There are a multitude of blogs, articles and guides on how best to seek equity investment. While you need to know ‘what to do’ when pitching for start-up capital, it is equally useful to know what not to do. Here are our top 5 examples – from angel investors themselves – on how to fall spectacularly at the first hurdle.
The hockey stick forecast: sales are flat, nothing is happening, but with your investment things are going to shoot right up. No experienced angel is going to be duped by this theory. Another pitfall to avoid is forecasting sales as a small but significant percentage of a very large market; start-ups simply do not suddenly grab 1% of a multi-billion pound sector. Sales forecasts are about people predicting the future and the best use of them is to track actual results over time, regularly reviewing the plan versus actual results and managing the underlying assumptions with management programmes. Likewise, the average start-up to exit period is well over six years, so promises that millions are to be made within a short space of time tend to be viewed with more than a little scepticism.
An entrepreneur thinks their product is the best thing since sliced bread and will make the world a better place. An investor’s thought process, however, is primarily focused on how this opportunity will make them as much money as possible. The start-up needs to present a business plan and presentation that addresses this crucial aspect when seeking funding. They also need to focus on themselves and their management team: ultimately, business is less about the product, more about the people.
It may be the founder’s baby, but overpromising and overvaluing are common mistakes in start-up pitches. The valuation needs to be commensurate with the risk of investing; a skilled angel will compare a business’ value with not only other private companies but those listed on the AIM. In the words of one high-net-worth individual – with over 35 years’ experience in investing – ‘You look at some of these valuations and you just shake your head and think you’d be more likely to see a flock of pigs flying past’.
The best pitch in the world will not result in any money unless accompanied by an analytical and believable business plan, that explains how an investment in the start-up will make its investors a return. This should include a coherent and persuasive executive summary that includes the problems the start-up will be solving, the size of the market, a sustainable competitive advantage and realistic revenue forecasts. ‘Winging it’ just won’t cut it.
The reality is that overused buzzwords rarely help explain ideas to investors. Instead, they harm the pitcher’s credibility and damage their chances of a successful fundraise. Terms to use with extreme caution include: