Striking-Out: Three Ways Entrepreneurs Swing & Miss at a Funding Pitch
Just last week I was sitting through a pitch from an entrepreneur, and as often happens, they swung and missed at a key moment.
Generally speaking, when a pitch goes awry, entrepreneurs — new and experienced — make at least one of these three common, yet avoidable, mistakes when presenting to potential funders.
Use of Proceeds – NOT!
During a pitch, entrepreneurs usually explain how they plan to use the investment by listing out the activities it will enable, what kinds of and how many people they will hire, or how many months the money will last. The problem is, that’s not what I really want to know. It’s a nice detail to understand, but it’s not what will matter when I’m deciding to invest or not.
What I really want to know is what you will accomplish with the money, and how will those accomplishments or milestones reduce risk in the business, create significant increased value over today, and allow the company to raise more capital at a lower cost in the future. This is important to investors for a different reason than you might expect. When making an investment decision, we are already thinking ahead to raising the next round of capital. Without demonstrating the ability to hit milestones that matter, raising the next round can be very challenging. During your pitch, don’t focus on tactics. Focus on the goals or milestones you plan to achieve as a result of the investment and how achieving them takes risk out of the investment.
Most entrepreneurs don’t spend nearly enough time analyzing the actual size of the market. Too often this exercise is treated as a metric to seduce investors, as opposed to something that really matters. Matters translates to: it will inform much of your business plan and financial model, and determine whether you are about to waste the next few years of your life or not.
Simply stated the total available market size, often supplied by firms like Gartner and Commscore, isn’t sufficient. You need to determine which niche of the total market your product and your company can actually serve in its initial release (probably some form of an MVP – minimum viable product), and then calculate the relevant initial market opportunity. In other words, your company’s sales if you were able to capture 100 percent of the specific niche of the market that could and would buy your offering.
The analysis should be both top down and bottoms up, with rational assumptions about who will really buy your early products and how many of those early adopter customers exist (see my partner Geoffrey Moore’s marketing classic Crossing The Chasm if you are unsure about this concept). Too often entrepreneurs fail to understand the difference between total potential market and the serviceable market. They don’t put enough thought into how the served market evolves over time, and what is required to achieve step function increases in market size along the way. The more you have studied, analyzed and teased apart the market size question, the more confident and more receptive investors will be.
It’s surprising how many entrepreneurs show up without any financial model, with only a slapped together financial summary, or what simply amounts to a 12-24 month spending budget. You are asking us to invest in a business. Successful businesses have detailed 3-5 year budgets and financial models. You should, too.
To be sure, as longtime investors, we know the presented model will most likely differ from what plays out in reality, and, accordingly, we will not hold you accountable to that initial model, at least the five year version. That’s not the point. A well-thought out plan not only illustrates the ability to create a solid model – crucial for managing the money and the business, but it also shows your level of ambition and how well you understand the market, product category and business you are trying to build. Perhaps most importantly, it helps you to think through and prepare for the likely risks and pitfalls that are bound to happen. Think of it as a way to visualize or “pre-run” your journey, much as a pro golfer tries to envision their shot before they take it.
A final thought on market size and financial models – there are many business ideas where projecting a market size and financial model is difficult, especially web/mobile consumer or any offering where there is no existing market or analog. Try anyway. There is always demographic data, reasonable assumptions to be made, etc. You may be completely wrong at the end of the day about the size or even what the market is, but the exercise helps to prepare you, and gives you models and data to assess the real market feedback you will get as you launch. The more thoughtful and prepared you are, the faster you will be able to respond and shift your focus and resources to where the market opportunity really is.