At some point in the life of your business, you will likely need to get external funding. Depending on the size and scope of your enterprise, you might apply for a bank loan, seek grant opportunities or borrow from friends and family. In certain situations, you can even consider crowdfunding your idea, although many entrepreneurs underestimate the effort involved. One more fund option is to seek equity investment.
If you live in Malta, the notion of equity investment is probably new to you. Our readers in the rest of Europe and the US are probably more familiar. Although the country is lagging behind, it is becoming easier to tell investors about your business. This is, in part, thanks to the efforts made by organisations such as BAM and TAKEOFF.
No matter where you live, getting to pitch your business to an investor is a great achievement, and also a moment of great tension. You need to convince the individual or group within a couple of minutes, and the last thing you want to do is tell investors any of the following phrases.
1. “The market is [this] big and if we can only get [this] percentage…”
Wouldn’t it be great it if you lived in a fairy tale where dreams come true just by believing that they do? This is probably the only scenario where this phrase might work. In the real world, you need to be honest about the size of the market which you have direct links to. Moreover, you need to have a concrete business plan which outlines how much of the market you plan to seize and how and when you plan to seize it.
2. “I cannot pitch before you sign this NDA”
I honestly cannot think of a quicker way to be shown the door than this phrase. An investor is likely to receive hundreds of pitches a week and there is no way he or she is going to limit their investment opportunities due to an NDA. This doesn’t mean you need to divulge any intellectual property to the investor, especially during the pitch. All you need to tell investors is what your solution can do, and only speak about how it does it superficially.
3. “We haven’t really thought about an exit strategy”
With this phrase, you are essentially telling investors, “We have no idea how or when you’ll get a return on your investment”. If you’re looking for an equity investor then you must have a plan to eventually sell your company, either privately or publically. In rare cases, the investor might accept to retain part ownership in return for dividends, but this is rarely the case.
4. “There are no competitors in this market”
Unless you are creating something new, but I mean really new, then you’re wrong. Imagine your business developed a way to teleport individuals. Although innovative, transportation is hardly a new process. Competitors might be bullet trains or a hyperloop. Market research should help you find who your closest competitors are. If you are 100% convinced that your solution has no competition whatsoever, you might as well tell investors you are delusional or no one needs your solution.
5. “This will work, guaranteed!”
If you tell investors that your idea is guaranteed to succeed they will ask you why you haven’t taken out a loan and put everything you’ve gotten on the line. Even if you actually did that (please be cautious if you do) investors are still unlikely to believe you. The only thing you can guarantee is what has actually happened so far. For the future, you need to provide reasonable and realistic projections. Anything more, and you’re unlikely to be taken seriously.
6. “We’re seeking your money, not your involvement”
It’s difficult to imagine how you could be more disrespectful with a shorter phrase. If you tell investors that you want their money but not their help or advice, you are basically telling them that you do not value their input. Smart investors are normally looking for businesses which can accelerate and grow quickly, and they usually use their network or infrastructure to support them. If you don’t want their input, perhaps go for a family and friends round instead.
7. “We’re going to use the money to renovate the office”
When you take out a loan, the bank only really cares that you can make the repayments. An investor is different. He or she wants to know that with the money, the company will grow fast, increase in value, get sold, and provide a substantial return. No investor wants to hear that you plan to waste the money to buy that expensive reception desk or the latest tech hardware.
8. “I’m going to be paying myself €60k”
As you are developing your financial projections you should be able to estimate the amount of time it will take for your business to become profitable. In some cases, you might be able to stay without a salary, at least until the company can afford to pay you. However, you might need a salary from the beginning, which is understandable. What is not, however, is expecting to take home the same pay you had in your previous job, and expect the investor to pay for it.
9. “The company is solid, we have no weaknesses or threats”
Here’s a quick weakness for you; the company doesn’t have sufficient financial resources as otherwise, you wouldn’t be standing in front of an investor. If you don’t actually need the money, you might need the investor because you lack his or her business network or know-how. If you don’t need any of that either, you shouldn’t be wasting the investor’s time. All businesses have weaknesses. All businesses face threats.
10. “My valuation is based upon projections for the next [x] years”
Why do so many entrepreneurs tell investors that they should pay for a company based on projections? How can you be sure what your company will be worth tomorrow? If you get hit by a bus right after the pitch, will the company reach its targets? Valuing your company is both an art form and a science, but that doesn’t mean you can go crazy with figures. Any idiot can raise money, but it takes a capable person to raise it at the right valuation.