Shortly after my college graduation, a few friends and I started a new media company. Within a few weeks we fleshed out the concept, wrote a business plan and set out to seek financing. With a little hustle, I managed to get us a meeting with a well-known investment firm to discuss the opportunity. Even though our business had yet to bring in a single dollar, and none of us had ever been the CEO of coffee shop let alone a multi-million dollar enterprise, we were all confident that we had a sure thing on our hands. After all, our financial projections forecasted gross revenues of $200 million. What investor could say no to that?
We'd be rich. All we needed to do was raise a small amount of capital--$15 million.
I remember thinking, "How hard could it be?" We were obviously, naïve, foolish and delusional.
There was one small problem with our plan. None of us had any idea how to pitch an investor. So I did what any clueless entrepreneurial upstart would do: Google searched "how to pitch an investor".
Nothing that I read online could have prepared me for what was to come. We would quickly find out that our presentation was doomed before we ever set foot into the meeting. In reality, it was doomed before we started writing the business plan.
At the beginning of the meeting one of the investors asked me to hand him a one-page executive summary review. I hadn't prepared a summary, so I handed him the first 11 pages out of the binder encasing my 95-page business plan. Strike one.
Less than four slides into my 32-slide presentation, the second investor interrupted me and said, "OK. Stop. I get it. You definitely don't need $15 million."
Defending our business plan, I overconfidently replied: "It can't be done for less."
"Really? It can't be done, huh?" he responded with a smirk masking a hint of laughter. Strike two.
Both of the investors then proceeded to hit us with a barrage of questions:
"How much money have you personally put into your business? Anywhere near $15 million?"
"Why should I pay a bunch of twenty-somethings with no track record $100,000 executive salaries?"
"How much revenue has the business produced to date?"
"Why should I give you $15 million when the company hasn't even made $15?"
"How can you possibly substantiate gross revenues of $200 million in year three?"
"Why are you trying to produce, market and distribute 10 products at the same time before you see if a single one sells at all?"
The questions went on and on. None of our answers were favorable. Strike three.
As you might have guessed, I didn't walk out of that meeting with a $15 million check. I later realized, however, that this was one of the greatest educational experiences of my young career. I learned more about real-world fundraising in 30 minutes than many entrepreneurs learn in a lifetime. To this day, whenever I pitch investors for capital, I always remember these six hard-learned lessons:
- Less is always more.
An elevator pitch is vital. Verbose presentations and lengthy explanations will not impress investors, and most likely will turn them off. Present your business in a manner that's short, sweet and to the point. Investors need to be confident that your business will attract and retain customers. If they don't grasp your concept in a short time span, they may presume that customers won't understand it either.
- Never hypothesize. Execute, execute, execute.
Inspire confidence with facts, not fiction. Most investors seek out low-risk businesses with proven managers that are as close to guarantees as possible. A company with cash flow, a track record and real-world experience has a better chance of getting investors than a business plan forecasting large returns. Find ways to test your business's viability on a shoestring budget, and turn your idea into a functional business before you seek investment.
- Leave the hockey sticks on the ice.
Excite investors about your big picture, but be reasonable and responsible. Avoid hockey stick projections. Respectable investors will not take you seriously if you present them with nonsensical financial graphs that claim your company's revenues will grow from $100,000 to $50 million in three years. Show investors that you have a grasp on reality with three versions of financial projections: best case, moderate case and worst case. Base each of these models on facts, past and present performance data, industry and competitor analyses and a series of well-thought-out, defendable assumptions.
- Learn to love discount stores.
Being cheap is chic. In an age where spending is out of control, you'll need to prove that you are a fiscally responsible manager who knows how to get the most out of a buck. Give yourself wiggle room in your operations and marketing budgets, but avoid being excessive. Never ask for a large salary or big-budget perks. Investors want you to be in a position where everything is on the line.
- Rome wasn't built in a day. Your business won't be either.
Investors are wary of funding over-eager businesses that seem destined to bite off more than they can chew. Before asking for millions of dollars to fund 50 divisions and hundreds of product lines, prove how well you can create, manage and fulfill demand for a single product. Demonstrate that your business can crawl before you say it can walk. Perfect your marketing tactics, sales strategies and operational procedures. Investors appreciate companies with sustainable step-and-repeat business models that are poised for exponential growth. Remember, even Google's success is based on a single product.
- Choose not to be the smartest person in the room.
Know what you know, know what you don't know and find the people who know what you don't know. Build a team of credible experts. The smartest leaders in the world are those who surround themselves with smarter people. Investors are funding a management team as much as they are investing in a great business concept.
Scott Gerber is the founder of Sizzle It!, a New York-based sizzle reel production company specializing in promotional videos for PR and marketing professionals, and the Young Entrepreneur Council. He is a serial entrepreneur, angel investor, columnist, public speaker and author of Never Get a "Real" Job: How To Dump Your Boss, Build a Business and Not Go Broke (Wiley, 2010).