Investor Pitch - Explained
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What is an Investor Pitch?
The business presentation is the formal presentation of your business to potential investors. It includes the business plan, the presentation materials, and the verbal pitch delivered to the investor. You may here the overall presentation referred to as the business pitch. In reality, the business pitch is just a part or portion of the presentation. While the business plan lays out the business and its intentions, the business pitch and accompanying material translate of the plan into an easily communicated message.
Next Article: Business Presentation Components Back to: ENTREPRENEURSHIP
The primary purpose of the business presentation is to attract interest in your business from potential lenders. Entrepreneurs seeking capital from investors will generally follow the process of contacting the investors, providing a complete business plan, and then waiting for an invitation to pitch the plan to the investor. If you are invited to present your business plan, your business pitch is the method by which you sell your business plan to the investor. Just like a situation where you apply for a job, you first submit your resume. If you are invited for an interview, you practice your interview techniques in order to sell yourself to the employer.
Investors Require Presentations
The above scenario is a generalized model for when the business presentation is necessary and relevant. In todays entrepreneurial environment, the business presentation has more relevance than ever. The entrepreneur may use the business pitch to test the business concept or try to attract investors at a business plan competition. These competitions are a great place to find investors, potentially win money from the competition, or to try and recruit talented individuals to join the business team.
Useful for the Entrepreneur(s)
The business presentation also helps the entrepreneur to develop their elevator pitch. The elevator pitch is the two-minute summation of your business idea that you would provide to someone interested in your business. It is called the elevator pitch because it should be concise, yet thorough, summation of your business that is short enough to happen during an elevator ride from the floor to the penthouse. Investors today are inundated with business plans and entrepreneurs seeking investment. It is not easy to grab the attention of these investors with a large, bulky business plan. Taking advantage of the ability to concisely deliver your business concept, product/service, and value proposition in an elevator pitch can be the key to being invited for a more formal and developed investor pitch.
In summary, the business pitch is extremely relevant and an important part of developing a business plan. Below we provide guidance in preparing the entire investor presentation.
Business Presentation Components
- The Business Plan - In the business plan section we talked about the various purposes of the business plan. Refer back to that section for guidance on preparing the business plan for investors. The important thing to remember is to format the business plan to appeal to specific investor interests. Particularly, you should spend a great deal of time on the executive summary. This may be the portion where an investor spends the most time reading. Further, you will need to include information about the financials and the underlying assumptions. Investors are interested in scalable businesses that have the possibility of delivering a desired return on investment. You financials should demonstrate this ability and your assumptions should back up these claims.
- The Investor Presentation Deck - The investor presentation deck generally consists of a powerpoint or similar presentation. The information included on the slides should serve to answer an important question or provide some amount of critical information to the investor. You should not attempt to recite the entire business plan within the investor presentation
- The Pitch - The investor pitch is delivering the presentation to the investors. Pitching is a form of public speaking and can take a variety of styles. Most importantly, you want to demonstrate enthusiasm, competence, and clarity when delivering the presentation material.
Below are information and tips about what should go into the business presentation material and additional advice on delivering that material. We will use the phase business presentation to collectively refer to the presentation material and the investor pitch.
The Presentation Format
One of the most famous of whom is Guy Kawasaki, a serial entrepreneur and angel investor. In his book, Art of the Start, Guy proposes the 10-20-30 rule for investor presentations. That is, the presentation should consist of 10 slides, presented for 20 minutes, with no smaller than size 30 font. This is a good guideline for your presentation and presents some important concepts about presenting.
- Number of slides - You want to keep the number of slides you use to a minimum. As when you are going through prototypes to arrive at the minimum viable product, here you are trying to use the least amount of material necessary to present the relevant information. Given the short time frame for delivering the business presentation, presentations are normally limited to 15 or less slides. Several famous entrepreneurs and investors propose standard presentation formats that consist of 10-15 slides that you can easily locate with a simple google search.
