Key Elements to Winning Investor Confidence

September 24, 2009

Hands_Catching_Funding I recently attended several meetings where start-ups gave their presentations to investors. It was abundantly clear that having a business plan with all the right elements makes a big difference. It may be difficult to attract funding today, but those start-ups with the RIGHT STUFF had investors anxiously wanting to talk further. What are the keys to winning investors’ confidence? – Product Concept, Team, Business Model, Market, Customer Validation, Funding Strategy. Everyone is chasing the same money. Investor confidence is only won when all the pieces of the puzzle are in place.

A product should be explained in an easily understandable manner, not necessarily an unsophisticated product but one that can be described in a way that can be quickly grasped. The funding process will not get off to a good start if potential investors are scratching their heads trying to figure out what is the product. Investors want to know what problem the product addresses; preferably with some means of quantifying the problem and relating the quantification to the business model.

A business model should describe the pricing strategy, sales channels and why customers would be willing to pay for the product. A concise statement of the value proposition to the customer; does the product save the customer money or does the product increase the customers’ revenue streams. “Must have” products are winners over products that are nice to have but not necessary.

The team is an important piece of the puzzle. Does the team have a background in the product area? Do you have an advisory board? Advisory boards should be small and should include those with experience to alleviate shortcomings in the team, subject matter experts, or those with potential means to acquire the start-up are a plus. It usually a good idea to briefly introduce who are the board members because the potential investors aren’t likely to know who they are unless you have Bill Gates or Warren Buffett as board members. Once you’ve stated who’s on the board, it’s easy for an investor to contact this person and find out what they think about your company.

The size of the market and its projected growth are important. The market size need not be a number from a market research report, but it does need to be quantified in some manner. Not much attention was paid to start-ups whose market segments were too small. They were viewed as viable businesses that may make tidy incomes, but not large enough to interest the likes of the venture capital community. Other start-ups receiving a lackluster reception were those involved in market segments that had been tried before and didn’t deliver returns for the investors.

Given the state of the economy, investors pointed out that they are seeing large numbers of product concept ideas being brought forth. Start-ups don’t need to be the first player in their market segment. A favorite example is Google which was a wildly successful late entrant. Some investors are adamant that they prefer start-ups to be the first player in an emerging technology. Yet others are looking to reduce the risks in the venture capital business and plan to achieve this by investing in companies with established markets. The morale of the story is to find the investors compatible with your company’s concept.

Investors want to know how much funding it will take to achieve market validation and the sooner market validation can occur, the better. The second phase is to get from validation to market acceptance.

Most investors focus on certain industries and therefore have predetermined notion of what the risks are to develop a product or service associated with a particular industry. What the investors want to hear is that the start-up team is also knowledgeable about these risks and how the start-up plans to address them.

It is very noticeable the difference between the good start-ups and the not-so-good ones. The later don’t answer all the questions and gloss over the troublesome spots in their presentations. Start-ups need to see themselves through the eyes of the investors because funding is necessary. They need to the story the investor needs to hear in the next 12 months and what do they need to do to achieve that story line. Entrepreneurs need to adopt a goal-oriented approach instead of a status-oriented approach. Show the investors what they want to buy instead of what the company wants to sell.