Entrepreneurs: when pitching to investors, you need to stay focused on only a few key items. While most likely you will be asked about many different aspects of your business, there are three elements you need to understand and be able to discuss in depth and with clarity. Most entrepreneurs would prefer to discuss their product or business idea, because that's what they've been focused on developing for months or years. But investors only have one goal—making a return on their investment.
With that perspective in mind, here are my top three questions to which the answers need to be in the forefront of any pitch to investors.
1. What is your target market?
It sounds simple. Think about those famous infomercials for ShamWow® absorbent towels. It's just a towel, but their target market is so specific. They target impulse buyers in the kitchen or garage consumer markets. Everything they talk about is focused on those two market characteristics.
Most entrepreneurs have a very difficult time focusing on their early market entry. Investors like large markets but realize a new business has to have a large addressable market to quickly gain a market foothold. Investors want you to tell them what that target addressable market is and how you are going to physically reach them.
2. What is your potential gross margin or profit?
For whatever reason, many first-time entrepreneurs have very little financial background or experience. But that's not an excuse for not understanding what it's going to cost to bring your product or service to market. For entrepreneurs applying to the Innovation Fund, we ask all applicants to provide at minimum three years of proforma income, cash flow and balance sheet information. In the early days of the Innovation Fund, the information provided was so off, the Fund couldn't invest in some potentially good ideas. Now the application process includes time with a financial advisor so entrepreneurs can sit down and help develop the information in an appropriate format.
We know the information being forecasted is probably incorrect, but a least the entrepreneur has a more realistic view on their cost and potential profitability. It also helps the entrepreneur understand where they need to focus their attention, product redesign or maybe other sources of capital. Without a reasonable level of potential profitability in a sensible amount of time, an investor will not be able to see how they'll get a return on their investment.
3. How much capital will you need to raise to reach profitability?
Entrepreneurs generally underestimate the time to market and the amount of money that it will take to make the business profitable and sustainable. When you talk to potential investors, you need to explain the capital investment strategy for your business. An investor wants to be sure that their money will lead to either revenue or new investors. It's highly unlikely an early investor will put capital into a business if they cannot see it leading to additional investments shortly down the road.
Just as important, if you're uncertain of or underestimate the time to market or the amount of investment needed to get to revenues, investors will question your capability to see an idea to market at all. This is why some investors insist that they have significant control over their investment, especially if they don't believe the entrepreneur has a good understanding of what it is going to take to make the business successful.
As I mentioned, these aren't the only questions that need to be answered within your pitch to investors, but they seem to be questions that either aren't addressed at all or aren't thought out enough to satisfy an investor's rigorous due diligence process. Take time to think these through and make sure your answers can stand up to some tough follow-up questioning—because it's sure to come.