What do you need to convince investors of?

Startup fundraising is a super broad topic, which is impossible to cover within any reasonable number of words. So, my goal here is to give you a couple of practical takeaways for your fundraising pitch.

Step 0 – mental warm up

First job – pull yourself out of day-to-day tasks. Yes, they are the scary mountains that keep you awake at night. But many of them are totally meaningless to people who see your idea for the first time. They are light years behind you in the understanding of your segment, proposition, features, etc. And some of them are really comparing apples and oranges (“I invest in IT and biotech”). Your job is not to communicate everything – it is to present a convincing-looking apple or orange in an understandable way. Try to step two levels up from what you normally do every day.

So, what do you need to convince investors of?

It’s very simple and boils down to two things:

• There is a big (ideally massive) opportunity in what you do
• Your team is positioned well (ideally uniquely) to grab this opportunity

That’s it. Send them the bank account number and, depending on a country, the money will arrive in 1-3 business days. That is - after you spend months trying to find the investors who understand you and then convincing them of these two things…

An important addition – before you can convince them, you need to learn to explain. And explain simply - they say “your grandmother should understand it”. In first meetings investors are notoriously short on time and have super fickle attention, so they are not so different from most grandmothers. OK, “grandmother” may be a bit of a stretch, but a “normal” friend or a sibling should be able to get it…

Opportunity

It used to be “we need a billion-dollar market”. These days many VCs treat single digit billion-dollar markets as chicken feed and want tens of billions, if not more. Most often you can’t change the market you are in. But, by reframing things you often can show much bigger numbers – and they would be true. One of my most memorable moments is when a team of very senior execs realised that their market size is not $3bn, but $800bn. What followed was a minute of silence with an almost audible sound of a penny dropping and a question “does anyone think that this is not true and we are not addressing this larger market?” Nope, nobody. They indeed were addressing a much larger market, but never framed it this way before. All of a sudden, they were working on a potentially much bigger company. I bet a thought of the value of their shares crossed a couple of minds at that moment as well…

Opportunity is not only about the size of your market. It also includes things like market trends, customer need, willingness and ability to pay, and whatever else makes sense. It’s a combination of these things that points to a simple truth – “there is a lot of money waiting to be made in this”.

We can grab it

While this point is conceptually as simple as they come, it can take any number of shapes.

One mandatory component is demonstrating that you, as a team, have what’s needed to execute on a plan, adjust it when required and ultimately get to a good result. This includes very obvious things such as experience, relevant expertise, knowledge of the market, ability to execute, your history, etc. To believe in success, one has to believe that the team can pull it off. “Class A team with class B technology will beat class B team with class A technology every time” is a common cliché. Mostly true.

In early stages you are unlikely to have a perfect team, but you should know what the gaps are and how you could plug them. That’s where having some advisors, current or potential board members, that have deeper expertise than you could be helpful. The message of this is two-fold: 1) we are benefiting from their expertise and 2) very credible people (e.g. execs from the industry with many years of experience who built big companies) believe in us. If you have some angel investors from this category – all the better. Many VC funds will make reference calls to these people to gauge how real their interest and involvement really are, so this has to be real. I’d also argue that it actually has to be real for your own benefit – there is no point surrounding yourself with ballast, especially at cost of equity, which is the most likely compensation in the earlier stages. Of course, sometimes you have to be creative in earlier stages and do what you need to do. But real is always better – you are, after all, building a company for yourself, not a beautiful front for investors.

Another common thing is to say “we have someone who will join when we raise the money”. Acceptable, but far from ideal in my view. “Why has this person not started doing something already, are they not enough of a believer?” is a question that begs to be asked. “This person is with us part time and will join full time after the round” sounds better to me if you go this route. Assuming they really do something…

And an obvious point - investors need to believe that you are the real thing. Most will want to see substance, not airwaves. They are buying the team as much as an idea, if not more. So, they may probe that you have done your research, understand the market you are in and have a plan. So, remember key facts and numbers, think of possible questions and do some Q&A, in your head, on paper, with your team, whichever way works for you. At the same time remember that definitions of “substance” and “airwaves” are different for different people. You can’t please everyone, some will not get it, others will fall for some semi-obvious nonsense.