- Length of the presentation - Most business presentations are less than 20 minutes. Like children watching cartoons, investors have short attention spans for hearing about individuals business ideas. The investor will generally form a firm opinion of the business within the first few minutes of the presentation. Unfortunately, investors rarely make decisions on whether to invest in a business at the time of the presentation. If the investor is interested, then he or she will follow on with an investor-entrepreneur meeting to further discuss the opportunity. If this conversation is fruitful, it can turn into preliminary bargaining and a period of due diligence where the investor inspect various aspects of the business operations and finances.
- Information on the Slides - Each slide should contain as few words as possible. That is, the slides should provide a cue for delivering the necessary information. Dont depend on the slide to deliver the information. It is the job of the presenter to deliver the information. The slides should reinforce the information and should simply demonstrate points covered in the verbal delivery. For example, you may tell the investors that the market size is $400 million per year, there are 20 million individual purchasers who make an average of 2.5 purchases per year, at an average price is $8 per product. Well, then your slide may contain simply contain the following information:
20 million x 2.5 x $8 = $400 M (per year)
As you can see, a slide with only this information provides a cue so that you can explain the size of the market, broken down by the number of purchaser, the number of purchases per customer, and the average price of the products purchased. You can now explain verbally how you arrived at this information.
Your business presentation will likely be in slide format, with content (information, statistics, pictures, videos, and other graphics interspersed). Below we break down the individual content that may be relevant and necessary in your investor presentation.
Slide 1: Company Logo
Slide 2: The Business Team
Slide 3: Problem or Need
Slide 4: Your Solution
Slide 5: The Market
Slide 6: Business Model
Slide 7: Your Advantage
Slide 8: Competition
Slide 9: Marketing & Sales Plan
Slide 10: Financial Forecast
Slide 11: Milestones and Funding
Slide 12: Capital and Valuation
Slide 13: Questions
Slide 1: Company Logo
You want to make your introductory slide appear very professional. You will include your business name and logo. A business logo represents your overall product and brand in a single glance. It should give your business a professional and memorable image. Think of the business pitch as selling your business or idea to the investors. You want to start by introducing investors to the brand that you hope to build around your business.
Creating a Logo
I recommend hiring or contracting with a graphic designer with experience to help you build a logo. There are lots of websites that help you locate designers and allow you to review their work. An increasingly popular option is crowdsourcing the design of your logo, website, or other graphic material. A leading crowdsourcing website is 99designs.com. Basically, you post an amount of money that you are willing to pay for a design. Designers compete to produce a logo that you like. You provide feedback along the way to help guide the designers. In the end, you choose the design that you like and that designer receives all of the money. Web services like this allow you to contract a designer at a very reasonable price. Another option is that you may be able to find talented designers at local colleges that will work for reasonable price.
Slide 2: The Business Team
I strongly recommend using the second slide to introduce your business team. Investors are curious as to the background, skills, and qualifications of the business members. Remember, investors invest in people as much as businesses. This is your opportunity to demonstrate you personality and the drive that you have to make the business a success.
Include 3rd Party Relationships
You may also wish to list and give the background of those individuals with whom you have a close relationship or provide support to your business. Many businesses form an informal board of advisors very early in the business. These individuals are generally knowledgeable and have strong business credentials. Naming these individuals as advisors to your business allows you to benefit from their personal brand. You may also wish to name your professional help if you believe it brings credibility to your business. For example, you make list your accounting, attorney, engineer, designer, business consultant, etc.
Slide 3: Problem or Need
Now you need to introduce the investor to the problem you are solving. You cannot assume that that the investor will understand the need or consumer demand for your product or service. It may seem obvious to you, but you are biased from having worked on the product or service for so long. Remember, each potential customer segment sees things a bit differently. An investor is no different.
Make it Meaningful
You need to demonstrate this need in a meaningful and memorable way. I recommend formulating a story to demonstrate the consumers need or want. If you are solving a consumer problem then think of a powerful story to tell about the problem that the customer encounters and how it affects his or her life. This makes the problem or scenario personal and more compelling to the listener.
Reference Multiple Customer Segments (If Applicable)
When you see that the investor understands the issue that you are addressing, you can quickly expand and show how this problem pertains to various types of customers. For example, this issue may present itself in a slightly different problem or to a different degree for different customer segments. Remember, you want to keep the words and information on the slide to a minimum. You should use a few key words or figures from your story to demonstrate the problem. You may be able to include a picture or graphic that tells the story better than words. You may also want to include a graphic or numbers to demonstrate the various customer segments that your product or service addresses.
