moment of truth, I’m going to trust my instinct for what I think you can sell, and how much I think you can grow, given the stories you’ve told me and the markets you’ve carved out.
Discounted cash flow. IRR and NPV. Amazing how people can believe numbers that project the future based on a compounded absurdity of assumed sales, less assumed spending, multiplied by an assumed discount rate, five years from now. And yet, I see young people crushed because I wanted something that had a lower IRR than their thing. Y’see, I didn’t believe the IRR either way. I went with the people and the market. This is actually a particularly annoying subset of the point above it.
The annoying myth that nobody reads business plans. Big mistake: confusing the obsolescence of the big pompous formal use-once-and-throw-away business plan of the past with not wanting or needing planning. Ask the two faces of lean startups, Eric Ries and Steve Blank, whether startups need to set strategy, tactics, milestones, metrics, and essential projections for revenue, spending, and cash, and they’ll say the equivalent of “yes of course.” But they are (mis)quoted often as saying don’t do a business plan. What they mean – ask them – is don’t do an old fashioned business plan. Keep it lean, revise it often, and manage with it.
Knowing everything. Sometimes people think investors want founders who know everything, answer each question no matter what, and are the world’s leading expert on any possible subject to come up. No. I want people who know what they don’t know, and aren’t afraid to be not certain.
I don’t want people who get all defensive when challenged. The win is in the relationship, long term. I can’t tell you how many times I’ve seen private discussions between investors, after a pitch, go negative for somebody who investors feel “isn’t teachable.” It’s easier to work with people who listen, digest, than with people who think every doubt is a challenge to their leadership and authority.
The small piece of a huge market. No, please, don’t ever tell me that your $10 million sales figure is realistic because it’s only one percent of a $10 billion-dollar market. Or 1/10th percent of a $10 billion market. That logic never works. Build your forecast from the units up, not from the top down.
Oversharing the science or technology. I want to hear about the business, not the physics, not the biology, not the chemistry. Pitches and plans are not the right place to show off all of your knowledge.
Not needing the money. If you don’t need the money then don’t seek investment. Own it yourself. Never seek outsider money you don’t really need. People who can live off of their generated cash flow are never going to exit
(bonus point) Stock words and phrases like “game changer” and “disruptive.” Don’t tell us that you are either that. Cross your fingers, and hope we tell you that you could be.
Question: What are the normal steps for angel investment? What’s involved in submitting a business plan?
I decided to answer this question here because I see it so often in email and in question and answer sites on the web, especially Quora, which is where I first saw it and answered it.
Yes you do need a business plan
In the U.S. market the business plan generally stays in the background while investors look at summaries first, then pitches, and only eventually, after a lot of screening, if they are interested enough to do the detailed study called due diligence, then the business plan.
You want a bare-bones lean business plan to guide your summary and pitch deck. You need to know strategy, tactics, milestones, and essential projections. But investors screen startups based on summaries and pitches before they look at full business plans.
If and only if the summary is interesting, then the pitch. There is a lot more information on the business pitch here on bplans. And for more of my posts, on this blog, choose the business pitch category.
If and only if the pitch is interesting, investors will want to see a full business plan for due diligence.
However, this applies as general norm only, and in the U.S. market only. Generalizations are never always true. There are always exceptions.
This is a true story. I was there. The details are possibly not exact, and the quotes are paraphrased, but the essentials are true. A startup founder was pitching to 22 local investors. The group had asked him to pitch because we liked his summary materials. He was local to us and had an interesting product. But he got screwed.
This is what happened
Two minutes into the pitch, he said he had been screwed by a partner in a previous venture.
Ten minutes into the pitch, he said that he had been screwed by attorneys in a previous business deal.
Fifteen minutes into the pitch, he said he’d been screwed by an employee he had to fire.
Normally, after every pitch, after the founder has left and we’re alone, the group takes time to discuss what we saw and heard. In this case, the room was quiet for a few seconds. Then one of us said:
“One thing we know for sure … if we invest in that guy, he’ll be blaming us for it later.”
He didn’t get the investment from us. Do you know why not?
This is what reminded me
This morning I saw this question in Quora, the world’s best question and answer site.
