Note, this was originally Titled “Don’t Focus on the Wrong Thing in Fundraising”. Thanks to Jonathon at FI.co…
I was judging a business plan competition this last week for a University. The plans were wildly different, but the prize was material. So each team did well to present their pitch and win the cash and prizes.
After the event, I talked to the winners and the losers. The winners were enthusiastic. The losers were trying to figure out why the other team beat them. But the losers were asking the wrong questions. The other team hadn’t beaten them, they had beat themselves.
We had four judges, and like most investors each of us look at both general things, and specific things differently. Let me start with the general guideline of investors look at deals.
- Are you going after a big idea in a big market? – Can you get to a $100M or Billion Dollar Market? If you generate less profit in year four then investment required in year one, that’s bad…
- Do you have a good team? The odds are your idea is wrong and you are going to have to pivot, do you have the team to make the type change? Many investors won’t invest in a single individual entrepreneur for that reason.
- Scalable or Novel Product – can you make money while you sleep? Or do you have to hire new staff every time you sell a customer a new contract (services). Can you build competitive advantage around your product?
- Traction – the most elusive element at all. Traction is never really defined well, and it seems to be the thing that you are always six-months away from getting, so you’re six months away from getting funding. Traction is showing that the business or product will work, that customers are saying yes, etc. If there was additional cash invested will make the company grow faster?
OK, you say… we have all of those things. Why aren’t we getting the investors attention in the form of checks? Here are some general rules for Angel and Institutional investors.
- Angel investors – are investing their own money. So typically, they invest in either industries they know (Real Estate if they made their money in Real Estate) or in sectors they’ve made money in before: B2C technology, medical device, etc. Though you may get a meeting with them, if you’re not in their sector or area of confidence, they likely won’t invest – even if you thought it was a great meeting.
- Angels look for things in your plan where they have been stung in the past – for example, do the founders pay themselves too much or do you really know what your Minimum Viable Product (MVP) is going to be before you launch.
- Angels are more likely to invest in things they are passionate about. If you not passionate about it, they won’t be either.
- Even Angels have to explain their investments to someone – their spouse or their friends at a cocktail party. Make you idea easy to explain
- Institutional Investors- or VC’s invest a pool of other peoples (their limited partners) money. So they have a charter, a set of rules about the categories of investment (tech, mobile, manufacturing). Or the stage (Seed, Early, Growth, Late) or even geography (West Coast, China). If you don’t meet their criteria you may get the meeting, but you’re generally wasting your time.
- Institutional Investors are looking to screen you out of the process – not into the process because they get so many plans, they need a fast NO on the front end of their process because they see so many plans.
- Like the Angels, they will look for things in your plan the have stung by before. If they had a company like yours in their portfolio in the past that failed, they won’t likely do it again. If they have one that succeeded you could have a great meeting.
- They have a higher standard of expectation, even for a first time entrepreneur.
- You’ll likely meet with an Associate for your first meeting – make sure your pitch is something they can repeat.
Red flags for investment. The problem is you don’t know the red flags the investors see until after the pitch. Yes, you should do your research in advance and know what type and stage of deals they will invest. But after you make the pitch, stop and ask for specific feedback. This is a really difficult shift. You’ve just made the pitch, now it’s time to listen (and stop pitching). Some of the feedback may be hard to hear, but likely most of it will be really helpful. Here are some examples from the business plan competition:
- Is it clear what initial target market your going after – or are you trying to do too many? Focus is important.
- How are you going to spend the first round – if it’s too much on salaries, you’re asking the investor to take the risk you’re not willing to take
- Make sure your numbers match up – we know your forecast is likely wrong by orders of magnitude, but you should have the same numbers on your financials and deck
- Can you win in the market your approaching?
- How many milestones will the first round get you? Not how many months of your salary the investor is paying for?
- How do I get my $$ out? I know as entrepreneurs you’re focused on getting the money in, but as investors, we’re also concerned about how we get the investment out. If we don’t think that part of your plan is believable we won’t invest. Saying you’re going to sell to a big company that doesn’t have a track record of acquisitions isn’t compelling.
Remember, it’s not about “why they won”; it’s about what you need to do to win!