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It’s no secret that budding entrepreneurs with grand ideas for successful businesses occasionally stumble along their way, but sometimes making a mistake at the wrong time can cost you. One of those times is when you’re seeking funding from investors. There’s a lot that can go wrong when pitching your ideas to potential investors—and that could result in not receiving the investment you need to get your business off the ground. Here are some of the best ways to send investors running.
Do a cold submission.
“We almost never consider business plans that have been submitted cold,” says Ron Tyler Heinz, senior associate at Salt Lake City-based Signal Peak Ventures, a private equity and venture capital firm. “To be seriously considered, an entrepreneur should network his way into an introduction with us. This is probably easier than it sounds, as tools like LinkedIn make it fairly easy to capitalize on network connections.”
Presume investors are a dumb audience.
“You need to know if the people you’re pitching to have made investments in this space already, or if these people are on a board in your industry,” says T. Craig Bott, president of Kaysville-based Grow Utah Ventures, a privately funded nonprofit organization. “You have to go into the room already recognizing the investors you are pitching to are pretty savvy.”
That means pitchers shouldn’t spend a lot of time on general information or dumbed-down presentations, Bott says, adding that it’s “not a compliment to investors.” “If an entrepreneur comes in and dumbs it down, it’s a disrespect to you as an investor, because it means you took no time to figure me out and know our [company’s] portfolio,” he says. “Get to the heart of the plan and what makes you unique really quickly.”
Pitch your idea as a strictly financial investment.
“A lot of people say, ‘We can promise you’ll get a rate of return. We need you to loan us $500,000 and we will return that by 14 percent, which is so much more than you’d get if you put money in a bank,’” Bott says. “They present with a lot of enthusiasm as if it’s a clincher, but the mistake with that is they assume it’s just a financial decision. No early-stage investor is making decisions based on finances. It’s about passion, interest and the romance of the product. Investors know eight out of 10 investments won’t go anywhere.”
Forget to do your research.
Heinz says entrepreneurs who don’t know anything about venture capital firms are easy to spot. “Entrepreneurs who approach us with proposals that are far outside our area of focus indicate to us that they haven’t done any research on Signal Peak and are simply cold-calling different capital providers,” he says. “This mostly results in an immediate ‘no.’”
Venture financing is more aggressive and involved than something like a small business loan, Heinz says, because entrepreneurs typically end up with a VC team member on their board providing advice and oversight. “It’s critical that entrepreneurs have a solid understanding of how venture firms work, how they structure their investments and what their expectations are,” he says.
Assume there’s customer acceptance of your idea.
“Technology types think if it works, people will just automatically buy it,” Bott says. “We already assume the entrepreneur will figure out how to make the technology work. The issue is, are you getting anybody in the marketplace who likes it enough to buy it?”
Bott says better presenters will show they’ve already got 3,000 to 5,000 using their innovation, which immediately takes a lot of risk out of the venture from an investor’s view point. “Anything entrepreneurs can do to cultivate early adoption goes a long way,” he says. “They can’t compete without customer validation.”
Guarantee you’ll get investors a percentage of a multi-billion dollar market.
“One mistake everybody always makes is they try to paint a picture that they’re going to get a percentage of a $20 billion market and therefore it’s a great opportunity,” Bott says. “But everything is a multi-billion-dollar market if you put the numbers right.”
Bott says this means entrepreneurs typically haven’t identified the addressable market, which is the people they’re really after with their products. “Everybody just rolls their eyes and thinks [the entrepreneurs] are unprepared because they don’t know the market. It’s a red flag that this person isn’t up to speed. It taints everything else they say.”