Impress Potential Investors in 12 Steps
David E. Gumpert has authored or co-authored seven books on business and written extensively about starting a business from scratch. The following advice on business plan presentations is an edited excerpt from his latest book, Burn Your Business Plan! What Investors Really Want from Entrepreneurs.
If you're trying to raise investment funds for an early-stage venture, one of the best opportunities is an in-person meeting with venture capitalists or angel investors. In preparation, you should develop a 20- to 30-minute slide presentation to address their most pressing questions and concerns.
To get you started, I've developed a list of 12 key questions you need to answer. I recommend devoting one slide to each question, for a presentation of 12 slides. Assuming it will take about two minutes to explain each slide, your entire presentation should take 24 minutes, which is right in the ideal range (BusinessWeek.com, 6/4/07).
I suggest you answer each question with three to six bullet points or phrases. If you can't capture the necessary details in bullet points or phrases, save them for the oral explanation you will provide for each slide. Jot down notes for each slide that will serve as the basis of your discussion. Your presentation should be more than a simple recitation of the points on each slide.
1. What is the opportunity? In other words: What is the problem you are fixing? Many Internet businesses—such as online car markets or travel agencies—aim to fix an inefficient and cumbersome market via a more open and speedy system. If it's a new problem or opportunity, investors will invariably wonder why no one has tried to fix this problem before? Or, if someone has tried, why didn't it work?
You also need to convince potential backers that there are huge premiums for solving the problem. Resist the urge to dwell on marketing studies showing annual growth of 50% for the next 200 years—investors have come to despise them—and instead provide data on the size of today's market, with various estimates of potential market growth. If the marketing data are suspect or incomplete, say so.
2. What gives you special advantages in solving the problem? Investors want to understand the competitive advantages your business brings to the marketplace. The ideal competitive advantage from their viewpoint is something proprietary—say, a patent on a new drug or important chemical or manufacturing process. A patent provides a form of government protection against imitators. Other proprietary advantages can come from trademarks and copyrights, though these are less desirable because they tend to be less protective for small companies. (A young company's trademark typically isn't well-known, and thus is less important in the marketplace than well-established corporate trademarks.) So be careful about overemphasizing trademarks or copyrights.
Another special advantage may be the experience of your management team. Simply having "a head start on the competition" isn't usually considered significant—unless you can create what are known as "barriers to entry," which make it difficult for new competitors to imitate your offering. For example, exclusive licensing agreements with corporate partners may help you create barriers to entry, and if so are worthy of mention.
3. What makes your team especially qualified to develop this business? Another way of asking this question: What makes this a business only you can do, or why is this business right for you? Investors are extremely skeptical about a team's ability to succeed, so it's best to anticipate their skepticism, and try to answer questions before they are asked.
The best answer provides evidence of past performance—not just that you started another company, but how that company fared. Many entrepreneurs gloss over this because the outcome wasn't clear-cut.
I believe it's important to be as forthright as possible here: Explain that a previous corporate management stint was cut short because of downsizing, for example, or that another startup a team member helped launch was sold before achieving its full potential.
4. What is the model? This used to be posed as, What is the strategy? The word "model" became popular with the advent of the Internet, when entrepreneurs spoke about "the advertising model" or "the membership model" or "the retail model." It's your scheme, or approach, to conducting business and generating recurring revenues.
It has become another area of skepticism for investors because a number of models popular during the dot-com craze have fallen out of favor—particularly the advertising model. Advertising on the Internet (BusinessWeek, 11/12/07) hasn't turned out to be in the same league as TV or print advertising, though that is showing signs of changing.
Be sure to explain your model carefully and why you expect it to succeed.
5. What makes it scalable? This refers to your ability to ramp volume up quickly with minimal new hires. Scalability is another term that became popular during the dot-com boom because the Internet was believed to provide huge opportunities for scalability. For some businesses, such as online auctions and travel, the Internet has been a great mechanism for achieving scalability. For other businesses, like food and toys, the Internet didn't deliver on the promise.
6. How do you know you'll have customers? This is the question entrepreneurs typically answer most inadequately during presentations. A market study from Forrester isn't the right answer. For whatever reason, too many entrepreneurs use external market studies to justify their potential businesses, and neglect all they've done to identify customers and prospects.
Investors want to know about your own surveys (BusinessWeek.com, 11/19/07) or test-marketing initiatives. They'll be on the edges of their seats awaiting your evidence, and the harder the evidence, the better. The closer you are to achieving real sales, the better.
7. How do you connect to customers? This follow-up question concerns your methods of selling to and maintaining ties with customers. Are you going through retail channels, direct mail, the Web, or some combination thereof? And if you have customers, do you have standard practices for staying in contact?
Even more important: What evidence do you have of repeat sales? Repeat sales can suggest that most desirable of revenue models: the annuity sale, whereby customers buy repeatedly on a long-term basis.
This is a slide you should think long and hard about. Muster all the evidence you can to demonstrate which channels work best and what you have learned about customer behavior.
8. Do you have a rainmaker? Investors will want to know whether you have a super salesperson on board. Being able to point to one or two people with proven sales ability will give comfort to investors. They know that selling is a very special talent, and they respect it. They also know that too many young companies, technology companies in particular, don't have that talent on board—and it makes them uncomfortable.
9. What have you learned from the competition? Note that I haven't asked whether you have competition or to identify your competitors. That's because investors assume every business has competitors, and claims to the contrary will worry potential investors.
To answer this question, think about your competitors, what they do well, and what they don't do well. Pointing out competitors' strengths you would like to emulate will please investors. The more specific you can be, the better. For example: "One thing that impresses us about Competitor A is its rigorous follow-up with new customers, inquiring into their likes and dislikes. We would like to go one better by responding immediately to customer dislikes."
10. What are the risk factors? Every business entails risks, and as in the previous slide, acknowledging those risks will impress investors. This isn't an area you need to dwell on, as you should in some of the market and customer matters. But you should be matter-of-fact about the risks—that your model hasn't been well tested in your particular industry, for example, or that the competition six months from now is likely to be much greater than it is now.
11. What are the margins? Here you should provide a synopsis of your financial projections. The emphasis, though, is on your margins—profits before administrative expenses and taxes. These should be high—hopefully over 40%—but not unrealistically so.
You should also anticipate the question of how your margins will change once the competition heats up.
12. How realistic is the exit strategy? Your exit strategy is your plan for enabling investors to take their profits from the company within five years. Young companies most often cite one of two exit strategies: they plan to be acquired or to go public. Those approaches are fine, so long as they make sense. For example, you might say you are looking to an acquisition rather than an initial public offering (BusinessWeek.com, 3/27/07) because your business is in a niche market, and thus would be most attractive to a large company seeking to enter that market.