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Seven deal-killer-mistakes-to-avoid-when-pitching-to-angels


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Seven deal-killer-mistakes-to-avoid-when-pitching-to-angels

  1. 1. © 2012 Funding Quest, LLC 1 Seven Deal-Killer Mistakes to Avoid When Pitching to Angels I recently returned from a day of listening to twenty startups pitch to angels. I love these events because it’s always fun to see the different ways that entrepreneurs express their business passion. I also felt a little frustrated that I saw so many of the same business mistakes in their pitches. Deal-killer mistakes that make angel investors write you off. Yet these deal-killers can be avoided, provided that you recognize the pitfalls and take action to correct them. So I wrote this report to help you avoid making these seven deal-killer mistakes: 1. Not clearly explaining what your business does 2. Lack of market validation 3. Serious flaws in your business model 4. Not knowing your key financial metrics 5. Weak competitive position 6. Wrong timing or pricing of the deal 7. Appearing too arrogant Reduce or eliminate these shortcomings and you’ll leap ahead of most of the other startups competing for angel investment dollars. I love helping entrepreneurs. And I want you to have the best chance to attract angel investors, so you can grow your startup and realize you dreams. I also want to acknowledge and honor your entrepreneurial spirit. I suspect that you feel as I do, that business is an especially exciting arena for creativity and achievement. It’s my pleasure to help you along the way. Bryan Brewer
  2. 2. © 2012 Funding Quest, LLC 2 1. Not Clearly Explaining What Your Business Does Believe it or not, this is the most common mistake, both in a business plan and in an investor presentation. This mistake is far more prevalent that you might imagine. I have read plans and listened to pitches where I am completely baffled about the basic nature of the business. I suspect this happens because the entrepreneur is so close to the business that he or she makes assumptions (often unconsciously) about what the audience knows. As a result, the pitch omits things such as: foundational information about the product or service; a clear description of who the customer is; important steps in the sales and distribution process; and most importantly – how the company actually makes money. Another symptom of this mistake is the use of technical jargon and acronyms that are not defined or explained. If your pitch doesn’t make it crystal clear what your business does, and thus your audience doesn’t understand your business, then you will get nowhere. Investors who don’t understand a business certainly won’t invest in it. Even if you are able to clarify these issues upon questioning, your basic ability to communicate – which is critical in business – will be in doubt. A great way to refine your message and to make it more understandable is to test it. Put together a rough ten-slide pitch covering the core startup components of your business. Find willing friends or colleagues who will listen to your pitch and give you (hopefully honest) feedback. If people have trouble understanding what your business does, keep refining your message to make it more understandable.
  3. 3. © 2012 Funding Quest, LLC 3 2. Lack of Market Validation There have been numerous great product ideas that look good on paper or in prototype form. But when tested in the market, these products simply don’t have enough appeal to induce customers to buy. This has been the downfall of many startup companies. Sales don’t meet expectations and the cash runs out before the company can pivot its product or business model. That’s why investors really want to hear some details about what you have done to test the market for your product or service. Here are some ways you can accomplish that. 1. Have Real Sales. This is the best way, because it’s not a test. Real sales from actual customers will give you – and investors – some confidence that people will buy from you. However, make sure that the sales process you use is as close as possible to the sales process you will be using as you launch and grow. Sales to friends and family members don’t count. 2. Focus Groups and Surveys. You don’t have to hire expensive market research firms to do this. You can recruit target customers and do your own interviews. Keep the questions open-ended so that you elicit un-prompted feedback from the groups. 3. Letters of Intent. For B2B startups, getting several Letters of Intent (LOI) from large customers can carry a lot of weight. Verbal expressions of intention are OK, but it’s much better to get it in writing, even if it’s just an email. Investors understand that all of these indicators do not guarantee success. They just show that you have been able to generate some positive interest in your product or service. But also understand that there’s a larger issue at play here. If investors see that you are talking to actual customers, then it’s also likely that you are listening to what your customers are saying. And gathering that kind of data can help you shape the features, pricing, and distribution to match what your customers want. It shows that you are not sitting in your garage or office creating something that you think the marketplace wants. Rather, go out and find out from customers themselves what they actually want … and are willing to pay for.
