5 Things Startups Can Learn From Angel Investors

what startups can learn from angel investors

Startups and high-growth businesses can learn a lot from angel investors, regardless of whether you’re seeking funding to grow your business or not. And if you pitch and get turned down, their feedback can be really valuable in helping you think about what you need to do next to meet your funding goals.

I’ve seen this over and over in my dealings, both as an angel investor on my own and as a member of a local angel investment group. Most angel investors don’t just reject startups—we explain why. And we don’t just say yes either; we explain what else is needed.

What we did at the Willamette Angel Conference (from 2009 to 2017) was the rule, not the exception. We took a $100 fee for submissions, and what we offered in return was real feedback. To see what I mean, take a look at the blog posts and videos available at Gust and do a web search for AngelList.

Angel investors are individuals willing to invest their own money to fund new startups. Most of them have made money with startups; they’ve been through the wringer, they’ve succeeded, and they are in a position to share. They can teach you a lot. So if you’re a startup, always focus on listening first.

angel investment not all businesses are good investments

Lesson 1: Not all good businesses are good investments

One of the most common misunderstandings is the assumption that angel investors invest in startups that will become strong, independent businesses.

However, the angel investors don’t make money from their investment until they can sell their ownership for actual real money—that is, until an exit, such as the business being acquired by a larger business, or registering for public stock sales. So, somewhat paradoxically, investing in a startup that becomes a healthy small business, generating its own cash and profits, can be a loss for investors. If that business never gives the investors a way to sell their ownership for actual money, then there is no return. No matter how good your business is, if it doesn’t offer investors cash out at some point, it’s a bad investment.

If the investors end up with a minority share in a healthy business, one that never sells out, then they never get their money back.

I think of it like the diagram here below—many really good businesses are not good investments:

This explains one very important point for your startup: If it has the potential to start, grow, and be healthy without needing outside investment, you could be better off without investors.

Keep in mind that when you take investment, you’re giving the investor a part of your business. When they have a stake in your company’s success, they have a vested interest in influencing your day-to-day operations for profitability. Never seek investment when you don’t need it.

Read more of my articles on seeking investment:

angel investor lessons not all metrics are useful

Lesson 2: Don’t sweat meaningless numbers

My personal favorite in the “pure nonsense category” is the IRR, the internal rate of return, something that was interesting for about one hour as part of the MBA curriculum, but which has no relevance in the real world.

Combine a wild guess on future growth for several years, add in a wilder guess about future valuation prices and exit opportunities, and then pretend that the combination means something. It really only means that you haven’t recovered from your MBA years. Forget it. You’re out of school now.

I have to admit, I’ve seen some judges of graduate-level business plan competitions care about IRR, but never an actual angel investor during actual due diligence.

A close second is projecting stupid profitability into the future.

Please, get a clue: Real businesses usually turn out net profits in single digits, and only rarely up as high as 20 percent. Angel investors are not impressed by projections of 30, 40, 50 percent or more profits on sales. They don’t think that means you’ll be profitable, but rather that you don’t understand what you’ll need to spend. If your sales forecast is reasonable, then you are probably underestimating costs, expenses, or both, in your expense forecast, budget, or projected profit and loss.

New Call-to-action

And it gets worse—a lot of angels, in a lot of tech business markets, prefer high growth and deficit spending to profits. I was told once that my business was too profitable for VC investment. Many investors believe that startups have to choose between profits or growth, and can’t do both at the same time (more on this in lesson 5 below).

Finally, depending on context, those big market numbers can work against you. Not that bigger markets aren’t everybody’s goal—the investors’ as much as yours—but because top-down market numbers are annoying. Angel investors hate projections of sales based on some small percentage of a huge market, as in “if we get just one-quarter of a percent of this $20-billion market.”

Read more of my articles related to meaningless numbers:

angel investor lessons know how to scale your business

Lesson 3: You have to be able to scale up

Good investments need growth, and growth requires what investors refer to as being “scalable.”

This is a very important concept: Scalable means a business can ramp up, increase its volume enormously, without increasing its fixed costs proportionately.

Can you jump from selling 10 to 100 to 1,000 to 10,000 without a proportional jump in headcount and overhead? Product businesses usually can. Some web service businesses can. But a lot of businesses can’t. This is why investors don’t usually like service businesses. They tend to depend on the people more than the product. Key assets walk out the door every night. They can’t scale up.

Investors use the term “body shop” to refer to the many service businesses that depend on people doing specific things for each unit of sales. They will ask “do the assets walk out the door at the end of the working day?” Professional services such as attorneys, accountants, consultants, and design or product development companies are classic body shop businesses that can’t scale. Rand Fishkin’s book, “Lost and Founder,” gives some interesting perspective on a company that transitioned from an unscalable consulting business to a SaaS product. Fishkin is pretty frank about the pros and cons of scaling his business and taking on investors.

Read more of my articles on what investors want:

angel investor lessons your business needs a secret sauce

Lesson 4: You need a secret sauce

Angels want you to have some way to defend your business against competition.

They’ll ask, “what’s proprietary?” They’ll ask, “what’s to prevent a competitor with a bigger budget from jumping into your market and taking it over?”

They’ll talk about whether or not you have a so-called secret sauce that sets you apart from the competition. All that is about defensibility, also called barriers to entry.

Sometimes, this discussion is about patents. Patents can protect inventions, formulas, and algorithms. In a perfect world, having patent protection would be a good answer to concerns about defensibility. In the real world, although patents are always an advantage, patents alone aren’t enough.

