What information do angel and venture capital investors look for when evaluating investment opportunities in emerging private companies?

If you are seeking investments in your start-up business, watch this recorded webinar on how to prepare an investor-grade presentation.

You will learn the foundations of a successful presentation and the key factors to address when presenting to potential private equity investors. Anchored by real-world examples, this webinar will equip you with tips on how to effectively communicate:

  • The market opportunity your venture is addressing;
  • Your business model; and
  • The potential upside for prospective investors

This webinar was delivered on March 25, 2010 by Marc Elrick, Principal Consultant, Critical Path Group for Industry Canada.

The recorded webinar material can be accessed here:

 

About the presenter

Marc Elrick is the founder of Critical Path Group and Executive Director of the annual Banff Venture Forum, Canada's largest financing forum for emerging high growth technology companies.  He has advised numerous entrepreneurs on developing professional business plans and investor presentations, and has delivered entrepreneur bootcamps designed to provide mentorship to entrepreneurs selected to present their businesses at leading investment forums.  

 

Summary of the Pitching to Investors: Creating & Delivering Your Investor Presentation Webinar

 

Problem or Market Need

 

  • It is critically important to clearly articulate your target customer market and to communicate a clear value proposition. It's from here that the most important work starts. You have to be able to answer the question, "who would find value in this?" The end users might be consumers, industry, educational institutions, or the public sector. The value proposition must address their specific needs and reflect their world view. Companies need to ask themselves:
    • Will my solution reduce costs? Will it improve efficiency?
    • Will it add value to what's already out there?
    • Will it serve as a replacement technology, or eliminate the need for something?
    • What is the potential market value of my solution to investors?

    This line of questioning also has to address the scalability of the target market. Will it be a family-owned business or a lifestyle business with limited growth? Or does the team have an appetite to think bigger-regional, national or global?
  • Make It Simple
    Your value proposition should be easy to understand. If you have a hard time describing the benefits of your product or service to potential users, they probably won't figure it out for themselves.
  • Market Segmentation
    When trying to answer the question of who would find the greatest value in your offering, it helps to simplify things by breaking the market down into components. There are two broad categories of customers who could buy your product or service: individuals and organizations. Each of these categories can be further broken down into smaller segments. This is called market segmentation-picking out the particular groups of people/organizations that benefit from your product or service, and selling to them.
    • Individuals can be segmented by geography, income, age, interests, gender, or nationality/ethnicity.
    • Organizations can be segmented by industry, size, function, level and type of individuals within the organization.

    Many segmentation schemes are combinations of the above. For example, a venture developing an innovative digital storage product decides to sell only to organizations, not individuals. It segments its potential market by size of organization, size of data storage requirements, and need for speed of retrieval. That leads to a focus on large financial institutions and large medical centers. Within those targeted organizations, the importance and cost of the purchase dictates that the venture focuses on selling only to "C-level" executives: the CEO, CTO, COO, CFO, etc. Finally, as the technology is very new, the venture team chooses to target the executives who are technology enthusiasts-people who love new technology for its own sake, and are often willing to look at it in preliminary form.

Opportunity Sizing

 

  • Even if your market opportunity is not obvious, you can assert the size of your opportunity on this slide. Sometimes you may need a slide to clarify the factors that define the size and scope of the opportunity, particularly if you are going after multiple market segments. There may be a unique market dynamic or emerging trend that requires explanation. Show that you really understand where your prospective customers are - from the ground up.
  • Define recent trends that validate the need for your solution, and in effect make it feasible. How are they currently addressed?
  • In order to validate your opportunity, you will need to undertake both primary and secondary research: 
    Primary Research
    • Primary research is more expensive than secondary research, but the results are more accurate and conclusive. Primary research helps you get up close with your prospective customers, finding out who they really are and what they really want. There are two broad categories of primary research: qualitative and quantitative.
    • While qualitative research isn't particularly useful for predicting sales, it is a very effective tool in getting to know your customer.
    • Quantitative research involves surveys of large numbers of people, and can be statistically validated. It is generally a better tool than qualitative research for predicting sales.
    • Above all, you need to keep a steady flow of data coming in to help you make decisions about next steps. The type of data you collect depends on exactly what you need to learn about the market. Market research is a necessary investment to validate and quantify the opportunity you have identified and are planning to execute against.

    Secondary Research
    Secondary research involves consulting published reports (existing information) to find out:

    • Who makes up your target market.
    • The needs of your market.
    • The size of the potential market. How does this market change and grow over time?

    The information needed to perform secondary research is easily available, and it's often free. The most accessible sources include:

    • Web-based directories and resources.
    • Back issues of magazines and newspapers.
    • Subscription based databases and information hubs such as those offered by Thompson Reuters.