Jess Lee (Partner at Sequoia Capital) and Aaron Harris (Partner at YC) discuss raising money as an early stage company, and how to think about the fundraising process. Ali Rowghani (CEO of YC Continuity, previously CFO, COO @ Twitter, CFO @ Pixar) shares his thoughts on how to be a great leader and succeed long-term. Thanks to Stanford Online.
This blog post is a compilation of my own items and a lot of others contributed to the Quora question.
My big two:
Issues around trust or integrity. Alternative truths don’t fly. Lies, gross exaggerations, hiding significant information. Fudging past financial data. Not mentioning about or grossly exaggerating their previous business history. Omitting significant facts. the pitch brags about a founder’s previous successful exits that turn out, later, to have been either grossly exaggerated. Founders holding back critical information for problems of perceived confidentiality or trust. Lawsuits that weren’t mentioned. Cap tables that hide things. Gaps in the history.
Issues around Leadership. For example, the scientist alone, instead of the scientist in a team with experience in the industry and business sense and experience. Or the team that lacks the CEO and is promising to get one after funding. Or the team of very young people that assigns all C-level positions to team members without realizing they need somebody else.
Lack of domain expertise – Anyone can have an idea, but if the person you’re considering has no clue about what’s possible, what’s been done before, or even a tangentially related background – that’s a huge red flag.
Lack of Coachability – there’s a certain amount of arrogance expected in an entrepreneur (they need to beat down their competition), but if they aren’t willing to consider outside advice or suggestions, stay away.
Terrible Idea – I shouldn’t need to say this, but the majority of ideas are actually just bad, really, really bad. Yes, you are investing in the human, but that doesn’t mean you should throw money at a bad idea in the hopes that something they come up with later might be good.
“No Competition” – This is like one of those logic puzzles. Every time I hear someone say “we have no competition” it immediately is a red flag, for two reasons. One, it’s a sign they haven’t done their research, because there’s always competition, or at least something comparable. Two, it’s a sign they might be naive enough to actually think it’s true. Either way it’s a sign to stay away.
Awesome team in a small market can figure out how to expand the market opportunity. Mediocre team in a brilliant market will produce mediocrity. Bet on the team.
Legal and financing structures that violate the norms are non-starters for me. No need to reinvent the wheel.
If a company is pushing too hard to get your investment that’s a bad sign. If it doesn’t yet feel right hold off. It’s OK to miss out on something. There will be other opportunities. You cannot ride every unicorn.
Bad co-investors suck. Bad means fundamentally bad people or people who will provide bad advice or influence. Most founders will to some degree bend to the will of their board/investors. Make sure they will be getting good advice.
No Deck/No Financial Model. Sending decks are standard unless you are a Siri co-founder working on Viv. VCs want financial models. If you are investing later seed then the startup should send you a financial model where you can see the assumptions and play around with the variables to test different scenarios and outcomes. If founders won’t send you both, red flag.
Finders/Brokers/Enthusiasts. At present the vast majority of finders, brokers and enthusiasts who connect founders and investors are working with non-great founders. Red flag.
Super Angel or VC Advising, Not Investing. Peter Thiel is advising a PayPay mafia cofounder-CEO. The CEO pitches fellow angel investors and me. We ask if Peter is investing. The CEO says he wants to be careful about asking Peter to invest. So why are you pitching us then? Red flag.
Product Not Needed. If someone loves a startup’s product and service, that could be because the product is free and a good time filler. Doesn’t mean they will spend money on the product or service. Maybe they don’t need the product. Red flag.
Not Great Sales. A great product with bad sales is often a bad sign. For example, a startup might have a great e-commerce product but Amazon is going to out-sell them about a billion to one. If the product is easily monetizable and they haven’t even tested monetization, that is a red flag.
Incompatible Goals. Some angel investors don’t want VCs involved later. This includes at least a couple Harvard Business School Angels who invest in startups that should not need VC funding because the startup is in a smaller market and should get to break-even pretty quickly. But does the founder agree? If you and the founder don’t agree on the financing goals, that is a red flag.
No Grit. If the CEO does not have grit, the startup likely won’t work. Red flag.
Uncompelling Pitch. CEOs need to be persuasive, regardless of context. They don’t have to be high energy. Elon is more reserved but still charismatic and persuasive. Uncompelling pitches are a red flag.