Investors look for what the patents cover and ways competitors will work around them. Not all patents are enforceable and not all patents rule out ways to work around them, getting to the same market without violating the patents.

The world of startups is littered with the carcasses of businesses that were protected by patents in theory, but not in fact. Patents require active legal budgets to protect aggressively against infringement.

There are other factors that make startups defensible. Trade secrets, effective branding, differentiation, and first-mover advantage can help. What investors will teach you is that you don’t want to identify a great market without having the resources to grow fast and seize market share before others do.

angel investment advice it costs money to grow your business

Lesson 5: Rapid growth costs money

Consider this the two sides of a single coin: First, angel investors want companies that grow fast and exit. Second, companies that grow fast are going to present both the need for more investment and the growth potential to justify more investment.

Therefore, companies that can fund their own growth are less interesting than companies that need to raise more money later to finance continuing growth.

Normally, attractive growth takes investment. It doesn’t fund itself.

The scalable defensible company that has a shot at increasing sales 300 percent per year for a few years needs to invest in marketing expenses, working capital, employee ramp-up, product development, infrastructure, and other factors that support that growth.

Product companies, for example, need to spend on product development and materials and prototypes before they launch, and they have to buy inventory to build products. Then, if they sell through channels, they have to wait months to get paid by distributors or retailers. All that absorbs cash resources. Web companies, as another example, need to develop the product offering in code, and test, before they launch.

Most of which boils down to: Listen and get a clue

If you’re working a startup and dealing with angel investors, it’s not up to them to understand your story and believe in you; it’s up to you to have something they want to invest in.

If they don’t get it, first listen carefully to what they have to say. Their most powerful tool by far is the simple use of the word “no.”

And, don’t expect angels to give uniform advice.

I’ve seen many times how a startup pitching a focused targeted ramp-up strategy, using a narrow market as a beachhead, will be told by angels that it’s too narrow—so the entrepreneurs change the pitch to go all the way to the huge market instead, to get turned down as “too broad,” or “too many moving parts.” Angels don’t do that on purpose to drive you crazy; they’ll have different opinions.

Read this article on unsuccessful pitches:

And one final word: If you pitch repeatedly for angels and nobody is interested, get a clue.

You might not have a good investment to offer. Revise your business plan, do something else, or maybe you have one of those good businesses that isn’t a good investment.

The only general rule? There are no general rules.

Editor’s note: This article was originally published in 2015. It was updated in 2019.

Was this article helpful?

Source link

The 7 Key Components of a Perfect Elevator Pitch

Whether you are trying to raise money from angel investors or venture capitalists for your business, or just want to perfect your business strategy, a solid elevator pitch is an essential tool for achieving your goals. An elevator pitch that describes your business in a nutshell can be delivered as a speech (ideally in 60 seconds or less), a pitch presentation, or as a one-page overview of your business.

An easy way to think of your pitch is as an executive summary that provides a quick overview of your business and details why you are going to be successful.

How to build a winning elevator pitch in 7 steps:

1. Define the problem

The most important thing is to identify a problem that is worth solving. If your product or service doesn’t solve a problem that potential customers have, you don’t have a viable business model. Simple as that.

Now, you don’t have to be solving a massive problem where the solution will change the world. That’s great if you are tackling such a problem, but for most businesses, that’s not the reality. Problems can be simple—and that’s OK. As long as you, as an entrepreneur, are solving a problem that customers have, you can build a business. Here are a few examples of problem statements that could be highlighted in a pitch:

“Transferring photos from mobile phones is a difficult and complex process.”

“There are no good Chinese restaurants in Eugene, Oregon.”

“Analyzing results from MRI tests is difficult, time-consuming, and expensive.”

Try and distill your customer’s problem down to its simplest form. Ideally you should be able to describe the problem you are solving in one or two sentences, or potentially a few bullet points. In the long run, your company may solve multiple customer problems, but initially you will be more successful if you just focus on one core problem.

2. Describe your solution

Too many entrepreneurs start their elevator pitch by describing their solution: a product or service that they think the market needs. They skip step 1 and don’t identify the problem they are solving. As a smart entrepreneur, you can avoid this mistake by first making sure that you are solving a real problem that customers actually have before you define your solution.

Once you have clearly defined the problem you are solving, you need to explain your solution. A clear problem statement will help you focus your solution on solving that one problem, and not stretch the solution to solve multiple potential problems.

Again, try and distill your solution description down to as few words as possible. You should be able to describe your solution at a high level in just a few sentences or bullet points.

Download the free Investor Pitch Deck Template Kit today!

3. Know your target market

As you define the problem you are solving, you should naturally be thinking about the potential customers who have this problem.

In the target market section of your elevator pitch, you will define exactly who has the problem you are solving and figure out how many potential customers you will be trying to sell to.

Market segmentation

You should try and divide your target market into segments—smaller groups of people whom you expect to market to.

It’s always tempting to define a target market that’s as large as possible, but that does not make for a credible pitch. For example, if you have a new shoe company, it would be tempting to say that your target market is “everyone.” After all, everyone has feet and everyone needs shoes, don’t they?

But, realistically, your new shoe company is probably targeting a specific group of people, such as athletes. Within this group of athletes, you might segment the market into additional groups such as runners, walkers, hikers, and so on.

How big is your potential market?

Once you have created a good list of target market segments, you’ll need to do a little market research and estimation to figure out how many people are in each segment. Take a look at our Bplans market research resource guide.

What do your customers already spend?

Next, try and estimate what an average person in each group currently spends each year on their current solution to the problem you are solving. Now, just multiply the number of people by how much they currently spend and you will have a realistic “market size” number or your target market.