Slide 4: Your Solution
Once you have laid out the problem (need or want) and how it affects different types of people, you have to tell the investor how you are going to address the issue with your product or service. Now is the time to be a salesperson. Do not be overly dramatic, but you should create a sense of anticipation or excitement as you reveal your product or service. Remember the famous scene where Steven Jobs introduces the MacBook Air by pulling it from a manila envelope.
How Does it Work?
Once you have introduced the product/service, you need to explain how it works. This is where a product or service demo or video of your product or service can be very useful. In doing so, you are elaborating on the value proposition for the customer. Try to demonstrate the anticipated reaction of your customer segments to the product. This will allow you to show the level of priority that the customer has to satisfy their need or want. The level of priority correlates with the strength of demand that the customer has for the product or service.
Slide 5: The Market
At this point the investor should fully understand what your product does and how it meets the needs or wants of the customer or customer segments. The next question in the mind of the investor is whether this business scalable. That is, does the business have the potential to grow sufficiently to create the investors desired type and amount of value. Remember, most investors lose money or break even on 9 out of 10 businesses in which they invest. Statistically, they depend upon a single business out of 10 investments to produce sufficient profit that all of their investments collectively are profitable. So, the investor needs to know if you business has enough potential customers and the ability to generate sufficient value by selling to those customers.
Market Size and Segments
In order to assess scalability the investor needs to know the size of the market. The market size is measured in two ways: 1) the number of customers and 2) total value of sales in the relevant market or industry. Refer back to the Feasibility Study and Market Research chapters for a review of how to estimate the market size. As you detail the number of customers and total market value, you should explain the different customer segments that exist within the market. Who are the customers in each segment and how large is each segment. Take the time to explain what are the defining characteristics of customers in each segment. That is, what attribute or characteristic makes the grouping of customers similar in their orientation to your product or service? This is important because each customer segment will potentially have a different reaction to a product or service.
Priority & Price
Also, the priority level will differ between the segments, meaning that some segments will require more marketing to convert the members into paying customers. Lastly, each segment may be willing to pay a different price. Refer back to the Feasibility Study chapter for information and how to take a weighted average across segments to calculate the average price per sale or rate per hour of service. Understanding the size and demographics of a customer segment will allow the investor to assess the potential revenue and expense associated with acquiring a customer in that segment.
Secondary Market Opportunities
The last thing that you should include on the Market slide is an explanation of any secondary opportunities that exist for the product. In many cases a particular product or service will allow the business to gain value in other ways. For example, sales of one type of product may allow for strategic partnerships with complementary businesses. Another example would be where your product or service facilitates the growth of another part of the business. If such a situation exists you should make it known to the potential investor.
Keep it Simple
As you can see, you will have to relay a great deal of information to the investor in this portion of the presentation. The temptation is to fill the slide with lots of information. As daunting as summarizing all of this information may seem, it is even more daunting to discern this information from a slide filled with statistics. As stated earlier, I recommend using no more than 5 or 6 words (perhaps accompanied by images) to cue the delivery of the information. For example, your slide could contain the following words:
4 Segments = 2M persons = $16M (annual transactions)
Survivalists - Hunters - Fishermen (Fresh, Fly, Sea)
Accessories - Government Contracts
As you can see, the market size, segments, and secondary opportunities are laid out in a clean symmetrical format. If your cause each line to appear in the slide as you are explaining the market size, segments, and secondary opportunities, then it will create a memorable impression for the investor. Further, when all the information is on the slide the investor has a holistic view of the market opportunity.
Slide 6: Business Model
Recall, the business model is a depiction of how the various pieces of your business come together to bring about the exchange of value between your business and the customer. For more information, refer back to the Business Model chapter for information on the purpose and use of the business model.