    Secondary research can sometimes lead you to contradictory or inaccurate conclusions. It can be helpful, however, in forming a preliminary research strategy.

Solution: Product and Technology

 

  • After having identified the customer market, you need to identify and articulate the current problem it faces and consider why the problem persists. How acute is the "pain" that this problem causes?
  • Consider the features and benefits of your solution. How does this address (or ease) this market pain point? Be able to validate your claims and be explicit about how strongly your solution is differentiated from any incumbent solutions, or partial solutions.
  • Some guiding questions are:
    • How does your solution fit in the value chain or ecosystem of your target market?
    • Do you complement commonly used technologies, or do you displace them?
    • Do you change the way certain business processes get executed, or do you just do them the same way, but faster, better and cheaper?
    • Do you disrupt the current value chain, or do you fit into established channels?
    • Who exactly is the buyer, and is that person different than the user?
  • And above all else - make it clear that your solution is a "pain killer" and not just a "vitamin".

Intellectual Property (IP)

  • Patents
    When you patent a product or an idea, the government prohibits others from making your invention for up to twenty years. To get a patent, you have to file an application that describes your invention thoroughly, and explains why it should be considered novel. If the patent is granted, your invention is made public, so only the law prevents others from copying it. This reality means that patents may in fact not be appropriate as the backbone of your IP strategy.
  • Copyrights
    Copyrights protect written materials of all kinds, including software. They don't protect trade secrets. For example, if you publish information about your product, and the information that you publish is copyrighted, only the expression of the information, or the particular phrasing you choose, is protected - not the information itself.
  • Trademarks
    Trademarks are words or design elements, registered with the Canadian Patent and Trademark Office, which represent a company or product. They must be registered to be protected.
  • Trade secrets
    A company that uses trade secret protection has to make efforts to prevent disclosure of its important ideas. Once ideas have leaked, nothing will prevent other companies from using them. Coca-Cola is an example of a company that uses trade secrets rather than a patent to protect its secret formula. If the Coke formula had been patented, the information would have been made public, and the patent would have protected the product for only twenty years.

Business Model

 

  • The business model spells out how your company makes money by specifying where it is positioned in the value chain. It articulates the financial transactions needed for your venture to generate revenue. Period. Who is paying for your solution, how much are they paying, and how often are they paying? The most basic business model involves simply producing a product or service and selling it directly to customers. The company makes a profit if revenues are greater than production and business costs. The business model essentially converts innovation to tangible economic value for the business.
  • In its simplest form, how do you make money? Usually by selling something for a certain price to certain customers. Explain your pricing, your costs, and why you are going to be especially profitable. Make sure you understand the key assumptions underlying your planned success and be prepared to defend them. Knowing precisely how much it costs you to acquire a customer in comparison to how much you expect that customer to spend is crucial to your company's survival.
  • Business models have changed over time. Regardless, today's business models must still address cost structure, maximizing operational effectiveness, and business process reengineering. But now there tends to be a focus on how to build capabilities for faster growth, how to attract and retain the best people, how to develop leaders at all levels in the company, how to manage knowledge effectively, how to become a true learning organization, and how to become a more effective global corporation.
  • Investors want to know who is buying your product and why. They also want to understand the economics of the customer and how much they are worth. During your pitch, prospective investors will likely be thinking: what if they can't sustain the price point? What if it takes twice as long to make each sale? What if their costs don't decline over time? Some investors will want to test the depth of your understanding of your proposed business model. Be ready to articulate the sensitivity of your business model to variations in your core assumptions.
  • Consider infrastructure:
    • Key Resources: The resources necessary to create value for the customer.
    • Partner Network: The business alliances which complement other aspects of the business model.
  • Consider finances:
    • Cost Structure: The monetary consequences of the means employed in the business model.
    • Revenue Streams: The way a company makes money through any number of primary and secondary revenue flows.

Competition and Sustainable Advantage

 