In your pitch, you will want to talk about the market segments you are targeting, how many people are in each segment, and the total amount they currently spend. These numbers are critical and must be part of any good pitch presentation.

If you need more help with this section, check out our guide on defining your target market.

4. Describe the competition

Every business has competition. Even if no one has come up with a solution similar to what you have come up with, your potential customers are solving the problem they have with some alternative.

For example, the competitors to the first cars weren’t other cars. The competition was horses and walking. As you think about your competition and existing alternatives, think about what advantages your solution offers over the competition.

Are you faster, cheaper, or better? Why would a potential customer choose your solution over someone else’s? Describing your key differentiators from your competition is a great exercise and ensures that you are building a unique solution that customers will hopefully choose over other alternatives. These differentiators will also help you focus your marketing on the key value proposition that you offer, but your competitors don’t.

5. Share who’s on your team

As great as your idea is, only the right team will be able to effectively execute and build a great company.

In the “team” portion of your elevator pitch, you should talk about why you and your business partners are the right team to execute your vision, and why your team’s skill set is precisely what is needed to lead your company to success. People often say that a company’s leadership team is more important than the idea—and this is often true. No matter how great or unique your solution is, if you don’t have the right people on board, you won’t be able to see it to fruition.

It’s also O.K. to not have an entire team in place. It’s more important to understand that you have gaps in your management team and that you need to hire the right people. Knowing what your team is missing and recognizing that you need to find the right talent to fill the gaps is an important trait in any entrepreneur.

6. Include a financial summary

For a great pitch, you don’t necessarily have to show a detailed five-year financial forecast. What’s more important is that you understand your business model.

“Business model” may sound like something complex, but fortunately it’s not. All you need to know is who pays your bills and what kinds of expenses you will have.

For example, if you are starting an online news site, the customers that pay the bills are your advertisers. Your costs will be writers, graphic designers and web hosting. As you learn more about your industry, it is certainly helpful to put together a sales forecast and expense budget. You will want to ensure that you can build a profitable company based on your assumptions. But, for your elevator pitch, a won’t have to include a detailed forecast. You should certainly have a forecast completed so that you can talk about the numbers if you get questions and provide the forecast if your potential investors are interested in learning more about your business.

7. Show traction with milestones

The final key element of your elevator pitch is conveying your business milestones, or your schedule.

Here you will talk about your upcoming goals and when you plan to achieve them. If you have already accomplished notable milestones, you should mention those. For example, if you have invented a new medical device, potential investors will want to know where you are in the clinical trial process. What steps have been accomplished and what’s the projected schedule for final approvals from the FDA? If you are opening a restaurant, investors will want to know about plans to sign a lease, design the interior, and open for business.

Talking about upcoming milestones in your pitch makes your business a reality. This section of the pitch illustrates how well you have thought through the detailed steps it’s going to take to open your business and start making money.

If you’re lucky enough to have made progress on your business and have evidence that your business is going to be a success, you’ll want to talk about that, too. For example, if you have pre-orders for your product or other evidence of strong customer interest, investors will want to hear about the successes you’ve had—this is often called traction.

Put it all together into a presentation

If you need help putting together your pitch deck for a presentation, check out our article that outlines exactly what slides you should include in your presentation and what should be on each slide.

You can also create a Lean Plan which is a great hand-out if you are giving an elevator speech and also a good solution for sending a pitch via email. Check out our Lean Plan template if that sounds like the right solution for you.

Bonus component: The one-sentence pitch

Let’s say you’re at a dinner party and one of the guests asks you, “So, what do you do?” Can you answer in one sentence so that they understand your company?

Being able to distill what your company does into one simple sentence is incredibly valuable. It helps you, as an entrepreneur, focus on exactly what you do and who you’re doing it for. It also helps you clearly market your business. A simple headline at the top of your website or brochures will communicate the core essence of your company and generate interest in learning more about what you do.

There are certainly other components you can include in your pitch, but these seven are really the “must-have” pieces, whether it’s written down in a pitch deck presentation or literally delivered as a speech in an actual elevator. If I’ve missed anything that you think is critical to include, please let me know on Twitter @noahparsons.

View this as an infographic:

This article is part of our Complete Elevator Pitch Guide. Check it out to learn everything you need to know about pitching.

Editor’s note: This article was originally published in 2012. It was updated in 2019.

Was this article helpful?



Source link

10 Things I Hated About Your Business Pitch

why i hated your business pitch

As I write this in early 2019, I’m thinking back on more than 20 years of hearing business pitches as a judge of business plan competitions and as an angel investor.

Next month I’ll have another round of it, judging both the University of Oregon New Venture Competition and the Rice Business Plan Competition. Once again I’ll be reading business plans first, then sitting for the pitch and asking my questions. 

The image here is of the Rice Business Plan Competition, entrepreneurs pitching at the finals. That’s me in the front row, second from the aisle, on the left. [Editor’s note: Permission to use requested via email 2/28/19].

With that in mind, I’ve recently reviewed an early post, and updated the 10 things I hate most when they come up in business pitches. Here’s the latest.

1. Your pitch was boring

Tell me a story that resonates. Tell me about people who care, ideas, how you started, why you started, and how you’re going to change the world. And just so you understand, market need and solutions aren’t boring, especially when you show them in stories rather than alleged facts.

And please give me financial projections with assumptions laid out clearly—that’s not boring at all. Your business is exciting. Your prospects are exciting. Don’t dry it all up. Talk about it. Add interesting pictures to back your stories up. Put faces on the screen when you’re talking about people.

Read Resonate, or Presentation Zen, or just at least the blog post Really Bad Powerpoint.