Why Investors Care
The business model is important to investors because they want to know how you are going to make money. That is, exactly how the exchange of value with customers takes place. For example, you may sell your product wholesale to customers, through a chain of retail outlets, or through your website. All of these are different business models. Say you run a content-based website. You may charge for the content through a subscription fee. In the alternative, you may give away the content for free and sell premium services to free users of your information. A third model would be to give away content for free, but sell ad space to advertisers on your website. In this last scenario you know have 2 customer segments. The users of your information and the purchasers of ad space.
Include the Most Important Business Model Information
The above examples help to demonstrate the variety of business models that exist. Each model has a different manner of collecting revenue and exchanging value with customers. There are various other portions applicable to the business model, such as: Key Partners, Value Proposition, etc. All of these pieces of the business model are relevant, but the most important thing to investors at this point is how you are going to make money. Also, early in your business, you may not have developed aspects of a typical business model, such as key partnerships. To reduce the information down to the most important aspects, think about your business and ask yourself the following questions:
- How do you make money?
- Who pays and how?
- What is the price?
- How did you determine it?
- What are the costs?
- How will I deliver the value to customers?
At a bare minimum, you will want to explain all of these questions when presenting your business model.
Why Will This Business Model Work
You will also want to mention your reasoning or justification for choosing this model. Explain why this model is superior to other potential models. Compare the business model to models used by competitors and explain how similar business models have been successful in this and other industries. As we discussed in the Business Team section, you want to associate your business (and business model) with prior success.
Keep it Simple (Use a Chart)
Now, you have to arrange information on the slide to provide information to investors without overwhelming them with information. In this situation I recommend using a flow-chart or graphic representation. The flow chart can demonstrate the operational phases and costs of each phase as a percentage of the product. It can branch out do the different customer segments and show the applicable price. Here is an example of such a flow chart. If you feel comfortable doing so, you may incorporate portions of the business model canvas discussed in the Business Model chapter. Be careful simply plugging the business model canvas into a slide. This can have the effect of overloading the investor with information. Instead, choose a simple tool that can encapsulate all of the necessary information within a concise framework. Remember, the slide does not have tell all of the applicable information, it simply has to provide the greater framework and cue your verbal explanation of the matter.
Here is a simple example of how you demonstrate your business model to the investor.
The above graphic uses simple drawings to show how all of the important pieces of the business come together to provide value to the customer. With this graphic you can easily walk the investor through your model. I do recommend placing specifics wherever possible in the model. For example, in the revenue flows, provide a % or total dollar value.
Slide 7: Your Advantage
The investor now understands your team, the value proposition, the market, and your business model. Now she needs to understand how or what allows you to carry out plans effectively. That is, what advantages do you have that allow you execute your business model effectively. This section corresponds closely with the concept of competitive advantage. Is there anything that allows you to beat out competitors other competitors in the field or those who may enter the market after you.
What Is the Best Advantage?
The clearest form of competitive advantage is ownership of intellectual property rights. Angel investors will quickly ask what type of protections exists for a product or service design. A utility patent, protection on the process used or manufactured good, allows you to exclude others from imitating your process or duplicating your good. Note, this doesnt stop alternative methods of producing the good or even innovations that improve upon your product, but it does provide a recognized form of protection against competition.
Other Types of Advantages
Other forms of competitive advantage (though often temporary) regard the existence of partnerships with key players in the market. If you have a distribution contract with Wal-Mart then you have an extremely strong advantage against competitors or new entrants. Another example of a competitive advantage is any unique skill or ability that your team or business possesses. If you have a computer engineer on your team who is at the forefront of your type of products design, then you could have an identifiable advantage. Dont be afraid to include any aspect of your business that you believe will provide an advantage in carrying on business within the market.
Slide 8: Competition
You have explained how you are going to exchange value with customers and why you will be successful at it. However, savvy investors know that even superior products and services can lose in heavily competitive markets. For example, larger competitors can lower prices and force smaller competitors with thinner profit margins out of business. With this in mind, you need to explain the competitive landscape to the investor.
What are the Competitive Forces?
