What should you not do during a funding pitch? We've heard our share of pitches from entrepreneurs looking to raise money for their startups. Sadly, the majority of fundraising pitches are a combination of a short story fantasy and a bad school project. Why do would-be entrepreneurs create a few slides, and then expect to start asking for money? Sadly, the pitch structure used by late-stage startups looking for venture capital funds is sometimes twisted beyond justification, to be used by pre-seed startups without revenue, product, or market validation. Though it's relatively easy to come up with an idea based on a perceived consumer need, it's not so easy to create the convincing metrics and facts that demonstrate why or how a startup will succeed. It is crucial to determine the following answers, yet they are often neglected in most pitches:
- How much will it cost to get a customer?
- How much will a product be sold for?
- When will the startup be profitable?
- What competitors are currently already serving the market
The sad truth is that most pitch decks contain more guesswork and fortune-telling than any investor could ever hope to see in their lifetimes. This entertainment is generally presented in the form of ridiculous financial models with exponential growth curves, sparse competitive landscape research, and fictitious revenue streams that are perversions of business reality. How to resolve this? Good old-fashioned honesty compensates for a lack of evidence and faulty or biased basic research.
Untested concepts do not provide a competitive advantage. Some founders, however, believe that they alone are destined to turn an idea into reality. A billion-dollar market may be exciting, but if an unproven and unbuilt concept is used to justify investment based on the market size or opportunity, it shows a lack of experience. Regardless of how few they may be, assumptions and facts should not be sugar-coated. An investor will quickly call the founder's bluff if they make a lot of assumptions during a pitch. Startup projections for growth should not exhibit exponential growth characteristics unless they are based on real metrics.
Pitches can get heated, and pride always creeps into the stakes when it shouldn't. Those who get defensive during their pitch are more likely to lack entrepreneurial experience or have developed few other business ideas in the past. Practical and experienced individuals would admit the flaws in their pitch, while also offering solutions. This provides the investor with the assurance that whatever the issue, it will be resolved before the cheque is cut. If you crack under the pressure of questioning, a bad concept won't sound any better. Individuals pitching should take the stance that the concept is not theirs, and they should not get married to the result. Provide facts, embellish achievements with excitement, and elaborate on problems with the same excitement.
Don’t ask for more finance than you need
Many founders have no idea how much it will cost to test a product, market, or business model. It shows poor planning if you don't know whether you need $25,000 or $250,000, but would be satisfied with anything in between. In spite of the apparent benefit of being oversubscribed, having extra cash to put away for a rainy day does little to maintain a lean organization and prevent dilution. The majority of expenses will likely be marketing and personnel/technical costs, but these are predictable, thus it is not necessary to raise a lot of money without knowing what you're going to spend it on. Web and mobile MVP (minimum viable product) startups can be bootstrapped with $10,000 to $25,000, with founders taking no salary. Using this amount should cover most, if not all, of the development costs for the website or mobile app, as well as allowing plenty of money for marketing. Founders can also avoid dilution by taking less investment. As an example, raising $25,000 on a $250,000 valuation (founders giving up 10% equity) may be more realistic, achievable, and favourable than raising $150,000 on a $600,000 valuation (founders giving up 25% equity). Also, a smaller initial seed investment can make it easier for the startup to increase its valuation for the next funding round - which again, can be more precise.
Don’t make promises
Investors have a difficult time swallowing statements such as "we will..." or "we are planning..." when hearing a pitch. While amateurs pitch on promise, more experienced entrepreneurs (those who are more investible) will state facts and provide personal observations that reinforce their justifications for securing funding. Both concept validation and quitting a full-time job after fundraising are selfish promises; the founder hopes the investor will bet on him/her before taking any risks, which means this would-be entrepreneur is probably not a real entrepreneur, and not worth investing in.
Don’t be a caricature of yourself
When entrepreneurs pitch, they tend to become someone else and use a different tone of voice, mannerisms, and personality. In an attempt to convince others that they are a worthy investment, many make claims that they think investors will want to hear. Often, after the pitch, the founder will revert back to their normal self. This contrast can appear disingenuous to investors. Investors expect you to act naturally, as you would during a casual conversation. Imagine you are pitching to friends and family, not to individuals who you are trying to impress. The ability to raise money is meaningless, but ego often gets in the way. When someone pitches poorly, raising money becomes more about the founder than about raising money for a viable business. The ultimate goal of fundraising should be to provide value to investors by returning a profit, not just to say "thank you" or "we tried".