2. You shared ridiculously optimistic projections

I’m amazed at how many pitches I’ve sat through that project completely unrealistic profitability. Please, get a clue.

Real businesses make profits like 7 percent, 9 percent, occasionally even low double-digit profits (stated as a percentage of sales). Rarely, some new innovative businesses will get to 20 percent profits to sales. And yet I’ve seen many pitches projecting 30 percent, 40 percent, even some with 50 percent and 60 percent profits.

Wildly optimistic profits kill credibility. They don’t convince me that you’re going to be that profitable. They tell me you don’t know your business that well.

So get benchmarks. Find out what other businesses like yours, on average, are making in profits. Benchmarks for different industries are easy to find online for a small fee. They are even built into LivePlan.

New Call-to-action

3. Your co-presenters were bored

When more than one person presents, the others have to act interested. Sure, you’ve heard the pitch many, many times, but if it bores you then that makes me less interested.

New businesses are fascinating. The new ideas, creating new markets, really smart people, that’s all fascinating. So step up your pitch. 

4. Your slides were full of words

You should say the words, talk to me—don’t have us all reading the pitch deck slides together with you.

That goes back to point 1 above, boring. You should tell a story and show pictures—see point 1.

5. You read your slides full of words out loud

Never turn your face to your slides and read us the bullet points. That makes all of us listeners want to throw something at you. Point 1 again.

6. You used buzzwords and meaningless adjectives

Why is it that every single plan is “disruptive?” Can they all be? Don’t use the same words that everybody else uses.

I don’t mind the technical jargon as much because people know they have to explain them. I mind all these trendy buzzwords that everybody applies. Not just disruptive, but also game changing, market-leading, and viral, and pivot. They remind me of the old days when every software package claimed to be user-friendly (and mine was the only one that really was).

Tell me the story of what you have, where you are, how you got there, and who’s it for—let me decide the adjectives.

7. You focused on internal rates of return and net present value

I’m glad they taught you internal rates of return and net present value in business school. But both of those calculations are based on five years (or so) of future cash flows. They are assumptions cascading on assumptions, presented as if they were statistical truth.

Show me your projections, yes, and, even better, show me the assumptions behind them. But don’t quote me a damned IRR. I’ll judge your projections for realism and credibility, but that’s sales, costs, expenses, cash flow, and other basic numbers. Not discounted cash flow.

8. You tried to dazzle with big market “facts”

I hate hearing about a $43 billion market, and even more so when you present a sales forecast validated by getting some percentage of that market. I’m not alone in this. Most investors hate the forecasts that start with a huge number and take some small percentage of that number as potential sales.

Instead of that, validate sales by bottoms-up assumptions. One really good example is a sales forecast that sets an assumed number of sales per month per store and an increasing number of stores. Or the web subscription forecast that tracks web visits, conversions, conversion rate, pay-per-click results, email opens, and so forth. Or the enterprise sales forecast based on sales reps, pitches closes, and pipeline.

Be sure you understand the difference between the three popular concepts on market and market share: TAM, SAM, and SOM.

9. Your bluster tripped you up

Know what you don’t know. Don’t bluff investors.

Some entrepreneurs take a pitch presentation as if it were some kind of verbal final exam, in which they have to know all the answers. What they don’t know, they guess, pretending they do know. That’s disastrous. Odds are that in a group of investors, somebody will recognize this kind of bluff. That kills credibility.

When you don’t know, “I don’t know” is the best answer. And, unfortunately, there’s no way to look good when you don’t know the essentials related to your own business. Bluffing makes it worse.

10. You avoided fault or responsibility

“Yeah, these numbers are probably wrong. Our financial person did them but we’re going to change financial persons.” What? Yes, I did hear that in a presentation once.

Investors are looking for businesses they want to join and support. Most investors assume that people who deflect and blame others are not likely to be working well with a team. I suggest you read this personal account, a true story: Did You Get Screwed in Business?

Did you know this article is part of our Bplans Pitch Guide? Everything you need to know about creating your pitch, all in one place.

Hear more pitching tips with Peter and Jonathan on the tenth episode of The Bcast, the Bplans official podcast:

Click here to subscribe to The Bcast on iTunes »

Was this article helpful?

Source link

6 Simple Tricks to Avoid Late Paying Customers

get customers to pay on time

This article is part of our Business Startup Guide—a curated list of our articles that will get you up and running in no time!

More than 30 percent of small and medium-sized businesses surveyed by Sage say late payments are impacting staff pay, company investments, and supplier relationships. When businesses have trouble getting their customers to pay invoices on time, it can really affect a business’s cash flow, and even their ability to survive.

If your business is growing and you’ve made a ton of sales, it might look on paper like everything is great. But until those customers surrender their cash and pay their invoices, you can’t use that revenue to pay your own bills.

But what can you do to encourage your customers to pay up faster?  Start with these six simple tricks.

1. Be careful: Know your customers

Net terms are not for everyone. Plain and simple.

There are some customers who you can trust to pay you and some you cannot. Your job is to become an expert in figuring out which is which. In most industries, you as the business owner can choose whether you require payment at the time of service or delivery, or if it’s better business to issue an invoice and wait.

Do your due diligence. Find out as much about a customer as you can before extending credit. Pull their business credit report to see how they’ve financially performed in the past. Have each customer apply for credit and make your credit application specific enough that you can do quality research on them. Ask for trade references so you can get a sense of their past payment behaviors.

