How to pitch your business to venture capitalists – Nairametrics
I’ve seen a slight increase in emails, DMs, and cold calls from entrepreneurs looking to pitch the next Flutterwave to investors. Some have an idea; others have a business plan; some have a pitch deck, sometimes a combination of ‘give me the money’ and ‘trust me to succeed’.
What are the best practices to attract investors?
Get an advisor
The first thing to do is find an advisor, mentor, or even an accountant, someone you can ask technical questions. An advisor can be a former speaker, a seasoned professional, etc. Do not enter into blind negotiations. Always have a lawyer and accountant review any financial documents before signing. Do not say, “I can’t afford a lawyer.
The next step; constitute and issue shares
Every business is financed by debt and equity. The startup, registered and incorporated, creates shares offered to investors in exchange for their capital contribution in your startup.
Be clear on the type of financing you are looking for. The type of financing you need depends on many factors. For example, how long do you need cash for? One year, three years? Suppose your business idea has a long gestation period from concept to deployment, in this case it is advisable to seek equity financing. Equity financing is known as “patient capital” because equity investors share the profits with you and the losses.
Investors review your company’s memorandum and articles of association that specify who owns the business and how many paid-up shares they own. Incorporation papers tell them how much money you’ve invested and even how much you’ve raised from family and friends. Family and friends should be the first place to raise “patient capital”. If you can’t raise funds from those who know you, then investors will wonder if they should really part with their funds. It’s not a deal-breaker; it presents a story to investors.
Figure 1. Capital structure of a company
Determine the value of your startup
As your startup reaches milestones, it adds value. See a hypothetical progression below, but remember this is only teaching.
- Your idea; is N0.00
- You incorporate a business; worth N1.00
- You file for a patent; N5,000.00
- You get an approved patent; 100,000 N
- You sign a distribution agreement with Amazon; value up to N10,000,000
- Your product test fails; value reduced by 50,000 N
The value of your business is the price at which you can sell it. The more positive steps you take, the more the intrinsic value of your business increases. The market determines the value. You can indeed get a patent, and the market says “so what? and assigns no value.
Don’t just assign a number, establish “milestones” to defend your valuation estimate. These milestones should allow your startup to generate income in the future. The value of your startup is essentially all of that future income, written down to today’s value by applying a discount rate to future amounts. You will need an analyst to help you determine this valuation.
Suppose you incorporate a company with 100,000 shares and you need N1million. If you offer 10% or 10,000 shares for N1million, you say the company is worth N10million (N10million for 100,000 shares). The question is, why? What steps have been taken? Why is a paper-based startup worth N10 million? Have you secured a distribution channel point of sale? Your business valuation reflects the work you do. Angel investors or venture capitalists will naturally seek a return on their investment by buying your shares at a discount. So they can offer you less money for the 10,000 shares or more money for more shares if they are interested. Your role is to present a story from the future, explain the vision and how today’s investment will generate income in the future and increase market share.
Determine how much of your business you intend to sell to investors
Remember that you will need more and more funding in the future to grow and develop. You will have series A, B and C which are basically fundraising exercises. Selling more stocks today limits your options tomorrow, but not selling means your dream will run out of money to grow. Overall, is it better to have 41% of a $ 1 billion business or 90% of a $ 100,000 business? Always look for non-debt-related methods to pay for services, including swapping.
Have a long-term growth plan (5 years) and raise capital only because you need to finance your long-term growth; fairness is eternal. Also, stay flexible. If Eurodollar debt is cheaper, like it is today, you can also consider debt financing.
A pitch deck is essentially a presentation to investors. It’s simple but tells a detailed story of vision, unique solutions, competition, and numbers.
Invest in a nice design pitch; think of it as your letterhead; It doesn’t have to be costly but should communicate competence. A pitch is an emotional but quantitative exercise, it is not a business plan. A pitch must be clear and must require a decision. You need to understand your numbers or have someone who does to pitch.
What should your pitch contain
- State the problem you want to solve or the process you want to improve
What is the problem? Be direct. For example, I want to rent but I can’t find apartments for rent in the big city.
- Explain how your product solves this problem
Is your offer new or an improvement? Are you building the Internet or just a better Google?
- Is there a market for your solution?
What is the potential size of your solution? Investors want to know if this sector can be profitable. If you want to make better black and white TVs, that’s fine; it will sell as a novelty but will it get enough sales to justify the investment you are looking for?
- Describe your product or service
Overview of what you are offering to the market, link it to (1), explain the benefits, not the features. Don’t sell an electric car; instead, sell “no more spending on expensive gasoline.” Talk about regulatory approvals and copyright where applicable.
- Please show me the numbers
The numbers don’t lie; show your numbers, sales, traction, income statement, balance sheet, cash flow. If you need the money to expand manufacturing, what have you spent on manufacturing so far? If you are 100% committed to growth, why are you taking money out of the business for a vacation?
Investors want to see the business grow; it doesn’t need to be making a profit today, but what about sales and adoption? How do you deploy cash? Where will the money you request be used?
- Who are you and who will deliver this product you described
Who is in your team? Why are they on your team? Industrial experience? Investors? Is a family member on your team? Any corporate governance, who is responsible for spending? controls
Does anyone offer this service today? Link the competition to the product. You need to describe the competition and explain how your offer is better. What are the unique attributes of your offering?
- Your call to action
How many do you want? How many shares do you offer? At what price? To do what? Extend the broadcast?
- Exit plan for investors
Do you plan to go public via IPO? When?
This is where you include the detailed business plan, regulatory approvals, etc. Your pitch deck should also have few slides but tell a cohesive story.
Keep in touch after the pitch
Even when you get a NO, stay in touch and send emails updating the VC of your progress. Don’t burn any bridges. Join a network of angels (Lagos Angel Network is recommended), be part of the community; continue to develop your brand. References are king.
Most startups fail to raise capital not because their ideas are bad, but they’re unorganized, or their numbers tell a different story than their vision.
Keep it, know your numbers, communicate visually, and highlight successes.