In this section you will address the major competitive forces in the industry. Start by acknowledging the competition that exists in the industry. Make reference to the largest competitors. If you dont have any identifiable, direct competitors, then focus on the substitute products in the market and the threat of new competitors entering the market. In doing so, mention the existing barriers to entering the market. Explain why these barriers make it difficult to enter and how you are able to overcome these barriers where others are not. Other competitive factors include the level of buyer or supplier strength. A disproportionate amount of strength among either group can make the landscape less favorable and more competitive. Also, address whether there are any on-going competitive rivalries relevant to the market? For additional information on describing the competitive landscape, refer back to the Strategic Analysis chapter.
Keep it Simple
When laying out this information in the slide, be a short and direct as possible. For example, you may use the logo of competitors, rather than their names. Logos do a better job of grabbing investor attention than written words.
Slide 9: Marketing & Sales Plan
This slide concerns how you are going to deliver information about your product or service and, later, how you will actually transmit that product or service to the customer. Take a look at the Marketing and Sales material for a refresher on the type of information that an entrepreneur considers in developing a marketing plan. You dont need to recite all of the information in the marketing section. Rather you should focus on your overall marketing strategy and the intended action plan. For example, do you plan to be a low-cost, high volume seller or a high price, high margin seller? These are just two examples of strategies you could employ.
How You Will Implement the Strategy
For whatever strategy you employ, you will need to present the tools you plan to employ in undertaking the marketing strategy. You should also have a rough estimate of how much you plan to spend on marketing efforts. After outlining the marketing strategy and action plan, you need to state the intended methods of sales distribution. Any distribution method should have a projected sales cycle, or time period from when the product or service is ordered into it is delivered and payment made. If you have a complex distribution system then you may want to have separate marketing an sales slides. For example, if you sell through multiple channels that are not similar in nature, you should separate the slides.
Your presentation of this slide should answer the following questions:
- What marketing strategy do you plan to employ? (I.e., what do you want your brand image to be?)
- Why do you believe this strategy fits your business model?
- What tools will you use to make the customer aware of your product or service?
- What distribution channel(s) will you use to move your product or service?
- What is the projected sales cycle?
Keep It Simple
Again, this is a lot of information to fit into a small slide and very short time period. Do not try to fit lots of words on the slide. Just use single words that represent your intended course of action. For example:
Low-Cost Seller = Fast Market Penetration
20% Traditional - 80% SEC & Social Media
Big Box Retail = 14 Day Sales Cycle
These three lines provide a sufficient cue to answer all of the above questions. This is obviously not the only or best way to present the information. Your slides do not have to be plain and boring. You can be creative in how you present your information. The key is to capture the investors attention and invoke curiosity. You will answer his or her questions as they arise. Dont try to fit everything into the slides.
Slide 10: Financial Forecast
The financial forecast is a snapshot of the most important aspects of the financial statements. Take a look back at the Financial Projections material to refresh yourself on the content of the financial projections. The main information that you should show in the financial projections are are follows:
- Revenue assumptions (Sales Volume and Average Price)
- Cost Assumptions (Total fixed costs and Variable Costs as a percentage of sales)
- Startup Costs
- End of your Net Profit/Loss for 12 months, Year 2, and Year 3
- Break-even Analysis
The above information will tell the investor about the use of cash and the expected revenues that will result from the expenditure of money. This is the one slide where you may include a complicated slide. You may want to take a snapshot of select portions of the income statement. This will show allow the investor to get a holistic view of the potential revenue production at various points in the business growth cycle.
Too much information can be overwhelming, while too little information can leave a customer or investor uncertain. Generally, it is a safe bet to use the most commonly understood and expected financial calculations, such as the Return on Investment (ROI), PayBack period, Cost-Benefit Analysis, and Profit Margin.
Slide 11: Milestones and Funding
This slide concerns the funding needs and the major events or milestones in the business. You will allocate available funds differently depending on the relevant stage of business development. Generally, a business will establish numerous milestones to help measure the progress of the business.
Create a Timeline
I recommend developing a projected timeline with your major milestones identified at various points. It can be helpful to estimate the expenditure of funds necessary to achieve each milestone. You want the investor to understand your major milestones, as this will allow him or her to understand where you are in your business development. Further, the investor will be curious as to how much money it is going to cost to reach the applicable milestone. You will discuss the issue of later capital needs and dilution on the following slide. You want the investor to understand how you plan to use available funds before ask for a particular amount of investment.