  • Competition is a good thing - it forces you to perform at a high level, and sometimes it can even legitimize your product or technology, (like when IBM entered the PC market and made computers specifically for individual use). But you still want to beat the competition, and that becomes much easier when your product or solution is significantly better along an important performance dimension - and you can demonstrate it - or if you can solve a problem that the competition cannot. When you're clearly the best, you make it harder for the naysayers not to choose you, and easier for supporters to promote your product. For this to happen, your offering must be truly world class.
  • Who are your competitors? For some types of products, this question is relatively easy to answer. Maybe you're planning to do what someone else is already doing, but you're going to do it better. In some cases, however, it can be harder to name the competition, or to figure out what, specifically, will differentiate your business
  • Depending on how important the analysis of competitive players is in your market segment, you may need a matrix that provides a detailed list of competitors by category. It is important, however, that you do your homework on the competition, and that you don't misrepresent their strengths or their weaknesses. Brutal honesty is critical. Know the competition, but focus on the customer. You need to pay attention to the competition's successes without forgetting that it's the customer you're aiming to please.
  • If you're looking to sustain your competitive advantage in the market, you'll need to consider four criteria that determine your firm's competitive capabilities in the marketplace.
    1. Is your product/solution valued by others? (Do you enable a firm to devise strategies that improve efficiency or effectiveness?) Why/how are you different?
    2. Are the resources used to design your solution or create your product rare?
    3. Is your offering imitable? Can it be easily replicated?
    4. Are there any substitutes to your offering? (If a ready substitute can be found, then this condition is not met.)
  • Distribution
    • First, how will the product get to the end user? Second, consider selling costs. What will it cost you to get the product to the end user? Relevant questions include: What distribution channels will you use? What threats or opportunities does this proposition offer to the industry? Will the product use a technology similar to one already in existence, or will it replace current technologies?
    • Awareness of the market is crucial to new businesses that want to convince investors that they have an opportunity worth funding. The only way to gather this information is through thorough market research.

Sales, Marketing and Partnerships

 

  • The overall marketing strategy of an organization should focus on developing relationships with customers in order to better understand their needs, and to refine your offering to better meet those needs. The purpose of a marketing plan is to communicate a clear and consistent message about your firm, and to build brand equity by informing, persuading, and reminding customers (and potential customers) of the market solution you provide. Although it is not required in your initial investor presentation, prospective investors will ultimately want to know the details of your planned market development strategy. In order to withstand this kind of investor scrutiny, your team will be expected to have undertaken the following activities at a minimum:
    • Information Gathering: Research potential customers, their needs, and spending habits in order to understand what sort of product, service, or idea they wish to buy.
    • Evaluation of Organization Capabilities: Decide what your organization can produce relatively well, and what your organization is not capable of producing based on the organization's specific strengths and weaknesses.
    • Identify Market Opportunities: Research the current market for a product idea, and look for an opportunity; preferably one for which there is no incumbent competition or strong demand.
    • Set Objectives of Marketing Strategy: Decide what results need to be achieved in order to reach the organization's goals; such as a specific increase in sales, or net profits.
    • Formulate an Action Plan: List the specific steps the organization needs to take in order to implement the marketing plan, and assign the responsibilities to specific staff members.
    • Monitor & Evaluate: Study the marketing plan regularly, at least once per quarter, to track performance against set objectives.
  • Broad Techniques
    Are you well versed in describing your overall marketing and sales strategy?
    1. Niche Strategy: Find a niche of customers who are under-served by current offerings.
    2. Growth Strategy: Increase revenue from existing market niches and deliver better offerings to new target markets.
    3. Defensive Strategy: Maintain leadership position by cultivating brand loyalty. Mass distribution.
    4. Offensive Strategy: Adopt a policy of "destroyer" pricing to preempt the entry of new firms or drive away existing competitors.
  • Specific Techniques
    Are you well versed in describing the specific techniques that your team will use to execute its marketing and sales strategy?
    1. Market Penetration: Increase sales within the present market through a more aggressive marketing campaign.
    2. Market Development: Increase sales by selling present suite of products in new markets, possibly to satisfy new consumer needs or to newly identified market segments.
    3. Product Development: Offer new and/or improved products to the current market.
    4. Diversification: Move into multiple lines of a given product or service offering.

Management Team

 

  • Focus on a significant, relevant accomplishment for each person that identifies that person as a winner. In ten to fifteen seconds, you should be able to say three or four sentences about your CTO that says everything the investors want to know about him or her at that moment. The key objective is to make investors feel confident that there is a credible core group of talent that believes in the company and can execute the next set of milestones. One of those milestones may be filling out the team, and so it is important to convey that in addition to having strong domain knowledge, the initial team knows how to attract great talent. If there is a gap in the team, address it explicitly, before investors have to ask about it.
  • Your organization's team is the lifeblood of your venture. The strength of your team is perceived to be a "leading indicator" of the potential success of your venture. It is also a leading indicator of how long investors will have to wait for a liquidity event (financial exit opportunity). In short, people are everything.
  • A strong team is a diverse team that can agree upon group goals and objectives, and work together to accomplish them. If you are an ideas person with an eye on the big picture, fill out your team with detail-oriented people. If you're an expert on the technical aspects of your venture, find teammates with business experience.
  • Your leadership team must have all three of the following attributes: domain expertise, business acumen, and operational experience. This is often referred to as the talent triangle.
  • Leadership is critical. Someone has to make sure that the team maintains momentum and that milestones are hit. Figure out whether you're the best person for the top role, or whether someone else needs to take charge. The best entrepreneurs are comfortable making a lateral move at the appropriate juncture in their firm's evolution - usually when they have "outgrown their skill set". Remember that as long as you still have the title of "Founder" on your business card, you will enjoy recognition as such. Many highly successful entrepreneurs replaced themselves as CEO early in their respective ventures and migrated to a role best served by their personal talents - Chief Software Architect, Chief Operating Officer, VP Business Development, etc. Investors want to know that you will always put the company's interests ahead of your ego.

