Pitching your ideas as a Startup to investors is one of the hardest things to do. David Rose, founder of New York Angels and Gust explained that, “[Each year] roughly 1,500 startups get funded by venture capitalists (investors) in the US, and 50,000 by angel investors. VCs look at around 400 companies for every one in which they invest; angels look at 40.” So this means that of the 400 startups, for example, 399 others get their pitches rejected.
Searching for the right investors and convincing them through your investor pitch can be an intensive experience as a startup. There is no doubt about it. DocSend’s studies reveal that companies needed an average of 40 investor pitches over 12 weeks to close a funding round. Twelve weeks might seem a big deal especially when your startup relies on funding to move to the next level. While being rejected after the investor pitch can be depressing for most startups, the following are the reasons why investor pitch efforts by most startups do not turn out successful.
1. Bad delivery
Eric Ries, a founder of IMVU and an advisor to Kleiner Perkins, and the Author of the Lean Startup says startup investor pitches fail because of bad delivery, and particularly because startup owners answer the wrong questions during pitch events. He advised that:
“I have come to believe that there is a hierarchy of pitches, and that understanding where your pitch falls in this hierarchy can assist in making decisions about what information to highlight. Pitches that sit higher in the hierarchy tend to be more successful, and if you can fit your company into one of those categories, you can get better results or better terms. It’s not always about what is being said; how it’s being said is equally as important. It doesn’t matter that you have a great business model with incredible traction and the ability to scale if you can’t properly convey those qualities in your elevator pitch.” Eric Ries proceeds to advise on the best ways to pitch deals, by answering questions, to avoid bad delivery.
On Printing money.
Key questions: Are those numbers real? How big is the market? Can your team execute the growth plan?
Most important slide: Valuation ( However, wait for the investor to begin the discussion of valuation and pricing.)
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On Micro-scale Results.
Key questions: Who is the customer, and how do you know? What is the potential market size? What are the business economics?
Most important slide: Lessons learned.
Practice your investor pitch. Make sure it is well organized, and that you have done enough research to know who you’re pitching to. If you have been successful in the elevator pitch, and are using the PowerPoint presentation style, you have to present a slide presentation in about 15 minutes, then leave time to answer questions within another 15 minutes
2. Traction Is Not Just Enough
Again, many times, startups get turned down after their investor pitch because they simply have not proven themselves enough. Almost no investor will fund a startup that has not demonstrated some initial success — meaning sales or users. Eric Ries further offers the following set of questions and answers to help your pitch get traction:
On Working Product.
Key questions: What does the product do? What’s the launch plan? Who’s on the marketing team?
Most important slide: Live demo.
On Prototype Product.
Key questions: What will it take to ship a working product? How do you know anyone would want it? Who’s on the engineering team?
Most important slide: Demo (if the product solves an obvious problem), engineering resumes
On Breakthrough Technology.
Key questions: Who owns the patents? Can we make a product out of this technology? Are there any good substitutes?
Most important slide: Barriers to entry.
On All-star Team.
Key questions: Has the team made money for their investors in the past? Are they domain experts? Are they committed to an idea in their domain of expertise?
Most important slide: Problem we are trying to solve.
On Good Product Idea.
Key questions: What kind of risk does this company need to mitigate (technology risk, market risk, team risk, funding risk)? Is it a revolutionary and novel idea? Is this team the one to back? Can the team bring the product to market? Who is the customer? Who is the competition? Will they fail fast?
Most important slide: About the founders.
You may believe in your startup, but investors believe in the numbers behind the startup. Although your funding resources may be small today, investors want to know that you were able to use those limited resources wisely to prove your concept and secure initial customers.
3. You May Be Dealing With The Wrong Investor
All investors are not the same; the same with their investment strategies. While some firms and angels prefer to invest in startups in the very early stages, others prefer to invest later funding rounds.
Ryan Westwood Co-Founder and CEO at Simplus, says:
“An investor with millions of dollars to spare usually requires a different level of oversight than an investor who’s dropped his entire life savings into your startup and needs it back in time to pay his kid’s tuition for college next year. It is also helpful to bring on investors who can make follow-up investments as you grow so you don’t convolute your capitalization table with more investors.”
Again, the choice of investment depends on the interest of the particular investor. While some may only invest in tech startups, others may only partner with hardware startups. The bulk of the work would be done by you, however, in finding out the best investors that fit your portfolio. You can also evaluate the investor’s personal business history before pitching the deals.
4. Your Investor Pitch Is Below Standards
Investors are interested in having best returns on their money. They like to put their money into something promising, and the best time to win their enthusiasm is during the initial investor pitch. An exceptional startup investor pitch is unforgettable. Even if an investor heard 50 investor pitches that day, only a few great ones will stand a chance for a deal. The keys to powerful investor pitch that get startups funded include that the investor pitch deck must be:
- Clear and simple
- Compelling
- Easy to act on
Standard slides should contain the following: Problem; Solution; Market; Product; Traction; Team; Competition; Financials; Amount being raised.
According to some researches done by DocSend, potential investors spend on average 3 minutes and 44 seconds per investor pitch deck. The studies in about 200 investor pitch decks were analyzed, investors spent the most amount of time reviewing the contents concerning financials, team, and competition.
5. Very Bad or Inexperienced Team
Having a very a bad or inexperienced team may rub off on your investor pitch efforts. Bad or inexperienced team members may have hard times getting the interests of potential investors.
Your team members need to leave their pride at the door when making an investment presentation and be open to the investors’ suggestions. The fundraising process can be grueling because experienced investors tend to ask numerous questions that are likely to have been posed to your team before. These questions test your business model and technology platform so all parties might realize the best way of structuring an investment.
Rick Frasch, a partner in venture fund KLM Capital Group has this to say:
“Most of the time, these questions are offered in the spirit of openness to justify the investment of such a large sum of money. But rather than viewing the questioning process as an exploration of alternatives by an investor who is obviously interested in the startup (otherwise why else would the investor have met with the entrepreneur in the first place?), some people reactively resist suggestions to consider changes to their business model or technology platform. Such a reaction is likely to cause a thoughtful investor to move on. You should instead take the time to consider the investor’s questions and suggestions, and view the process as useful insight into his or her thinking.”
Charles Rapulu Udoh
Charles Rapulu Udoh a Lagos-based Lawyer with special focus on Business Law, Intellectual Property Rights, Entertainment and Technology Law. He is also an award-winning writer. Working for notable organisations so far has exposed him to some of industry best practices in business, finance strategies, law, dispute resolution and data analytics both in Nigeria and across the world.