2. Be clear: Spell out your terms

Identify your standard payment terms (30 days? 45 days?) and spell out your late payment consequences. Leave no room for questions, and eliminate the possibility of any “he-said, she-saids.” If you offer different terms to different customers, make sure you’re not saying one thing to one customer, and putting something else on your website, for example.

Word your invoice as clearly and simply as possible. Use a professional looking invoice template. Don’t overwhelm your customer with a ton of information—be concise and to the point. Put your customer’s name on the invoice, not just their company’s name, if you’re selling B2B. Don’t use internal jargon or vague descriptions whenever possible so it’s abundantly clear what you’re invoicing for.

You want your customer to get the invoice, understand what it’s for, and be able to tell who authorized the work or product purchase as quickly as possible. Avoid general phrases like “due in three weeks” and put an exact due date on your invoice. The easier you make it for your customer to cut you a check, the more likely you’ll be paid quickly.

Free cash flow template download

3. Be polite

Did you know by simply adding a “please” or “thank you” to your invoice, you can increase your chances of getting paid by five percent? Being polite can go a long way.

Be friendly and warm in your invoices. Remember, the customer hasn’t paid late yet. By being cordial, customers will have a more positive response to your communication and you have a better chance at being atop their payment priority list.

4. Make it easy for customers to pay

The easier it is for people to do something, the more likely they will do it. It’s time to embrace quicker payments methods for your customers. First, invoice faster. Don’t send paper invoices, don’t fax invoices if you can help. Save the paper and the lag time and email them.

Take checks, accept credit cards, and PayPal. Make online payments available, and make sure they’re mobile optimized options so customers can pay right from their smartphones. Putting a link to a payment processing form in an invoice is a great way to speed up payments. The trade-off there will be credit card or processing fees, but weigh the options and decide if it’s a good trade-off for your business.

Put your contact information right on your invoice. Make it easier for your customers to contact you if they have a question about a bill. How many times do your customers not quite understand something and set aside your invoices until they have time to track down your phone number?

5. Be flexible

There are times when customers hit difficult financial spots. We’ve all been there.

You’ve been cautious when extending credit, but you didn’t see this coming (and neither did they). Sometimes it’s O.K. to work with customers whose cash is momentarily tight. You just have to be the judge in deciding if this is habitual or situational.

Don’t indulge the habit, but help out those who’ve hit a rough patch. Look at offering these customers installment plans. Although you won’t receive your entire sum up front, it will allow you to start receiving cash and will help guarantee that you will, in the end, receive what you’re owed.

When you work with a customer to develop a plan that meets their needs financially and still gets cash flowing into your system, you’re saving yourself. Installment plans, in fact, are at times the difference between you getting paid or not getting paid at all. Option number 1 is always the best, even if you have to be flexible with the terms.

6. Be consistent

The thing to remember when extending payment terms is the human element. We are busy people who easily get sidetracked and easily forget. It’s not unheard of for a customer to receive an invoice, place it to the side, and unintentionally allow it to get lost under a pile of papers.

Do them a favor and remind them. If it is a week before payment is due and you still haven’t received anything, don’t hesitate to send them a friendly reminder email or letter. Keeping yourself on their radar will only help increase your chances of getting paid.

Looking for a free invoice template? Here are a few to help you get started.

Was this article helpful?

Source link

What to Say in Your 1, 5, 10, or 20 Minute Pitch (+ Tips From Successful Entrepreneurs!)

what to say in your investment pitch

How much time you have to deliver a pitch to investors will have a big impact on how and what you’ll want to do and say.

If you’re giving five-minute presentation followed by a Q&A, you will approach that a little differently than if you’re giving a one-minute presentation!

So, how do you know what to include in a really short pitch? What about a 20-minute pitch? We’ve got you covered. In this article, I’ll review:

  • What to include in a one-minute, five-minute, 10-minute, and 20-minute pitch
  • Tips from entrepreneurs who successfully pitched their businesses for funding

The one-minute pitch

-you have to know what the problem

This very brief time slot is a little brutal—you have to be clear and concise—but if you’re nervous about speaking in front of people, there’s one big benefit: it’s over quickly. The challenge, of course, lies in using the time as wisely as possible.

Think of a one-minute pitch as the absolute heart of your business: What problem is your business solvingProjecting confidence and having the clearest, most concise explanation of your product or service possible is key.

Jackie Wu created Rook, a flying security camera, and received funding after pitching an incubator. Jackie says, “The biggest thing is, you have to know what the problem you’re solving is and how your product/service will solve it. We articulated that very clearly to the investors. That is the one-minute pitch.”

The five-minute pitch

A five-minute pitch is when you can start branching out from your core message. In it, you’ll cover the problem your business solves and how you’ll solve it, but you can include other important details like what your competitive advantage is and why your team is the best for the job.

Forbes has a great example of a winning five-minute pitch from a pitch competition. The winning entrepreneur offers some important advice: avoid unrealistic financial projections (you’ll look like an amateur), and always copy edit your pitch deck. A typo or misspelling in such an important event says to investors that you aren’t detail oriented—not exactly the message you want to be sending.

Download the free Investor Pitch Deck Template Kit today!

The 10-minute pitch

Caroline Cummings has successfully raised nearly a million dollars in angel investment. To help entrepreneurs achieve funding success, she’s distilled the process into a series of manageable takeaways and has even created a great format for a 10-minute pitch.

Caroline suggests this format for your pitch:

To present a polished and professional pitch, practice it. You should know the key points you’ll mention and the order you’ll present them in, whether you use a pitch deck or not.

