What an Entrepreneur Says, What a Potential Investor Hears
Meet Jeff Shackelford, executive director of Digital Sandbox KC. Jeff has a unique and diverse professional background with a rare combination of Fortune 100 enterprise experience coupled with entrepreneurial, startup and early stage ventures. He has a successful track record of raising equity capital of more than $500M.
Below, he translates what entrepreneurs commonly pitch to investors, and what those investors actually hear.
In my role as director of Digital Sandbox KC, I spend the bulk of my time interacting with very early stage entrepreneurs. Having met with more than 200 and having seen no less than 100 pitch presentations in the last 15 months, I realized that what many early stage entrepreneurs think is a positive statement, is in reality, a big red flag to potential investors.
After reviewing my notes from several meetings/presentations, I decided to point out just a few of the “translations” that happen on the way from an entrepreneur’s mouth to a potential investor’s ear.
- What an entrepreneur says: “We’re working with several strategic partners on distribution agreements.”
- What the potential investor hears: “We really don’t have any idea how to sell our product to a large market.”
Suggestion: If you are truly working with partners that could significantly accelerate your product distribution, then name them and quickly explain why they’re significant. If you aren’t actively engaged with anyone, don’t bring it up.
- E: “The market is enormous, and nobody is tapping it.”
- PI: “We really have no idea how to size our target market and have done no research on possible competitors.”
Suggestion: Use some simple Google searches to develop some educated guesses about how big a market opportunity there really is, and you will most likely find some other players in the space. If the market is enormous and there really are no competitors, there is probably a really good reason why.
- E: “We’re in the process of adding some additional features to our beta version and will be launching it to potential customers soon.”
- PI: “We’re still not sure when we will ever get a working version completed.”
Suggestion: Be specific! What features are you adding and why? Give a date as to when the beta version will launch. Even if you miss that date you have given, you’re letting investors know you have a plan and are working it to completion.
- E: “Everyone we have shown it to loves it.”
- PI: “You’ve shared it with your drinking buddies and your mom.”
Suggestion: To whom have you shown it? Industry insiders? Potential customers? How many people have you shown it to, 10 or 100? Did you ask them what they would pay for the product? What features are most important or missing? Unless you have some meaningful data to support this type of vague, meaningless comment, PLEASE don’t say it.
- E: “We plan to grow through social media.”
- PI: “You’re going to tweet to all 300 of your followers and get 12 new users per month.”
Suggestion: Social media is not a distribution/sales strategy. It may be one of the vehicles you incorporate into your strategy, but it’s not the way to a potential investor’s wallet. This type of statement sounds like a painfully slow (and expensive) path to any significant customer acquisition model.
- E: “There are several revenue streams for the business.”
- PI: “You still haven’t figured out which one, if any, will make you any money.”
Suggestion: There may very well be several revenue stream opportunities, but which one is the core focus and why? Typically, if an early stage company tries to serve multiple markets it is a recipe for failure. Detail where your business will succeed and profit today. You can always attack ancillary markets after you’ve hit a home run with your targeted market.
- E: “We’ve done some minimal market research validating the business.”
- PI: “You’ve asked about 10 friendly people what they thought, and none of them how much they’d pay for it.”
Suggestion: See “Everyone we have shown it to loves it” above! Better yet, go where your potential customers are and ask them what they think of your product and how much would they pay for it.
- E: “Without going into a lot of detail, I’ll go over the product concept.”
- PI: “Don’t ask me anything specific about how it works.”
Suggestion: Why wouldn’t you go into detail about your product? Do you think the investor won’t be able to understand it? Do you not know the details yourself? Are the details still to be worked out? All of these questions are huge negatives to a potential investor. Take the time explain how your product works and why it is better than anything in the market today. Please NEVER say, “I’ll try to dumb this down so everyone can understand it.” This was actually said to a group of experienced investors, and needless to say, the meeting was a bust.
- E: “You won’t find a harder working team than this one. We’ll do whatever it takes.”
- PI: “This isn’t an hourly job. The question is, ‘Can I find a more successful one?’”
Suggestion: All investors understand and appreciate the hard work needed for any business to succeed. And, investors are looking for successful ideas in the hands of people they believe can maximize the opportunity. They expect you to know what it takes to drive this business to success. You would be much better off providing an outline of the major milestones needed to get the product launched, showing that you fully understand how much work is left to do.
- E: “We can name several potential buyers for a quick exit.”
- PI: “You have no customers, no revenue, and you think someone will buy you?”
Suggestion: While some potential investors may appreciate the effort of a startup discussing an exit strategy, many find it laughable to discuss potential buyers for a business that hasn’t really gotten off the ground. If you think there are existing competitors who might have an interest in acquiring the business somewhere down the road, then just quickly mention them when you discuss the market and existing players. A simple, “When we’ve shown rapid customer and revenue growth, ABC company may have interest in acquiring us.”
- E: “This is the only money we will ever need to raise.”
- PI: “First time entrepreneurs with no clue how much investment it will take to succeed.”
Suggestion: At this stage of your company’s development, there are many unforeseen situations (many of which will become seen very quickly) that could be reason to raise additional capital. Maybe your initial product launch is so successful that you need to scale overnight and need capital to hire and buy additional equipment, yea! At this point, it’s best to match raising capital with success milestones, such as “this round of funding will allow us to finalize our product development and launch to our first market.” Most angel and early venture investors realize and expect there will future capital investment rounds.