Pitching to Hard-Hitting Investors

Be prepared for the questions potential investors in your company will ask.
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My first column focused on

developing a business plan that would have investors pleading to meet with you. The

second column provided insights on the swamp an entrepreneur had to survive to get an opportunity to play

Let's Make a Deal

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Somehow, you have received the blessing of the trolls who guard venture capital, and an audience has been granted with the mostly Ivy-League-educated, open-collared super-cool money boys, who may have never run a business besides a fraternity keg party. These masters of your future will invite you into a boardroom and ask you to tell them why they should write you an enormous check on behalf of their rich private investors and pension funds. You undoubtedly will quake like Dorothy and wish you were back in Kansas.

How do you prepare for the meeting with the Great Oz? When I prepare for a meeting with investors, I develop a list of questions and write out the answers so I can see my responses.

Here is the list of questions, broken down by category, that investors will ask:

Problem and Solution

  • What is the problem you are solving? Professional investors aren't interested in putting money into the next Giga Pet, because there is no one out there wishing someone would develop it. The Gordon Gekko types are looking for corporate and/or consumer pain that needs fixing.
  • What is the solution you are providing? Here, you want to provide a short one- or two-sentence description of your superhero solution to the problem.

Market

  • How big is the market in terms of dollars? Don't bother coming to a professional investor if the market isn't more than $1 billion and growing.
  • Is the market growing, shrinking or flat? Shrinking and flat markets usually invite a yawn from the venture capital gods. A market growing at 20% a year brings a smile to even poker faces.

Revenue

  • What are your five-year revenue projections? You might wonder who would be able to predict one-year revenue let alone five-year, but venture capitals want to know that the revenue will be large enough for the business to go public or be bought by another private investor.
  • What does your 24-month cash flow statement look like? The investors make a mental note of how much money you believe it will take to get to profitability and match that with your funding request.
  • What are the margins? You better say pretax margins will be 25% or more, or the ejector button will be pushed.

Marketing

  • What is the market positioning for your product or service? Essentially, is the product being sold for a premium or at a low price to build volume? Premium is the better of the two choices, because higher margins mean greater profits and more room to cover for mistakes in sales, marketing or market-timing.
  • How will your product or service be marketed? The investors want to know whether it would take Bill Gates money to launch and build marketing momentum or just some great PR and word of mouth. You can guess their preference.

Selling

  • How will it be sold? The investors want to know if you will have to spend a tractor-trailer load of money to build and train a team of Navy Seal-type sellers, or if you can you leverage partnerships and distributors to keep costs low and move quickly into the market.

Competition

  • Who are your competitors? Investors want to know if there are a few King Kongs lurking in the jungle or just bunch of retiring mom and pops who don't realize what a great opportunity they are sitting on.
  • What is your competitive advantage? Products that are patentable and proprietary are similar to thick walls in a fortress. The stronger the patents, the easier it is to keep the invaders out. At minimum, if the business fails, the investors can get back some of their money by selling of a patent. If you have Jack Welch as your president and CEO, that would count as competitive advantage as well.

Management

  • Who is on the management team? Investors want to see experienced hungry blue-chip players who have successfully built other companies and virtually guarantee a success just because they showed up. The investors want management loaded with industry experience, big-name employers and databases of contacts that would make strong potential partners.

Capital Requirement

  • How much capital do you want? When you give them a figure, the venture capitalists will go back to the notes on your 24-month cash flow projection and see if they believe you can make your timeline. There are two choices for the needy entrepreneur. Choice one: Provide the investors with high revenue projections and low expenses, knowing that the check writers will cut the projections in half. They will also double the expenses, because they believe that most entrepreneurs are basically living in a fantasy land where everything goes according to plan. The second choice, and the one I opt for, is being very good at showing them how you arrived at your numbers and defending them.
  • What do you need capital for? The key is to demonstrate that all of the money is going to work in building sales and hiring smart people and that little will be wasted on palatial offices.
  • How much of the company do you want to sell? Typically, if you say you need to own a majority of the stock, that could kill the deal even if the investors love everything about you, your team and your product or service. The reason is that in the back of their minds, they'll think you won't be open to changes in strategy and to possibly replacing yourself if the business requires a better leader. This could pull a Katrina on your getting their investment.

Exit Strategy?

  • What is the exit strategy for the investors to get their money out? The biggest fear of investors is that you don't want to sell the business. Investors are not in it to build a great company; they are in it to provide a return that is at least twice as good as they could get putting their money into mutual funds.

Just remember, these venture investors need good ideas to sink their money in. They aren't being paid to sit on money and give their investors a passbook return on their capital. Venture capital is a simple business. The money boys give you a few bags of cash, and you give them a return that allows them to buy vacation homes in Jackson Hole, Wyo., and Tuscany, Italy.

Marc Kramer is the author of five business books on topics related to venture capital, management and consulting. He is a faculty member at the Wharton School of Business at the University of Pennsylvania and the veteran of over 20 startups and four turnarounds.