Beyond the team this part of the story can consist of just about anything and is very specific to a particular company. Here you often hear about “competitive advantage” – if you had a dollar for every time you will be (or already have been) asked this question, your round would probably be half-filled. And they usually want it to be “unique” or “unfair”. Despite this looking as classical MBA speak, there is a point to it – and a very simple one. Rephrased “(unique/unfair) competitive advantage” means a plain “why you? why not others?”. Some popular answers include:

• IP (intellectual property). Very common and liked theme. There is a reason why deeptech made a comeback after many years of B2C internet domination. “This technology comes from 10 years of research by a world-leading expert in X in university Y” sounds good, no? In truth, most likely it is a good thing for a company that has exclusive access to it. IP comes with other challenges and doesn’t work everywhere, but often it’s a way to have an advantage
• Something unique or unusual (non-IP). A way of doing something, some assets, algorithms, data, know-how, etc. “We have been trying this for a while and by now know exactly how to do it and accumulated a zillion terabytes of data to build models on, here’s proof. Competition will need X years to catch up”. Also - not bad
• Insider market understanding. “We know the market as nobody else does. We know the issues, understand the customers and their needs, have relationships with buyers, know how to solve their pain points. Nobody/very few others do”. Essentially back to the unique way of doing things based on grey hair or insider information that in public markets may even be illegal, but in typical information asymmetry of private markets is a clear positive
• Execution. “We can execute better than the others and have a better plan”. Much less liked by many investors since it’s not “structurally unique”, i.e. can be replicated by others. I am not saying execution isn’t important – it is paramount and without it nothing will come into place, but as a sole competitive advantage it’s more challenging than some of the other things, especially in earlier stages. If that’s all you’ve got, maybe think of how you will execute differently/better than others, why it is a good thing and gives you the edge?
• Team. “We have a great team with all skills, knowledge, experience, etc needed”. In most cases not good enough. Believing that the team can do it is a necessary, but not a sufficient condition. It could be different if the team is unique and hard to replicate. “We came up with a practical application of relativity theory and have Albert Einstein full time as our Chief Scientific Officer” kind of thing is clearly different and would impress many… Just make sure your Albert Einstein can actually join calls and really is your CSO.
• Market position. This could be a good argument, but it depends. It’s very hard for startups to achieve dominant market positions in most existing markets or in markets with low barriers to entry. Even in many new markets it’s hard - that’s why most successful B2C startups needed to raise so much money. To win they need to buy market share and once they are in the top X, they are cruising amongst winners. From an early investor perspective, it’s a very expensive, dilutive and dangerous play. But some like it and this thesis works well in many later stage situations. On the flip side, many successful companies operating in new or changing markets managed to get to a dominant position while the market was small (and hence not interesting for the big players) – and then grew to behemoths with the expanding market. That’s one of the textbook ways to success.

Whatever it is – the story needs to stack up and not only do you need to believe it yourself, you need to be able to convince others. One CEO I know used to say “So far I haven’t found anyone who thought it was a bad idea, although I continue looking”. Nice to be building a company like this…

Who is the investment pitch for?

Having spent a part of my career as a VC, I know that industry from the inside and am fairly sceptical of it (with some exceptions, to be fair). I always say there is not much value in a fundraising process except for the cash, if it comes. But in truth, there is another aspect which is rather important – fundraising helps you to better understand and articulate what you do, why it’s interesting and sometimes rethink how you do it. And you also get a lot of feedback from people who see many companies. Of course, some of them have no clue, never had and never will, some feedback is nonsense in its purest form, some are simply using you for their own learning - but sometimes some golden nuggets of real value can surface. Plus, you develop a fluent autopilot for explaining your idea.

Therefore, working on your investment pitch is as much for your benefit as it is for investors and cash. It is a (well hidden) opportunity to strengthen your company while going through a myriad of useless meetings and the boredom of presenting the same slide deck for a hundredth time. Positive thinking through a nonsense process, eh?..

Checklist

• Does your story paint a big opportunity?
• Did you explain why your team/company is uniquely positioned to grab this opportunity?
• Optional: does the story seems to stack up to you? (Of course it does. But really – does it?)
• Did you test it on someone who hasn’t heard it before?
• Mandatory, step 1: do others understand your story?
• Mandatory, step 2: do others believe your story?
• Are you explicitly capturing and thinking about feedback from meetings?
• Bonus: have you received feedback from someone with experience in fundraising?