Setting the Hook
The elevator pitch (verbal) and the executive summary (written) are short summaries of your business model that act as the hook when you are fishing for investors (debt or equity). Tell them what they need to hear in a persuasive fashion. Set the hook early. Interested investors will ask for the details later.
• Good business model?* unique value proposition (what makes you special compared to the alternatives). Well-defined target customer (know the ideal customer and how and where to find them). There is always competition, other ways for customers to spend money. Know the competition and why you can win.
• Passion – Is the entrepreneur believable as a sales person? If you don’t believe in it, customers won’t. Don’t be boring. Enthusiasm and passion are essential for sales and necessary to pick yourself back up and keep going when obstacles arise. Investors like the never give up attitude or optimistic persistence. Passionate people figure out a way to get it done.
• Revenue potential – the potential revenue has to be significantly more than the current revenue. A lot of investors have specific goals – e.g., potential for at least $10 million in annual revenue. There has to be a pot of gold at the end of the rainbow, so sell the big opportunity, not just the conservative goal. Top line growth requires effective, planned marketing and market focus.
• Growth Potential. Growth is tied to revenue, but this is bottom line profit and enterprise value potential. Inflation will typically double revenue and profits and value in 8-10 years. Saying, “I’m going to take a $2M company and make it a $4M company in ten years,” doesn’t impress investors. They want to see a company that can really grow. For instance, “I will more than quadruple growth in value in less than five years.” So taking $4M company to a $16M in EBITDA (earnings before interest, taxes, depreciation and amortization) company in five years is interesting.
• Coachable? Investors want management that will listen and learn. Someone who rejects advice
won’t do. Investors expect to protect their money by “helping” the company with expert advice,
networking and more. An entrepreneur who won’t take coaching or advice increases risk from the
investor’s viewpoint and reduces the emotional/intellectual rewards of helping investors succeed.
• Fenced Market. What keeps competitors from entering once you prove there’s good money? Barriers to entry that keep other players from merely copying you are important. This may be regulatory barriers, intellectual property or simply great market knowledge and systems. A business that is too easy cannot sustain success because new competitors can just compete away the profits.
• Trustworthy. Perhaps self-obvious, but investors don’t want charlatans. Anything you can do to
convey you’re an honest, direct partner (and not just a player or big-talking promoter), the better. Consider a testimonial from a customer or partner – someone else saying good things about you.
• Experience. Do you have the right experience for the market and the business plan? Can you create the systems, recruit and manage talent necessary to grow? Do you know the customers? Do you understand the customers? Will customers take your call? How much of it have you already done, or done before? Experience goes to the question, “Why should I believe you can make these numbers come true?”
• Exit Plan. Generally in the Iowa market, it’s enough to show you know companies are built to sell.
If you can explain you know what generates enterprise value and that you want to get to a sale,
that’s enough. Investors make their money when you sell. That’s when the appreciation in value is
realized. Or you have to structure a deal to give the necessary rate of return for a specific investor.
Investors want out in some reasonable period of time, even if you stay in the company. You need to
know the growth path of companies within your industry and show you intend to follow the road
map of successful examples.
Bottom line. You have to sell the sexiness in the deal. Demonstrate there’s a big market with a real need and your ability to capture a big and rapidly growing share of the market.
You need a hook. The goal of the pitch is to set the hook and make them dig for the facts in the details of the business plan. You don’t have to tell them everything in the pitch. Tell just enough facts to pique their interest within an outline that makes them salivate over the potential.
*The bold words are based in part on a Babson College outline, “What investors look for in a pitch.” Explanations, order and wording are mine.
Daniel Pitts Winegarden, JD, Director Business Incubation and Acceleration Services John Pappajohn Entrepreneurial Center/ North Iowa Business Accelerator