  4. 4. © 2012 Funding Quest, LLC 4 3. Serious Flaws in Your Business Model Most of the time, investors are looking for reasons to say “no” to your deal. And they most often find those reasons as flaws they perceive in your business model – provided, of course, that they understand your business model (see Mistake No. 1 above). Here are some of the more common flaws to avoid:  Not having a viable sales strategy. The sales process is one aspect that is most often neglected in startup business plans or pitches. You need to demonstrate an understanding of exactly how you will sell your product or service to prospective customers. Understanding your sales cycle for B2B customers is important, especially if customers need to change their procedures or specifications in order to buy from you.  Too many revenue streams or initial target market segments. This reflects a lack of focus, or the notion that you will just try a lot of different strategies and see what works. Investors want to see that you have researched the alternatives, have thoughtfully analyzed the options, and have chosen the best revenue streams (just one or two) and the best initial target market segment (often seen as the “low hanging fruit”).  Ignorance or disregard of regulatory issues. If you are operating in a business space that is subject to specific regulations by government agencies or industry groups, you need to know that your business will not run afoul of the rules.  Lack of scalability. Most angel investors are looking to invest in businesses that are highly scalable. This means that the net profit margins increase as the business grows. (For example, businesses like manufacturing and publishing are highly scalable.)  Addressing a market that is not big enough or growing fast enough. Big markets provide more opportunity to secure a foothold. And rapidly growing markets give you more room to recover from initial missteps.  Unrealistic revenue model. A common mistake here is to rely too much on online advertising revenue. Or perhaps your pricing model just doesn’t make sense. Investors need to get a sense that customers will actually pay you money. How to correct these mistakes? Get some good business mentors who will tell you the truth and suggest improvements. Having a strong Board of Advisors not only gives you access to good advice and contacts, it gives you a boost in credibility by showing that you have been able to enlist the support of important people.
  5. 5. © 2012 Funding Quest, LLC 5 4. Not Knowing Your Key Financial Metrics This mistake usually surfaces during the question-and-answer session after your pitch. Often, investors want to know that you understand the key components of your financial model and how changes in these metrics would change your growth or profitability. Below are some of the key financial metrics of your business that you should be intimately familiar with. (Note: some of these metrics may not apply to your business model.)  Gross Margin. This is a relatively straightforward metric. It is simply the difference between the revenue you receive and your cost to make a single unit of your product or service. Investors like high gross margins, which are often available for software companies.  Cost of Customer Acquisition. You derive this number by dividing your total marketing spend by the number of customers you acquire in a given period. Investors look for high efficiency here, and a high ratio of this cost to another important metric:  Lifetime Value of a Customer. This is the expected revenue (and associated profit) that the average customer will contribute to your company over the period that they remain your customer. Hint: recurring revenue is a BIG plus.  Customer Retention Rate. Over a given period of time (usually a year), how many of your customers remain your customers? The converse term is known as customer “churn.”  Sales Cycle. This is the average time, usually expressed in months, from the time of initial customer contact to the point when the sale is closed. Long sales cycles require patience and cash, and investors want to know your strategy for dealing with them.  E-Commerce Conversion Rate. This is a measure of what proportion of visitors to your Web site actually end up making a purchase. It’s important to know the expected range of conversion rates for your type of product or service. These are just a few of the metrics that may be relevant to your business. Get to know them well and you will be in a better position to answer questions well to impress investors with your knowledge and insights.
