Pitching To Investors

Raising Capital

I have stood before millionaires and billionaires to pitch a 100 million dollar business plan on at least half a dozen occasions. A modest plan swelled to a national rollout to accommodate the demand for profits investors desire. Pre-Covid, I did not accept investments but pivoted to another direction. I am not an investor, but I have something valuable to share about pitching to them.

Are you ready to become an entrepreneur? Do you already have a business and think that an infusion of capital can take it to the next level? I share this experience to shed light on the process for those considering fundraising. This will measure whether you are up to the task and help you to avoid some costly mistakes.

Why consider investors? Banks charge moderate interest rates on collateralized loans. Investors are willing to take risks for a higher return. They may also bring expertise, business connections, and infrastructure you need to catapult your ideas.

Business Plan

Prepare a thorough business plan. Prospective investors will not see the extensive research. But it will help you to get a better grasp of your audience and how to position yourself among competitors. You will better understand how much money you need and what to do with it. It should include a year’s worth of working capital. Your business plan is also the basis for an executive summary or one-sheet. By way of comparison, your business plan is dozens of pages. Your executive summary is perhaps four pages. You might also have a one-sheet.

The idea is that you reserve the business plan for confirmed investors or owners. A business plan is a dynamic guidebook that adapts to a changing market. It reveals goals and strategies to remain relevant competitive market. The one-sheet whets prospective investor appetites. You can distribute the executive summary after your oral presentation. It is always nice to reserve something with which to follow up on interested parties.

The Wind Up

Online video courses and books can train you to prepare pitches. Have your pitch well enough in mind that you are ready to present it on a moment’s notice. Besides the 15-minute version, you will have 3-minute and 30-second versions. In a pinch, you can say one sentence that arouses interest of investors.

Always be ready to whet a listener’s interest with one sentence. You might say: “In 3 minutes I can improve your financial future with a handheld device that converts inexpensive square widgets to valuable round widgets.” This may grant more time for highlights. At this stage, sometimes called an elevator pitch, you might outline why there is demand for the business or product; customer acquisition cost; current versus projected sales; profitability; financial invest­ment and ROI.

With more time, an executive summary can include detailed financial projections, manufacturing process, patents, growth trajectory, and other details to win over an investor. Keep your “secret sauce” close to your vest to maintain personal relevance in a deal.

Do not stand in front of investors without knowing your facts and numbers. Understand how much money you need and how to grow it. Be able to explain risk mitigating strategies.

Contract Negotiation

You will be walking into a room of savvy negotiators. You could walk out spending, by way of equity, more money than you ever have in your life. How? By giving up 20 to 50 percent on a multi-million dollar business opportunity.

Weigh your decision with the fact that 50 percent of something is better than 100 percent of nothing. Understand what you are giving up, what you are receiving in return, and whether the company can remain profitable with the remainder.

If you determine that you are willing to give up 33 percent equity, do not lead with this figure among shrewd investors. Even though their money may provide advantages, you might offer 20 or 25 percent. This allows room for them to negotiate for more equity.

Shrewd investors want to feel like they are putting the squeeze on you, not the other way around. Every percentage you give away translates to vast portions of a (pre-revenue) profitable business.

Recognize that the return on investment must be significant in relation to investor net worth. Someone with billions of dollars has little interest in risking their money to possibly earn 10 percent return on investment (ROI). They are seeking orders of magnitude. For investing one hundred thousand dollars they expect to get back between one and 10 million dollars. If you are seeking millions, your roadmap to significant profits must be compelling.

On the auction block too is a piece of your sole. Someone else will have a say in how your profits are spent, when you should expand, and if you take vacations. Your business partner will become a de facto marriage partner—or perhaps worse: a task master.

Generally speaking, as long as you reach financial projections, investors might remain at bay. However, they may want to take your idea for making 10 million dollars into one that makes ten times as much. Soon you could find yourself flying around the country or the world to meet investor demands irrespective of your family.

Speaking of family, how much support is your mate willing to offer. A breakup with community property could cost you half of your diminished share of the business. Do not begin seeking rounds of funding while your marriage is going south.

The Psychology of Wealth

I do not believe you can place everyone of a particular net worth in one category or mindset. Some will tell you that it makes no difference if you are black or white, rich or poor, as long as the plan makes money. Others will say there is a reticence to inviting someone into an elite social status. So it is worth mentioning that factors beyond your business plan or pitch may be at work.

Intentionally or not, ultra-rich investors might look at common people through a more critical eye. This could mean that the social status of the person actually delivering the pitch can have more merit than the value of the proposal.

