In the last article, I detailed my first experience of being denied funding. My business partner and I tried to pitch and raise capital for our own tech startup and were unable to convince the investor to say yes, despite our research, passion, and best efforts. We failed to secure the funding because we did not sufficiently de-risk our startup in our pitch, which raised some red flags for the investor.
I want to share the important lessons which I learned from that experience on how to reduce the perceived investment risk of your business in your next pitch meeting:
1. Prove That You Have the Right Team with the Right Skills
2. Know Your Industry & Target Customer
3. Put Some Skin in the Game
4. Make Your Proposal/Pitch Authoritative
Prove That You Have the Right Team with the Right Skills
What in you or your team’s track record and experience proves that you can successfully run this company?
To boost investor confidence, you must prove your credibility in your chosen sector.
You have passion, you have done your research, and now it is time to convince the investors of your mission, vision, and purpose. Most importantly, it is the time to convince your investors that you and your team are prepared and well-positioned to make this business a success.
When demonstrating credibility, it helps to have an academic or research-based understanding of the space (such as my understanding of the information technology sector). However, if you are operating in an existing industry with a number of large players who control a significant portion of the market share, you need to do the extra work to convince the investor that you and your team are the people to disrupt the market.
Having an idea alone is not enough. Show off your team’s skills.
As much as possible, demonstrate in your pitch that you and your team have the necessary technical capabilities to execute the project without the need to rely heavily on external providers.
It is ok to have partners or vendors, but the core aspects of the product or service should be shown to be within the direct control of whoever is requesting the funding. Show that you can respond quickly and effectively based on the strengths of your team.
Anyone can have a great idea, but only the right team of people with the correct set of skills can execute it properly, and that is what makes a good investment.
In our experience, as mentioned in the last article, neither Jack nor I, as the founders of our tech startup, could code or develop the tech product. The investors saw that we would have been dependent on an external third-party to deliver our product.
If that third-party company went under or did not produce what we wanted, the investment could have easily been lost as we would not have been able to produce the product on our own.
Lesson Learned: Have an industry specialist and the core skills needed to produce your product or service on your team. It makes a big difference.
Know Your Industry & Target Customer
Knowing your competitors means that you understand your business and the space in which it is operating. Knowing your target customer means you understand the pain and the problems that you are solving and how the people affected by those problems behave.
You must show an in-depth understanding of these two things when pitching investors to de-risk your investment.
A keen understanding of the industry and target market demonstrates that you have done your research and that you can think beyond the present moment. What if the market changes? What if the demand changes? Would your business be prepared to respond and to therefore protect the investment?
Many entrepreneurs seeking startup funding claim that no competition exists for the product they intend to bring to market because of its uniqueness or variety in its offering. However, there is always competition.
If you do not think you have competition, you most likely have not done enough market research. What are your target customers currently using to solve their problems?
A product or service is merely a means to an end, the focus must be on what is the problem you are trying to solve.
Consumers do not purchase products and services. They purchase solutions to their problems, feelings they desire, and experiences they crave.
Focus on your customer’s problem. Research your competition.
Take the time to thoroughly understand your customers, their problems, and how they will use your product/service. Get out there and talk to them, and then use that information in your pitch. How do you solve the problem better? What makes what you are offering unique?
Similarly important is understanding what is being offered by your competitors. This research can help you to make your products, services, marketing, and branding stand out, and will allow you to differentiate your product and company and generate sustainable profits, which is important for investors.
If you cannot articulate why people should spend their money on what you are offering, you will not have much success in winning the investment.
Lesson Learned: Know the main players in the market and what you could do differently than them, proving your competitive advantage. Show that you have done your research, understand your customers, their problems, and why they will choose your solution.
Put Some Skin in the Game (Blood, Sweat….and Money)
An effective way to de-risk your company for investment is to spend time testing and tweaking your idea first:
- Hold focus groups to identify the kinks
- Test the product with your target customers
- Gain traction in the market
- Build hype and momentum
- Prove your concept
Personal investment in your company should be at least 10% of what you are asking for as an investment. It shows buy-in from the owners, shares the financial risk with investors, and demonstrates that you believe in the success of your company.
In addition to investment from the owners, you can also tap into your network of friends and family members to provide the initial investment. If you can get your friends and family to believe in you, it is more likely that you will be able to build confidence from external investors as well.
If you are still short on startup capital after putting in what you can and getting investment from friends and family, there are a few other possible options to fund what is needed before you go to the external investors:
- Search for start-up incubators and other programs and business competitions that may give guidance or funding to companies,
- Start with an idea that has a lower initial capital requirement that will allow you to save the initial investment needed,
- If possible, adjust your spending to allow for more savings from current income.
Lesson Learned: Be your first investor – this includes investment in both time and money.
Make Your Proposal/Pitch Authoritative
Once you have demonstrated credibility, taken the time to understand the industry and your customers, and put some of your own money on the line, you are ready to prepare your pitch.
An effective pitch will convince investors to give you money to reach your dreams and will support your business case with credible research, industry trends, and the right numbers.
In addition to what is detailed above, make sure your pitch focuses on the following:
Demonstrate that you have product-market fit
As we discussed before, an in-depth understanding of your customers shows that you have done sufficient market research and helps you predict the potential for growth and market capture in your industry. Market research is a continuous process and needs to be updated as market dynamics change or as your product/service evolves. Explain why your customers choose you over a competitor and show that you are in tune with what they are seeking. Direct customer feedback is a great resource here.
Detail your go-to-market strategy
Show and tell how exactly how you plan to execute your business idea and generate healthy investment returns.
The more detailed, the better.
Most importantly, show how your strategy will de-risk their investment, and you are more likely to convince an investor to inject some capital into your business.