Raising financing for the business, however, involves selling the idea and future prospects of the business to investors. The entrepreneur must sell a small piece of the company to outsiders to finance its growth. The process is similar, not the same and angel investors routinely confront skillful business owners who do a poor job of selling the investment deal.Why? I believe this happens because most often the seller is not mindful of his/her audience.
Let's look at the parameters of two "Acts" that occur in the "Play" of business building and financing:
Act 1: Entrepreneur E is pitching Product/service P to prospective Customer C
E understands C's problem well
C understands well and is painfully aware of his problem
C appreciates the difficulty of solving the problem (it is yet fully or partly unsolved)
E has put a lot of time, effort and creativity to find his proposed solution
E is particularly proud of the obstacles encountered and overcome along the way to create the solution being proposed, and explains them in detail to C who is interested in and understands the details and is impressed by E's competence
C is looking for reliable continuing long term performance and support in the solution he buys
E promises to be around forever to service C's needs in a continuing relationship
Note: Over time Act 1 is repeated regularly, frequently and profitably thereby creating a practiced habit which makes its performance easy and almost automatic.
Eventually when financing is needed to grow the business the Entrepreneur must perform in a new Act with little or no prior practice as follows:
Act 2 - Entrepreneur E pitches Business B to Investor Group IG
IG need a vehicle to invest their cash at as good a return as they can find
IG decided that buying a piece of a good business (B ?) run by a good operator (E ?) will give them good returns
IG, looking at business B, are focused on: how fast it will scale, how profitable it is, or will be, and how fast they get their money back, and how many times overIG, in the first presentation, do not have, individually, the technical competence to assess or are interested in the minute details of business B's products
E is expected to make his pitch to address the interests of IG.
E instead remains true to his well practiced past presentations:
E focuses on product minutiae that go right over IG's head - IG is confused and bored
E demonstrates his creativity by the complexity of the solution and all the things that went or could go wrong with it, that E had to master - IG is scared by complexities as opportunities to lose money
E is proud of his business plan to create a business that will grow, change the world and last forever - IG see their investment locked inside a business, never to be returned
This performance becomes the concluding Act of a "Tragedy of missed opportunities". Missed opportunities for both the Entrepreneur who gets no funding and for the Investors who were bored and scared away from a business that possibly had real potential.
The fix is for the Entrepreneur to learn about the Investors audience as diligently as he learned about his customers. Then speak to them on their own terms:
- KISS - make complexity simple and brief (Elevator Speech and One Page Summary)
- The company is the object of the pitch not the products - Investors assume the products work, at least in the first presentation.
- Scalability is the key to big ROI - Convince, why it is possible and likely
- Specific parameters of profitability and scalability yield ROI and return multiples that interest angel investors Few types of businesses can do it (see AngelCalc post) at the right size of investment, do not waste your time otherwise.
- Business does not happen, a team (more than a founder) makes it happen. Sell the team, have a team that can be sold, evolve the team it if necessary.
- If there is no competition, you have not found it yet. Even if true, doing nothing is always an alternative. Investors are afraid of competition that has not yet been identified, so should you.
- Investors love simple solutions to serious painful immediate problems, are leery of solutions in search of a problem and markets needing years of gestation, or of new standards to be created to coerce the world to do it your way.
Mostly, practice KISS: know your audience, speak to them on their terms.