Financial Projections

 

  • The two previous slides above should come together neatly in your three-year financial projections. You should show the two or three key metrics that drive revenues, expenses and growth (such as customers, unit sales, new products, expansion sales, new markets), as well as the revenue, expense, profit, cash balance, and headcount lines. The most important thing to convey on this slide is that you really understand the economics and evolution of a growing, dynamic company, and that your vision is grounded in an understanding of practical reality.
  • Your financials should tell your story in numbers as clearly as you are telling your story in words. Investors are not focused on the precision of your numbers; they're focused on the coherence and integrity of your presentation and business plan.
  • In an investor presentation, you have limited time to sell your idea, let alone delve into the finances. In the context of a short presentation, there's only time to make a few high-level points with the financials. The time to impress with your spreadsheets and modeling is later; after you're finished with the overview. Note that you should have these as supplemental materials or as an appendix to a hard copy of your presentation. Consider these tips when creating the financial projections slide:
    1. Use a simple table. If necessary, show a graph.
    2. Make the font legible (sans-serif; not less than 18 pt for anything; 24 is better).
    3. Round to the nearest 1000, and add the legend "($000)".
    4. Show actual calendar years, not quarters and not "Year 1, Year 2".
    5. Use a horizontal table with years across the top row.
    6. Go out three to five full years in the future, but no more. Beyond that will likely be considered to be in the realm of fantasy.
    7. Don't label "actual," "estimated" (not 2008A, 2009E, 2010E).

Funding Requirements and Use of Funds

 

  • It should be clear from your financials what your capital requirements are. On this slide you should outline how you plan to take in funding - how big each round will be, and the timing of each. You should also map the funding against your key near-term and medium-term milestones. Specifically, you need to clearly communicate how $X will get you from Milestone A to Milestone B. You should also include your key achievements to date. These milestones should tie to the key metrics in your financial projections, and they should provide a clear, crisp picture of your product introduction and market expansion roadmap. In essence, this is your operating plan for the funds you are raising. Investors want to know that you are asking for the right amount of money to get the company to a meaningful milestone.
  • The funding requirements slide requires a bit of finesse as you are starting a set of discussions that could turn into negotiations if a potential investor turns into an actual investor. In this slide, a little background is helpful. Make sure you let your audience know who you have raised money from in the past and at what valuation. This is not "secret" information; be open and transparent. If you seed funded your company, that's a good story - make sure you talk about it. You should also talk about the structure of any prior formal investment by a third party: who, how much, when, format (common, preferred, convertible debt, etc).
  • It's important to get right to the punch line of this slide. You MUST be prepared to address the following (have data, be thoughtful, use a clear explanation):
    1. How much money would you like to raise?
    2. Why that amount? (What will it be spent on? How long will it last? What value will you create in your business using it?)
    3. Could you do what you need to do with less? What might you do with more?
    4. Are you actively working with anyone else on this round?
  • If you have raised money at a particular valuation in the past, that is your starting point…but in this current macro-economic environment previous valuations do not guarantee ANYTHING. It's important to understand that investors tend to model their business on investment exits, cash returned, and consequently ownership percentages in their portfolio companies at the time of exit.
  • You also need to consider your "fit" with the prospective investor.
    • How does your opportunity fit with the investor's portfolio and expertise?
    • What synergies (or competitive issues) exist with the investor's existing portfolio?

Call to Action, Contact Info, and Asking for Questions

 

  • Your key objective on this slide is to solidify the core value proposition of your company in words that are MEMORABLE and unique to your company. If the investor in the room has to give a short description of your company to others, these are the words you want used. This is a good place to reinforce your tagline, or mantra - the short phrase that captures the essence of your message to investors. A good approach to creating your summary slide is to imagine that this is the only slide you will ever be able to present. If you had to do your whole pitch in one slide (with 20 point font), this is that slide.
  • This should be a modified version of your elevator pitch. Tell your audience your mission, quickly describe the product or service offering, and if appropriate, tell them how much funding you need.