  6. 6. © 2012 Funding Quest, LLC 6 5. Weak Competitive Position Perhaps you have a pretty good product, revenue model, and management team. What about the competition you will encounter out there in the marketplace? What advantages can you use to attract customers? What differentiates you from the rest of the pack? These are all questions about your position vis-à-vis your competitors. And investors want to know your competitive strategy. The holy grail in this particular quest is the “sustainable competitive advantage.” In other words, a way to keep competitors out of your market (barrier to entry). Such a clear advantage is difficult to come by. Most often, startups must rely on other strategies. Here are a few thoughts about dealing with your competition.  Patents. It’s important to understand the role of patents in the competitive landscape of a startup. First, it’s not wise – for a lot of reasons – to rely on patents to keep competitors out. Second, the main reason to pursue patents is that a good IP portfolio may significantly increase your valuation upon acquisition. If you have patentable inventions or processes, an investor will expect you to protect them.  Innovative Marketing. Marketing is one area where new ideas and approaches can give you leverage against your competitors. Perhaps you have a way to make your Web site extremely sticky. Or reward customers. Or stimulate word of mouth. If so, be clear about how you plan to execute your strategy.  Embracing your Competition. This is all about creating a win-win situation with others in your marketplace. Perhaps you can develop a plan to somehow work with your perceived competitors rather than meeting them head on. NOTE: It almost always a bad idea to startup to attempt to compete on price. Successes with this approach are rare. Developing a coherent and realistic competitive strategy is essential if you want to attract the interest of angel investors … and, of course, if you want your business to success in the marketplace.
  7. 7. © 2012 Funding Quest, LLC 7 6. Wrong Timing or Pricing of the Deal When you pitch to angels, you are really selling three things: (1) your business; (2) your team, especially you, the CEO; and (3) the deal. You and your business might be very attractive, but it the deal is off, well, the deal is off. The two main areas where deal terms miss the mark are timing and pricing. The most common example of wrong timing is when an entrepreneur tries to raise money too early in the life cycle of the business. Angel investors prefer deals where the risk of product development has already been mitigated. In other words, it’s difficult to raise money before you have a product ready to go to market. It is true that some deals get funded on little more than an idea. But these situations are rare, and when they do occur, it’s usually because the there is a powerful combination of a good idea, a charismatic CEO, and management team with a proven track record. Find other sources of financing – bootstrapping it yourself or friends & family money – to complete your product development at least to the prototype stage. Even better if the product is complete. And best of all if you already have customers and revenue. The most common example of wrong pricing is a deal where the pre-money valuation is too high. On a typical deal, angels want to own a significant portion of the company, usually in the range of 20% to 35% of the post-money valuation. For example, investing $500,000 on a pre-money valuation of $1.5 million results in a 25% stake. If your terms are way out of alignment with this normal range, then your deal will not be as attractive as other deals that are priced closer to the norm. Take the time to review your deal terms with people who know the current market for angel investment in your location. Talk to angel investors, other entrepreneurs who have raised money, and well-connected startup attorneys who see a lot of deal flow. Pricing your deal correctly means that you will have fewer roadblocks on your path to raising angel investment.
  8. 8. © 2012 Funding Quest, LLC 8 7. Appearing too Arrogant Finally, you might have a good combination of an innovative product or service, a viable business model, an experienced management team, and an attractive deal. But there’s at least one other thing that can kill your deal: You. This mistake usually occurs in the Q&A session of a pitch. If you come across as being too arrogant, with too much of an attitude of superiority, you actually make yourself less attractive to angel investors for two reasons. First, while angel investors are always looking for a good deal with promise of success, they also know that by investing they are creating a business relationship, one that may last five years or more. And the truth is that people like to do business with people they like and can get along with. Arrogance – having an exaggerated sense of your own importance in an overbearing manner – is a real turn-off for most people, including investors. Now it’s true that as a startup entrepreneur you need high levels of confidence and perseverance to launch a business and make it a success. But it’s important to balance that drive with a certain degree of humility. It makes you more likeable, and thus, fundable. Second, angel investors want to know that you are coachable. If you appear too arrogant, they may perceive that you will not be open to feedback and constructive criticism. This can be a fatal flaw for the success of your business. It’s rare that a single individual has all the answers. Most successful startup businesses are built with teamwork, and that means that differing opinions can be aired and vetted properly. Investors want to know that you are open to taking advice, whether it comes from them or your other advisors. The best strategy here is to be open to the opinions of others and to take in their advice graciously. It doesn’t mean you have to always act on that advice, but you should be able to listen and make thoughtful decisions. Don’t get defensive when investors question aspects of your business. They just might have valuable ideas for you. Best Wishes for Success on Your Funding Quest!