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Tips on Talking to and Tapping Potential Investors

Debra Reisenthel, chief executive at Palo Alto Health Sciences, has been trying to raise money from investors for the last four months. The goal is to finance the development and production of a biofeedback device that measures carbon dioxide output and trains people to breathe in a way that helps them manage anxiety disorders.


Along the way, Ms. Reisenthel said, she has learned some important lessons about pitching to investors. “We used to start meetings with a story about our founder, the problem we were addressing, its cost to society and the scientific research that led to our business idea,” she said, “but investors wanted to know right away, ‘What exactly are you selling and who is going to buy it?’ ”


As a result, Ms. Reisenthel learned to get to the point, immediately. Whether they are pitching to venture capitalists, angel investors or friends and family, entrepreneurs who have been through the process stress the importance of making a crisp presentation, sizing up competitors and knowing what kind of information the potential investors require.


KNOW YOUR AUDIENCE


Angel investors and venture capitalists come to the process at different times with different needs and goals. “The angel investors we met with during our idea stage were interested in the zeitgeist of the project,” Ms. Reisenthel said. “They were excited to be part of what we were trying to achieve, and they were O.K. with unanswered questions. They didn’t need a detailed five-year plan, and understood their investment would be diluted in value when we took on additional funding.”


She said the venture capitalists, by contrast, are generally willing to invest more money but they want to know when the company expects to be profitable. “V.C.’s are more about the details — market size, business model, cash flow plans, sales break-even point and how the company will find customers,” Ms. Reisenthel said. They were more likely to want to be involved in strategic decisions, expected regular updates and often wanted a seat on the board of directors. “They were also less willing to accept risk than angel investors.”


KEEP IT CONCISE


Pete Higgins, a founding partner at the venture capital group Second Avenue Partners in Seattle, has heard hundreds of pitches over the last five years and has financed about 7 percent of them. He said a concise presentation was telling because entrepreneurs who can explain a complicated set of technologies or a new product show they are smart, that they have done their research and that they can communicate — all factors critical to a company’s future.


Ms. Reisenthel uses a slide deck of about 10 and no more than 15 slides and prepares additional slides in case deeper questions arise on topics like manufacturing costs or competitive analysis. “You need to know the business, the technology, the science better than anyone in the room,” she said. “Practice in front of smart professional friends in the industry who can critique you before you go in for the real meetings.” Selling the quality of your leadership and your team is as important as the idea, Mr. Higgins said.


Sometimes just a few compelling sentences can get an idea financed. Last year, Mr. Higgins said, “A start-up veteran pitched us, saying, ‘I want to sell $4.99 live concert recordings that are ready to be downloaded to the concertgoers by the time they get to their car in the parking lot. It’s technically straightforward, makes money for the band on tour and is an inexpensive memento for concertgoers, who are often trying to record on their phone anyway.” Mr. Higgins said he knew in five minutes he would invest, and the Lively app made its debut this year.


KNOW THE COMPETITION


Beyond just listing other companies in the same arena, understanding and describing the competitive landscape can be critical, according to Mr. Higgins. “If other companies have tried something similar and failed, tell us why they failed,” he said. “If the market is crowded with competitors, how will you do it better? Just having a feature they don’t is an incremental benefit and not enough to overcome the inertia that will keep customers from switching to your product.”


Mr. Higgins advises entrepreneurs to ask for financing only when they can demonstrate a transformational new technology, a new distribution method, or a better cost structure that cannot easily be copied. And recognize that there are competitors to every business idea, he said, even if it is the pencil and paper people are currently using to do the task you plan to automate.


EXPECT MISHAPS


Julie Gilbert Newrai of Minneapolis raised $1.5 million in her first round of fund-raising in June 2012 and is preparing to begin a second round. Her service, PreciouStatus, relays personalized daily updates from professional care providers to family members of people in eldercare and child care centers.


Ms. Newrai demonstrated her product to give investors a better picture of the business but did it in a way that did not put her at the mercy of factors beyond her control. “The Wi-Fi can be unavailable or other some technical problem pops up,” she said, so she embeds a video in the slide presentation instead of showing off the real product. Or, she uses a series of screen shots to demonstrate how something would work. And she also brings a printout as a backup.


VET YOUR INVESTORS


Ms. Newrai says she researches potential investors before she meets with them. Have they invested in this industry before? If not, she prepares to go into more detail. What value might they bring along with their money? Perhaps they have technical knowledge, connections or advice. The investors’ goals are also important. “If an investor is looking for a certain return by a certain date, but you are in growth mode and want to reinvest all your profits,” she said, “your values aren’t aligned.”


Ms. Newrai tries to contact other companies the investors have financed to ask how the partnership is going, how the investors interact with the founder, and what their interests are. She also tries to meet potential investors before the official presentation. “You learn about their persona and can talk about why they are investing in a more informal way,” she said.


FRIENDS AND FAMILY


Five years ago, Ben Friedman and Brad Gillis approached people they knew to finance an organic sandwich shop, Homegrown, in Seattle. “Restaurants are the riskiest kind of start-up, so really the only people who would invest in us would be friends and family,” Mr. Friedman said.


It was important to lay out all of the financial risks and possibilities, he said, because he wanted investors to contribute to something they thought was a great opportunity — not just “because of our relationship.” He approached only people he believed could afford to lose the money they might invest.


Today, Homegrown is opening its fifth sandwich shop in the area, this one on the Amazon corporate campus, which the founders consider a perfect location because of its high volume of health-conscious and sustainability-minded workers. Mr. Friedman says he sends periodic e-mails on how the business is doing, in part to separate the friend and family time from the investor-briefing time. “If you are direct and communicative throughout the year,” he said, “then your friends and family will be less likely to dig into details in social settings.”



Author: JULIE WEED Publisher: NY Times URL: http://www.nytimes.com/2013/10/17/business/smallbusiness/fine-points-of-making-pitches-to-investors.html?_r=0

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