Taking a look at psychological studies on the subject may be helpful preparation. People from higher socio­economic classes do worse on a test where they’re asked to identify emotions in photographs of human faces.

—Source; “Social Class, Contextualism, and Empathic Accuracy,” Michael W. Kraus, Stéphane Côté, and Dacher Keltner, Psychological Science, October 25, 2010.

“Let me tell you about the very rich. They are different from you and me. They possess and enjoy early, and it does something to them, makes them soft where we are hard, and cynical where we are trustful, in a way that, unless you were born rich, it is very difficult to under­stand.

“They think, deep in their hearts, that they are better than we are because we had to discover the compensa­tions and refuges of life for ourselves. Even when they enter deep into our world or sink below us, they still think that they are better than we are. They are different.” —F. Scott Fitzgerald

Authors from another study suggest that rich people could be using a defense mechanism to stave off guilt and justify their relatively privileged position within a visibly unequal system. But, for whatever reason, the more inequality rich people see in their home county, the more likely they are to believe that meritocracy is working.

—Source: “False Consciousness or Class Awareness? Local Income Inequality, Personal Economic Position, and Belief in American Meritocracy,” Benjamin J. Newman, Christopher D. Johnston, and Patrick L. Lown, American Journal of Political Science, April 2015.

What does all this mean in practical terms? Someone standing in front of investors saying, “My business has made 50 million dollars and I need your help to reach the next milestone of 100 million” has more credibility than someone who has no money and a plan to make 100 million dollars.

Telling multimillionairs how to make millions when you don’t have it is just not very credible. You may need to walk into the pitch room with one eighth of the funding already pledged before asking others to join your big plan.

Making The Pitch

Ideally, in preparation familiarize yourself with the background of each potential investor. What companies are in their portfolios? How are those performing? If the investors have written books, have you read them? By presenting pitches through a mediating event planner, I was in the dark on investor backgrounds until the last minute.

You might be able to approach some investors on your own for free. On a shoestring budget, lookup investment companies that have a complementary portfolio. Mail out your one-sheet requesting an appointment to pitch an investment opportunity.

Having someone curate a room of deep pockets can cost you hundreds of dollars per minute. Needless to say, you better know what you are going to say and use time wisely. It helps if you are a good orator. But genuineness, honesty, and commitment must be evident.

What gives your pitch the most credibility? Was the business plan the product of a business incubator? Does your business have challenging inventory or manu­factur­ing issues? Do you have patents? Are focus group results available? Do you already have an established customer base that is a good fit for your new idea? How does your marketing plan look?

Are you selling B2B or direct to consumer? Prepare to highlight this information in your pitch. If you are uncomfortable presenting and negotiating, flank yourself with a panel of experts.

Seeking funds to expand a successful business is less of an uphill battle than raising funds for a new startup. But increasing your overhead tenfold means there is less margin for error. A few months of miscalculations or bad decisions can cost the company over a quarter of a million dollars.

Star Player

Investors will reasonably want to know what is your relevance in the equation? Are you putting up personal funds? Do you have considerable sweat equity? Does your background qualify you as the ideal candidate to run this business? If not, those with the money may figure they already have executives and resources to create the business without giving away any of the profits. In this respect, establishing why you are qualified to execute this plan is more important than most minutia, though vital, in the business plan.

After a brief introduction, clearly explain how much money you are seeking and how much equity is available to investors. If multiple investors are sought, what is the minimum buy-in price? Communicate what the product or service is, how much progress has been made, and why this is a compelling investment opportunity. Then establish your value. If you have a team, identify its compos­ite value. Be prepared for follow-up questions afterwards from naysayers.

A Walk Around The Bases

Most pitches are foul balls. Good ideas are rejected all the time because presenters are not well matched to investors. In a group setting, some people you think are good investors have ulterior motives. They may be there to grab low-hanging fruit by telling you they like the idea but require 70 percent of the company.

In a large group, some attendees are there trying to get you to spend $20,000 to $50,000 for their service that will “significantly increase your chances for funding.” You might even be talking to someone with a competing business. Can they carry out your idea with a modest investment and a few tweaks? As you can see, the cut-throat world of fund raising has many challenges.

During the pitch, sell the sizzle but not the sauce. Leave listeners eager to know more. Expect forensic accountants to follow up any verbal offers before you see any money.

How much time, effort, money and other resources are you willing to expend to hit the idea out of the ballpark? It can take many months or years before you are ready to pitch. In addition to knowing how much you need to succeed, understand the limits of sacrifice before recognizing that the cost is too high.

Investors are eager to put up money when they feel they have as much to gain as the presenter. Offer a opportunity they can’t refuse.