The 20+ minute pitch

If you have the opportunity to pitch for 20 minutes, its safe to assume you probably have a larger block of time, like 40 minutes or an hour, in which to cover both the pitch and the Q&A. Guy Kawasaki, Apple’s former chief evangelist, has what he refers to as the 10/20/30 rule, which is a good guideline when it comes to longer pitches.

It goes like this: If you have a pitch deck of slides for your presentation, use no more than 10 slides, you should be able to pitch from these in 20 minutes, and you shouldn’t be using a font smaller than 30 points.

Screen Shot 2015-04-27 at 3.29.47 PM

If you start from the heart of your pitch—the one-minute version—then each longer iteration allows you to provide more detail expanding from that point.

20 minutes gives you plenty of time to not only hit those high points listed under the 10-minute pitch, but also time enough to really flesh them out. You could include a brief product demo that shows off your technology, or more details about your smart and efficient business model that you might not otherwise have had time for.

Advice from the trenches: Pitch to win

I talked to entrepreneurs who had successfully pitched their businesses and received funding and collected their advice on how to prepare for your pitch and what makes a pitch successful.

Here’s what they learned from their experiences:

Assemble a solid team

Have a great team working with you and know why they are the best people for their jobs. Jackie Wu says that your team is one of the most important things to mention in your pitch.

She recommends answering questions like, “Why are you guys uniquely capable of doing this? Do you have a lot of experience?” Be able to concisely say why you and your top people deserve funding.

Have a plan and structure

Jasmin Augustin of Swift Logistics, Inc., a shipping company, won the Liftoff Houston Business Plan Competition after a four-minute pitch and 10 minutes of Q&A, but she says she never would have gotten to that point without writing her business plan first.

You won’t need to submit a business plan before every pitch you make, but you can bet that having a plan in place will make your pitch that much easier to create, and you’ll have something to direct investors to should they ask.

Bring a backup

It sounds old school, and it is, but it’s also a guarantee: If you have a hard copy of your pitch deck on hand, no amount of technical difficulties will stop you from using it.

“I would highly recommend that you print a copy of the slides in case the projector or computer fail. This happened to me,” says Roman Diaz, president of Touchstone Compliance.

Practice

Practicing, especially if you’re the nervous type, is a must. It’s common to be a little jittery, but you don’t want it to distract from the great idea you have for your business. So the more you can get used to explaining your business to people, in a cohesive and relaxed manner, the better chance you have of staving off nerves when you really need to.

Remember that practice doesn’t mean memorized; this can make you sound robotic or mean that an interruption could throw you off. You just want to get so familiar with all of the pertinent material that you could answer relevant questions in your sleep, so that there’s little risk of drawing a blank when the pressure is on.

If you’re not comfortable with public speaking in general, check out Toastmasters, an organization that helps people build those skills, and also take a look at Bplans’ guide to pitching for more help and ideas.

Caroline Cummings says: “If there’s one thing I can’t stress enough, it’s the importance of rehearsing your pitch.”

Make them say, “Tell me more.”

I heard this one from quite a few people: piquing the interest of your audience is a worthy goal. Greg Archbald of Greasebook, an oil and gas technology company, says that this can be done in one of two ways:

1.) Talk about all the traction you’re getting, or 2.) not only inform, but entertain.

Remember, investors want to see any kind of external validation of the usefulness/coolness of your product or service. The more traction you can show, the less you’ll require investors to take a leap of faith.

The next best way to stimulate interest is to entertain. You can do this with penetrating new insight, humor, or controversy. Not only will the investor appreciate this, but you’ll stand out from the crowd, be memorable, and above all else, stimulate interest,” he says.

Tell your story

Every startup has a story. Lida Zlatic of ClassTracks, a language learning company that has won two pitch competitions, advises thinking of your pitch as a compelling story you have to tell.

Every story has characters (who is your product helping), a problem, a pathway (a general suggestion for solving the problem—we start this section with, ‘If only…’), and a solution (our product). Longer pitches spend more time explaining the product. Stats and humor are also helpful,” she notes.

Have you used any of these tactics during a pitch? Do you have a pitch-related question? Let us know on Twitter!

This article is part of our Business Funding Guide: fund your business today, with Bplans.

Editor’s note: This article was originally published in 2015. It was updated in 2019.

Was this article helpful?

Angelique O'Rourke
Angelique O’Rourke

Artistic + intellectual pursuits. Social justice. Actress. Model. Musician. Eugene // Portland.



Source link

How to Get Funding for a Business

how to fund a business

Most healthy businesses need business financing at some point. Startups have to deal with starting costs and ongoing businesses have to finance growth and working capital.

Deciding to take on some kind of debt is quite common. In this article, we’ll take a quick look at the big picture, and then talk through options for funding.

Financing options depend on what kind of business you have. Its age, position, performance, market opportunities, team, and so forth are very important. So you should tailor your funding search and your approach. Don’t waste your time looking for the wrong kind of financing.

Understand the general realities of getting funded

Let’s start with a quick reality check. Like so many things in business, a lot about business financing depends on your specific details. Realities go case by case, depending on the growth stage, resources, and other factors.  

Are you a startup or ongoing business?

The outlook for funding depends a great deal on the specifics of the business.

For example, many ongoing businesses have access to standard business loans from a traditional bank that would not be available to startups. Also, high-tech high-growth startups have access to investment funding that would not be available to stable, established businesses that show only slow growth.

Small business financing myths

Before we get into the most viable options for start-ups and established businesses, let’s dispel some popular funding myths, just so we can get them out of the way. Don’t get discouraged at this point. Better to deal with realities that you can work with rather than myths you can’t.

Myth #1: Venture capital is a growing opportunity for funding businesses

Actually, venture capital financing is very rare. I’ll explain this more later, but assume that only a very few high-growth companies with high-power management teams are venture opportunities.

