Investors have money to spend. Founders need money to operate. How hard could it possibly be to get these two groups together? As it turns out, getting them together is not the problem.
The problem is resolving the complexity of clear communications in a world where people under extreme time and option pressure tend to hear what they want to hear. The process of training investors and founders how to get what they truly need from each other has grown into a new sub-industry known as Investor Relations.
In the service of getting more great business models funded despite institutional bias and cultural mis-signaling, we created our own Backstage Capital Investor Day series of meetings in a few cities across the US. In those events, we saw for ourselves first hand, that the majority our most promising startup founders (aka our Headliners) wanted practical insider advice on how to present themselves and their ideas to investors more effectively.
Based on feedback from both investors and founders, I’ve put together a list of tips for founders to help them engage more productively with investors, with less heartache and wasted effort.
Take a virtual journey with me right now to a perfect world where investors - eager to support great startups with funds and advice - meet founders who are able to present their innovative models both intelligently and passionately. Let’s call our founder Angela and our investor Beatrice. Here’s the best way to get from seed to A to B and beyond.
You read that right. However, this doesn’t mean that all of those sleepless nights and heated debates that went into the perfect pitch deck were not wasted. Investors still need pitch decks to remotely decide who they want to talk to. It can’t end there, though. The pitch deck should be no more than note cards that you can expand on in person.
Once Angela is in front of Beatrice, that’s where the magic happens. Too many founders refer to memorized scripts and simply refer to pages on their pitch decks as though that is all there is to say about company performance. If you were to ask Serena Williams about playing tennis and she referred you to Tennis for Dummies, how would you feel? Immerse yourself in the data so you can deconstruct it for the investors. Practice taking questions from people who don’t know anything about your business. The pitch deck is nothing more than the ticket to the ball. Now it’s your turn to be Cinderella.
It can be inspirational that your team overcame obstacles to get here and the story of how you came up with the idea might be really inspiring, but your “founder story” can not and should not be the focus of your conversation. As clearly and succinctly as humanly possible, explain what problem you are solving. Turn it into a Haiku and then summarize that.
Over and over, investors tell us they wish founders could:
Just as smart founders seek to eliminate risk wherever possible, smart investors deploy risk strategically. As Carl Sagan sagaciously cautioned, “Extraordinary claims demand extraordinary evidence.”
Chess is not a game. It’s a training gym for your mind. Look at the all the options and look one step ahead to predict how others will respond. Look two steps ahead if you can keep all that in your mind, which takes a lot of practice. Look three steps ahead by relying on your smartphone voice memos and phone-a-friend on speed dial. For every claim you make, investors will definitely ask what data you have to substantiate that conclusion, and you should expect that they took the same Logical Reasoning elective in high school that you did. They are going to ask “why” more than you think and less than they want. Separate correlation from causation.
Investors want to hear that you validated your data with first hand surveys of the target market and analysis of unstructured data from small group sessions and focus groups. Did end users identify this as a problem? Do they really feel pain around dealing with the problem or is this merely an inconvenience to them? Did they emphatically state that they found value in your solution and would actively engage in it if available?
Stand on firm statistical ground when you say that your solutions addresses an X market where Y% of customers are not having their needs met -- and of those Z% say they love or would love to use Angela’s program. That’s just the beginning though, because investors want to know that you have thought two moves ahead. The two key concepts that will carry the most weight with investors are Revenue and Growth. Learn how to relate your percentages back to long-term revenue trajectories and how much of that revenue is likely to filter down into profit at various probable growth rates.
Nothing is ever over. While there is life in the business, you can continue to survey market segments and figure out how to improve the customer experience. Pay close attention to how visitors interact with your solution in ways you never imagined and refine, refine, refine. It can be really tough to go back and identify those initial market and need numbers later on down the line. The time is now. Identify them as early as possible. Group your startup development strategy and features into sprints so you can tell each sprint story to investors as things change in real time. Present new data when you see investors or their friends again on what you’ve done to secure Q users or gained R capital.
Lay out exactly why your are confident that features S and T will be key in the next sprint to attract another U customers with V revenues. Prove you are working the Build-Measure-Learn loop by continuing to refine your prototype. The size of the active investor community can be shockingly small to founders, and news (good or bad) travels at the speed of a text blast. Buzz can make or break you.
Too many founders think investors want to see phenomenal, best case numbers, so founders often take an overly optimistic and fish-eye perspective of the startup’s potential. Don’t pump up the hype. Get real and get narrow. Come up with some hard numbers on M customers for a specific city, like NYC or LA. Start with a process that works perfectly in a single location, then scale, scale, scale. Draw up numbers on what it will take to enter cities N and O or introduce feature F to your existing customer base.
The question of “What can this bring to me in relation to other investments in my portfolio?” is always top-of-mind for investors.
Bootstrapping in the beginning will win you respect and fans in the investor world - and serve as an accomplishment for you. Before investors hand over their cash, they would really like to see you discuss what actions you took to do all you could with your own resources. This doesn’t mean take it right to the limit where you have to choose between Wi-Fi and food. Waiting too long to seek out financial partners is just as reckless as jumping the gun. Plan ahead and prove that you aren’t the type to run out of runway. When you start to show reliable revenue, it makes sense to investigate your options for operational funding. Just remember not to shirk on maintaining a cap table and a statement of cash flows with six month projections.
In startup mode, it's important to find and maintain relationships. It’s tempting to put your head down and work, avoiding interactions with the public until you are ready to talk about your startup. Don’t cheat yourself and you future partners this way. Go to events, listen to speakers, pull subject matter experts on the side to talk, engage with investors. Go early and leave late. Introduce yourself to influencers, even those in sectors that you think are unrelated to what you are currently doing.
You are not just meeting people, you are meeting potential brand advocates and strategic advisors.
Research the speakers ahead of time so you have common ground to open up a conversation. You can always spark a dialog around JKL college or a quote from the speaker’s latest video. Everyone in the community will be more receptive to you once you establish trust with commonalities and the act of showing up for them.
You don’t need a co-founder. Too many people look to a co-founder for the skills they don’t have or for motivation to keep going. The fact is that if you have a co-founder or co-founders, you must be aligned in vision and goals or you will have to make the hard decision to park ways, the sooner the better. A study by Crunchbase found that 53% of companies that found financial success had only one founder. The company hired the talent they needed. Another 30% of successful firms had two co-founders so it can work if conditions are just right. Only 17% of the companies with a successful exit had three or more co-founders, so odds against. If one partner is gung-ho, while another partner has other priorities at the moment, the entire ship is likely to shake itself apart under the stress of operations.
Investors want to believe in you and what makes you special. They are hungry for stories that excite them and founders who really care and are all-in about solving problems. The flip side of that coin is that investors are counting on you to grow the company and bring them a better return than they could get by squirreling away their cash in a low-risk money market fund. If you are the key to success, you are also the key to growth. Can they rely on you to be there? Are you in it for the long haul or just until you can cash out with an M&A? If that’s your plan, that’s fine, but investors want to know that everyone is up front about what they want.
At the end of the day, funding decisions often turns on whether founders are prepared to answer hard questions from investors on the spot. Never forget that plans may fail, but planning is everything. Programs like our Investor Day events have proven that there is plenty of investment funding available for founders who are contagiously energetic and who know precisely what problem they are solving. Our Investor Days find alignments, get the best fit groups talking to one other quickly and turn more of those discussions into deals.
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