Differing Visions Intra-Team. Talk to the CEO and other core team members individually. Are they on the same page as the CEO? If not, red flag.
Can’t Lead. Has the CEO built and led a team successfully before in anything? Sports, clubs, etc.? Her siblings? Anything? If not, red flag.
Unanswered Questions. If you have unanswered questions that are important to you about anything related to the startup, the team, the legal documents, etc., make sure the CEO or someone from her team who’s authorized (e.g., her law firm) answers your questions to your satisfaction. If you feel pressure to not ask too many questions, just ask this one
Legal and Ethical Issues. Does the CEO do things that are highly unethical or technically crimes? If so, you may have a Theranos or Zenefits on your hands. Red flag.
“How can I find investors who don’t take much equity?”
“How can I find investors who don’t interfere with my running the business?
I first posted my objections to this kind of thinking nine years ago in Dumb Investors Dumb Idea, one of the earliest posts on this blog. That was before I joined an angel investment group and became one of those investors. My objections then are a lot stronger now. And I still see a stream of this kind of thinking in blogs and at my favorite question and answer site, Quora.com.
Valuation determines equity
The equity share from investment is simple math. If your investors put in $100,000, that’s 10% of a startup valued at $1 million, and 50% of a startup valued at $200,000. So what’s the underlying valuation? Read up on that with 5 things entrepreneurs need to know about valuation and understand startup valuation. So with normal angel investment, the startup founders want a higher valuation and the angel investors want lower. It’s a lot like negotiating to buy a house or a used car. Ultimately, both sides have to agree, or there is no deal.
Angel investors normally care and add value
Angel investors are overwhelmingly amateur investors, investing their own money, investing in industries they know or local startups. They are successful entrepreneurs giving back. They believe in their ability to select startups well, study them well (it’s called due diligence) before deciding on a deal, and to offer valuable advice and experience. I’ve seen dozens of pitches that ended with investors not interested in startups whose founders knew everything and wanted no advice. People who don’t want interference with their business are not going to do well with angel investors.
Normal angels choose angel investment instead of leaving their money with an investment advisor, bank, or some other institution. They know that investing in startups is risky, but they trust themselves and expect to be able to help.
Can you execute on the brilliant business idea yourself? That does happen. For example, take your browser to KiddoLogic.com. That’s a venture built by one very smart woman, on her own. She used her own money and paid the providers she needed, to get going. If you can do that yourself, without help, then I applaud you. Go for it. Forget investors; just do it. You don’t need them.
For the rest of us, your next step is to gather a team of people who have the skills and experience you need to get going. Look for people different from you who can do what you can’t and who know what you don’t. If you don’t know anybody, or don’t know the right people, that’s a damn shame; but it’s your problem to solve. If you can’t solve it, then keep your day job. Other people have solved that problem millions of time.
If you can afford to pay them…
If you can find suitable people, then you have to convince them to join you. If you can afford to pay for their services with your own money, then maybe you don’t have to convince them of the idea. Just pay them. This puts you in the category of the smart person on your own. Just do it. You’re special, the sole entrepreneur with a great idea and the means to execute. Skip to the next section.
However, if you can’t afford to pay people, then you need to convince them to join you as co-founders and work on this idea for free. Don’t feel bad about that; that’s what most successful entrepreneurs had to do. And if you can’t convince the right people to join you, then get a clue. Your idea was one of the many ideas that seem brilliant but won’t work. Keep your day job. Revise your plan. Focus on a subset you can do yourself. Or give up.
Get your people together and revise that early plan. Bring it up to date with what you’ve learned while gathering the team, and what your team members were able to contribute to the plan. Remember that plans are made to be reviewed and revised and kept live and up to date.
2. Execute. Get traction. Prove it.
You have a team and you have a plan. Execute on it. Follow your plan. Go as far as your team can take you towards early website, product prototype, discussions with potential buyers or distributors, so-called minimum viable product. Maybe you go on Kickstarter or one of the other sites for pre-launch selling. Get traction. Prove to yourself and future investors that you idea will work. You’ll have to know what that means in your specific case. It’s different for every business.
3. Seek investment if and only if…
Don’t go for investment unless you really need it. Never bring in investors unless you need them to address an huge opportunity that makes sharing your business ownership with outside investors good for you and them. Read the startup sweet spot.