Myth #2: Bank loans are the most likely option for funding a new business

Actually, banks don’t finance business startups. I’ll have more on that later, too. Banks aren’t supposed to invest depositors’ money in new businesses.

Myth #3: Business plans sell investors

Actually, they don’t.

A well-written and convincing business plan (and pitch) presents your business to investors in detail; but they are investing in your business, not just a plan.

Normally you have to have a team in place, have made progress toward idea validation, or—better still—traction (paying customers). So you do a lot of work before you get investors.

Nobody invests in ideas or plans. The rare exception is a special case, in which investors know an entrepreneur well and are ready to invest in them at an early stage. In that case, they are investing in the entrepreneur, not the plan.  

The role of the business plan

I’m not saying you shouldn’t have a business plan. You should.

Your business plan is an essential piece of the funding puzzle, explaining exactly how much money you need, and where it’s going to go, and how long it will take you to earn it back.

Investors will look first to a summary, and then a pitch; but if you get through that screening, they’ll want to see a business plan for the process of due diligence. And even before that, during the early stages, they’ll expect you to have a business plan in the background, for your own use.

Most commercial banks require a business plan as part of a loan application. A plan is also required for applying for a business loan guaranteed by the Small Business Administration (SBA).

Everyone you talk to is going to expect you to have a business plan available. They may not start their discussions with you by looking at the plan, but don’t get caught without one when they ask to see it.

Where to look for money

The process of looking for money must match the needs of the company. Where you look for money, and how you look for money, depends on your company and the kind of money you need. There is an enormous difference, for example, between a high-growth internet-related company looking for second-round venture funding and a local retail store looking to finance a second location.

In the following sections of this article, I’ll talk more specifically about six different types of investment and lending available, to help you get your business funded.

1. Venture capital

The business of venture capital is frequently misunderstood. Many startup companies complain about venture capital companies for failing to invest in new ventures or risky ventures.

People talk about venture capitalists as sharks, because of their supposedly predatory business practices, or sheep, because they supposedly think like a flock, all wanting the same kinds of deals.

This is not the case. The venture capital business is just that—a business. The people we call venture capitalists are business people who are charged with investing other people’s money. They have a professional responsibility to reduce risk as much as possible. They should not take more risk than is absolutely necessary to produce the risk/return ratios that the sources of their capital ask of them.

Venture capital shouldn’t be thought of as a source of funding for any but a very few exceptional startup businesses. Venture capital can’t afford to invest in startups unless there is a rare combination of product opportunity, market opportunity, and proven management.

Venture capital professionals look for businesses that they believe could produce a huge increase in business value within just a few years. They know that most of these high-risk ventures fail, so the winners have to win big enough to pay for all the losers.

They focus on newer products and markets that can reasonably project increasing sales by huge multiples over a short period of time. They try to work only with proven management teams who have dealt with successful startups in the past.

If you are a potential venture capital investment, you probably know it already. You have management team members who have been through that already. You can convince yourself and a room full of intelligent people that your company can grow ten times over in three years.

If you have to ask whether your new company is a possible venture capital opportunity, it probably isn’t. People in new growth industries, multimedia communications, biotechnology, or the far reaches of high-technology products, generally know about venture capital and venture capital opportunities.

If you are looking for names and addresses of venture capitalists, start with the internet.

The names and addresses of venture capitalists are also available in a couple of annual directories:

2. Angel investment

We started with venture capital first in this article because the phrase is more common, and some people think of all outside investment in high-growth startups as venture capital.

However, the reality is that what we call angel investment is much more common than venture capital, and usually is much more available to startups, and at earlier growth stages too.

Although angel investment is a lot like venture capital (and is often confused with it), there are important distinctions. First, angel investors are groups or individuals who invest their own money. Second, angel investors tend to invest in companies at earlier stages of growth, while venture capital typically waits until after a few years of growth, after startups have more history.

Many people use the term “venture capital” to apply to any investors who invest in high-growth startups. In fact, angel investment in startups is much more common than venture capital, especially at the earlier growth stages. Businesses that land venture capital typically do so as they grow and mature after having started with angel investment first.

Like venture capitalists, angel investors normally focus on high-growth companies at early stages of development. Don’t think of them for funding for established, stable, low-growth businesses.

Your next question, of course, is how to find the “angels” that might want to invest in your business. Some government agencies, business development centers, business incubators, and similar organizations will be tied into the investment communities in your area. Turn first to your local Small Business Development Center (SBDC), which is most likely associated with your local community college.

You can also post your business plan on websites that bring angel investors together. The two most reputable sites in this area are:

You should also be aware that angel investment was affected by the 2012 JOBS Act that loosened some restrictions and allowed what we now call crowdfunding.

Traditionally, angel investment was limited by U.S. securities and exchange regulations to individuals meeting some minimum wealth requirements, called “accredited investors” in the legal wording. Crowdfunding is the accepted term for individual investment in startups by people who don’t meet the legal wealth requirements.

Under certain conditions, startups and even non-high-growth small business can solicit investment from a wider range of investors. Details are still fuzzy on a lot of this, so, when in doubt, check with a good attorney first.  

Important: Be careful dealing with anyone or business firm offering to find you startup investment if you hire them to act as front or negotiator for you, or do your business plan, or your pitch presentations and such. These are shark-infested waters.

I am aware of some legitimate providers of business plan consulting, but legitimate providers are harder to find than the sharks. Real angel investors want to deal with the startup team founders, not brokers, or finders, or consultants. Finders’ fees had a place in startup investment a few decades ago, but have become obsolete.

