Over the past few years, I’ve pitched to hundreds of angel investors and venture capitalists. I’ve met many more at conferences and a lot have become good friends.
I love to pick the brain of an investor, and it’s taught me an incredible amount about how to position a pitch toward different types of investors, and especially the difference in thought process between an angel investor and a venture capitalists.
However, I also learned that there’s a lot of little things that companies can do, especially at an early stage, to dramatically improve their chances of raising money from an investor. The common theme among all of these things is that they reduce the risk of the investment in different aspects of the company. I’ve outlined three of the most common things I’ve heard here.
1. Letters of Intent/Preorders
If you’ve read the Lean Startup, and likely if you’re going about the process of building your company methodically, you’ve done a lot of customer discovery. That means you’ve been in front of (hopefully) hundreds of your customers and listened to what they needed before building your product. You’ve really focused on solving a need and you’ve targeted your sources of revenue. When you pitch, it’s definitely a strong argument to say that people have told you they would purchase what you are building. But it’s even more powerful if you can get someone to put this in writing. When you validate your revenue source, this eliminates the risk that your revenue model doesn’t work, and now the investor just focuses on the team involved to execute as well as the go-to-market plan. Which brings us to…
2. Team/Board of Advisors
Your team should be comprised of the best people in the world to execute on your business model. They don’t need to be on your founding team, but you need to make sure everyone on the founding team has a necessary reason for being there. Clear roles help investors understand each person’s strength. Using vague titles such as “Hustler” or “Business Development” come off as buzzwords, but if instead you say, “This person has been focused on building partnerships with X and Y industry companies for Z reason,” you’ve much more clearly defined that person’s role.
After you fill your founder team with solid people, I always recommend finding a Board of Advisors of people who have done it before. The higher you can reach, the better. These people don’t need to contribute more than an hour a month, but their networks and their ability to mentor you (especially if you’re a newer entrepreneur) mitigates founder risk for investors. Plus this shows that you’re willing to hustle to get connected to whomever you need to in order to make the business succeed.
3. Knowledge of the Industry
This one is a tougher one to show. If you are a seed stage company, investors know that it’s likely you will have to pivot at some point. When you do have to pivot, investors want to know that you know what you don’t know, and you know how to learn those things.
A great way to do this is to show a clear path to market, and validate it either with other companies that have used this path to market, or recommendations from industry experts.
I’ve sat through a LOT of pitches, and what kills me is when an entrepreneur thinks they know everything about the industry. An important thing to show is humility, because nobody wants to invest in an entrepreneur who won’t listen to their advice, or at least consider it. It’s easy to think you know everything about your industry, especially if you actually do know more than the investor you are pitching to (that’s actually what an investor wants, because you are the one doing the work).
It’s just SO important to convey your understanding without being condescending or shrugging off the investor’s questions. I can’t stress enough how many founders do this - and it’s the quickest way not to raise money.
So really the main takeaway here is to make sure you’re thinking about your business from the aspect of mitigating the risk of the investment. This lets you put forth a more solid offering during a pitch with less holes in the deal.