Stages on the Timeline
When constructing your timeline, common milestones include: prototype development, secure intellectual property, product launch, achieve positive revenue, break-even point, growth phase (various growth metrics - revenue, volume, number of customers, market penetration, etc.) and exit.
Slide 12: Capital and Valuation
This slide presents your request for capital and proposed valuation of the business. In the Financial Projection chapter we explained the different methods for valuing the business. You will need to propose an anticipated value for your business when asking investors to purchase equity. (Note: Some investors say that the entrepreneur should not state the valuation, as projections are often inflated and valuation is the job of the investor.)
Presenting the Valuation
The business valuation is primarily drawn from the expected revenue of the business at the time of exit. Your slides should provide the following information about your businesses revenue and valuation:
- Projected Revenue
- Industry/Transaction Comps
- Compare against DCF
- Ask for the Money
The projected revenue should mirror the information (particularly the revenue assumptions) stated in the financial projections slide. For example:
$20 x 100K persons (.5% of market) = $2M (Revenue at Year 5)
After stating your projected revenue at the time of exit, you should state a proposed value of your business. The most common method is to identify comparable valuations for similar deal sizes (similar revenue) or for similar businesses within your area (scaled up or down to fit your revenue projections). The discounted cash flow method is the least used method by angel investors, but is the dominant method among Venture Capitalists. If you are seeking early stage money, then it will likely be from an angel investor. If, later in the development of the business, you seek venture capital funding, you should rely primarily on the discounted cash flow method.
Example of Valuation Calculation
In the scenario above, you are projecting revenue of $2 million at year 5. If your business has a valuation multiple of 5x (5 times) earnings, then the value of the business at the time of exit will be $10 million. You are asking for $250,000 worth of equity investment from the angel investor. The investor will want to receive anywhere from 10x to 30x the amount of money invested at the time of exit. Lets say, the investor is intent upon receiving 20x money invested. This means that the investor will need to receive $5 million at the time of exit. This means the investor will want 50% of your business for this type of investment. This means that the investor assumes that the business has a post-money valuation of $500,000 and and Pre-money valuation of $250,000.
$2M x 5 = $10M (at exit)
Required Capital = $250K
Investor Return = 20x or $5M
$5M / $10M = 50% of the Business
Pre-money = $250K, Post-Money = $500K
Now, if your financial projections and timeline indicate that you can achieve your business milestones without the need of more outside cash, then you can deduce the investors percentage as stated above.
In many cases the investor will assume that you will have to raise more equity financing at later points in the business. The issuing of more shares in these later rounds will dilute the original shares of the investor. In this case, the investor will want certain protections in the equity purchase agreement to protect him or her against dilution. However, even with these protective provision in place, the investor will still face the risk of dilution caused by overbearing later investors. The later investors will sometimes withhold financing unless the angel agrees to be diluted. So, the initial valuation will often require adjustment in the percentage of equity purchased to protect the investors interest.
Slide 13: Questions
The last slide should ask for investor questions. Its not uncommon for questions to last as long or longer than the presentation. If possible, you should also highlight some of the key issues addressed in the previous slides. This helps summarize the presentation for the investor. If you do so, make certain to restate in a convincing manner the main reasons why the investors should invest in your business.
Innovative Product in Scalable Market
$250K = 50% = $5M at Exit
Now that you have the content down, lets take a look at some style tips.
Presentation Style Guide
Here are some additional strategic and stylistic advice to remember when creating your slide deck:
- The material should be attractive
- Tell the big picture, but know the details
- You are selling, the investor is buying. Buying is emotional - money is not the #1 issue.
- No Jargon, Acronyms, Be Specific, Mention Partners and Key customers.
- Lay the background before introducing the product - assume investors arent the customer. (Tell a story about a real person)
- Dont use top-down marketing; rather use bottom-up.
- You need a clear economic model (not complex) that shows what costs are and what your customers will pay.
- How will you make your brand stand out to customers?
- Point out your strengths and opponent weaknesses - show you know how to exploit them.
- Develop a marketing plan that involves the praise of early adopters.
- Be honest about your numbers, investors understand when they are hearing spin.