Download the free Investor Pitch Deck Template Kit today!

3. Commercial lenders

Banks are even less likely than venture capitalists to invest in, or loan money to, startup businesses. They are, however, the most likely source of financing for established small businesses.

Startup entrepreneurs and small business owners are too quick to criticize banks and financial institutions for failing to finance new businesses. Banks are not supposed to invest in businesses, and are strictly limited in this respect by federal banking laws.

The government prevents banks from investment in businesses because society, in general, doesn’t want banks taking savings from depositors and investing in risky business ventures; obviously when (and if) those business ventures fail, bank depositors’ money is at risk. Would you want your bank to invest in new businesses (other than your own, of course)?

Furthermore, banks should not loan money to startup companies either, for many of the same reasons. Federal regulators want banks to keep money safe, in very conservative loans backed by solid collateral. Startup businesses are not safe enough for bank regulators and they don’t have enough collateral.

Why then do I say that banks are the most likely source of small business financing? Because small business owners borrow from banks. A business that has been around for a few years generates enough stability and assets to serve as collateral. Banks commonly make loans to small businesses backed by the company’s inventory or accounts receivable. Normally there are formulas that determine how much can be loaned, depending on how much is in inventory and in accounts receivable.

A great deal of small business financing is accomplished through bank loans based on the business owner’s personal collateral, such as home ownership. Some would say that home equity is the greatest source of small business financing.

4. The Small Business Administration (SBA)

The SBA makes loans to small businesses and even to startup businesses. SBA loans are almost always applied for and administered by local banks. You normally deal with a local bank throughout the process of getting an SBA loan.

For startup loans, the SBA will normally require that at least one-third of the required capital be supplied by the new business owner. Furthermore, the rest of the amount must be guaranteed by reasonable business or personal assets.

The SBA works with “certified lenders,” which are banks. It takes a certified lender as little as one week to get approval from the SBA. If your own bank isn’t a certified lender, you should ask your banker to recommend a local bank that is.

Need help finding a business loan? Find available small business loan options with the Bplans Loan Finder.

5. Other lenders

Aside from standard bank loans, an established small business can also turn to accounts receivable specialists to borrow against its accounts receivables.

The most common accounts receivable financing is used to support cash flow when working capital is hung up in accounts receivable.

For example, if your business sells to distributors that take 60 days to pay, and the outstanding invoices waiting for payment (but not late) come to $100,000, your company can probably borrow more than $50,000.

Interest rates and fees may be relatively high, but this is still often a good source of small business financing. In most cases, the lender doesn’t take the risk of payment—if your customer doesn’t pay you, you have to pay the money back anyhow. These lenders will often review your debtors, and choose to finance some or all of the invoices outstanding.

Another related business practice is called factoring. So-called factors actually purchase obligations, so if a customer owes you $100,000 you can sell the related paperwork to the factor for some percentage of the total amount. In this case, the factor takes the risk of payment, so discounts are obviously quite steep. Ask your banker for additional information about factoring.

6. Friends and family funding

If I could make only one point with budding entrepreneurs, it would be that you should know what money you need, and understand that it is at risk. Know how much you are betting, and don’t bet money you can’t afford to lose.

I’ll always remember a talk I had with a man who had spent 15 years trying to make his sailboat manufacturing business work, achieving not much more than aging and more debt. “If I can tell you only one thing,” he said, “it is that you should never take money from friends and family. If you do, then you can never get out. Businesses sometimes fail, and you need to be able to close it down and walk away. I wasn’t able to do that.”

The story points out why the U.S. government securities laws discourage getting business investments from people who aren’t wealthy, sophisticated investors. They don’t fully understand how much risk there is. If your parents, siblings, good friends, cousins, and in-laws will invest in your business, they have paid you an enormous compliment. Please, in that case, make sure that you understand how easily this money can be lost, and that you make them understand as well.

Although you don’t want to rule out starting your company with investments from friends and family, don’t ignore some of the disadvantages. Go into this relationship with your eyes wide open.

Maybe, your idea and your situation is a better fit for crowdfunding—that is, creating a profile and pitching your business idea or product on a site like Kickstarter. In fact, this method of raising money has become so popular that here are dozens of crowdfunding sites to choose from, all offering different terms and benefits.

Words of warning

Sadly, financing and investment involves money; and money breeds some predatory business practices, scams and such. So here are some reminders to help you avoid the pitfalls.

  • Don’t take private placement, angels, friends, and family as good sources of investment capital just because they are described here or taken seriously in some other source of information. Some investors are a good source of capital, and some aren’t. These less established sources of investment should be handled with extreme caution.
  • Never, spend somebody else’s money without first doing the legal work properly. Have the papers done by professionals, and make sure they’re signed.
  • Never, spend money that has been promised but not delivered. Often companies get investment commitments and contract for expenses, and then the investment falls through.
  • Be aware that turning to friends and family for investment is not always a good idea. The worst possible time to not have the support of friends and family is when your business is in trouble. You risk losing friends, family, and your business at the same time.

Summary

Most businesses are financed by home equity or savings as they start—bootstrapping. Only a few high-growth startups can attract outside investment. Venture capital deals are extremely rare. Borrowing will always depend on collateral and guarantees, not on business plans or ideas. And business borrowing is normal for ongoing businesses with an established history, but not a normal option for startups.

What might be the next steps to take depends a lot on your specific business. Generally, high-tech startups might explore angel investment or friends and family first, while steady ongoing businesses should start by asking their small business banker. But always remember, your business is unique.

Was this article helpful?

Source link