In this article, we’ll be exploring how to pitch a business idea to an investor so that they will say yes to your ask. We’ll go over the investment cycle, how to craft your pitch and some tips on what to do and not do in order to ensure a successful pitching process. To find out more just keep reading.
The investment cycle
When creating a business you will go through some pretty standard steps in gaining capital for your business. Whether it’s obtaining a loan from a financial institution or gaining finance from the private sector the following five steps will be ones you’ll have to take to turn your idea into a reality.
1. You raise a first financing round.
2. A seed investor will learn if the probability of your business or brand being successful.
3. Based on the above the seed investor will decide if they are going to participate in a second financing round.
4. Investors who weren’t already involved will update their valuations of your business/brand and make financing offers.
5. You’ll raise a second financing round and through this earn profits off your business idea.
What’s a seed investor?
This is an investor who invests in your business/brand even before it has any cash flow. This financing will often cover things like market research, product development, hiring staff, hiring or buying equipment and/or distribution costs, etc. Seed investors are usually friends, family, colleagues, wealthy individuals (think: angel donors) or a group of individuals that are enthusiastic about your product/service (think: crowdfunding).
Key Elements of Your Pitch
To gain this financing you’ll need to develop a persuasive pitch. Your pitch should be no longer than two minutes and cover eight critical areas: an introduction to your business and audience, the problem that is being faced by consumers, the solution you are able to provide, your customer value proposition, the return on investment you’ll provide your investor/s, the resources you need and what you need from your investor/s. There is no room for uncertainty, equivocation or pretentiousness. You need to be compelling and informative in 120 seconds or less.
Company/Brand & Audience Introduction
This is pretty self-explanatory. Your audience needs to know who is behind your business or brand. This might briefly touch on who and why you’re your business/brand was established and who is part of it today. You should briefly touch on who your audience is. You should be able to succinctly define who you’re pitching to.
The Problem
This should explain what your audience’s business pain is. It should explore what undesirable situation your audience is dealing with and why they may be currently dealing with it.
The Solution
This should explain how your business/brand has the ideal product/service to deal with your audience’s business pain. It should clearly demonstrate how your business/brand will bring about a desirable situation for your audience and how you’ll go about it.
Competitor Analysis
To develop this you will have to a four-step process.
Determine metrics (e.g. products/services, pricing, online activity, aesthetic, etc)
Identify competitors (e.g. same products/services, same industry, same target audience, etc)
Classify competitors (e.g. primary or direct, secondary with a different target market, tertiary with different products/services)
Do research
Input the data into a spreadsheet
The Customer Value Proposition
A customer value proposition is defined as a way “to create value for customers” (Johnson, Christensen & Kagermann, 2008, p. 52) or solves a “fundamental problem in a given situation” (Johnson et al, 2008, p. 52). Its expressed in three ways:
the customer that is the intended target of the solution
the tasks that need to be completed to solve the problem and what
how your brand or business is offering to solve that problem.
The Profit Formula (ROI)
This is how you and your audience will profit from this solution. This formula is based on four factors:
your revenue model - how much money can be made (think: market size and frequency of purchases)
your cost structure – how your costs are allocated (think: direct and indirect costs)
your margin model – given the revenue model and cost structure this is how much you need to make on each transaction
your resource velocity – given the resource model this is how many resources need to be used in order to match your revenue model (think: lead times, etc) (Johnson et al, 2008, p. 54).
Resources
This refers to all the individual elements that are required in order to achieve the solution you’ve stated you can provide. These elements may include:
People - the individuals who have the technical or commercial knowledge and experience required to make complete all relevant tasks
Technology - the hardware, software, apps, etc. that are required to implement your proposed solution
Equipment – this might mean vehicles, office furnishings, machinery, etc. that you need to implement your solution
Information – this might refer to market research, scientific research, etc. that is required in order to successfully implement your solution
Time – The time it will take to implement the solution and how long it will take to see results
Other considerations might be, the marketing channels you will use, the alliances you may have with other companies or brands and your brand and its reputation.
The Ask
This is the part where you clearly state what it is that you actually need from your audience whether it be finances and contacts, just finance, etc. You want to avoid:
Asking for too much
Asking for too little
Also, you need to clearly outline what the terms of the investment are, when the investment will be made available to your business/brand, what the investment will actually be paying for, and when your audience will actually see returns on their investment.
What to Do & What to Avoid
To succeed with your pitch then take on one of three roles: the showrunner, the artist or the neophyte. However if you choose to take on on of these roles be prepared to be disappointed: Careless Carly, Robotic Rob, Sleazy Sam or Desperate Danny. These roles will ensure you walk away disappointed.
Do this
Be a showrunner
The vibe is: charismatic and witty
It’s a yes please because: you are creative and have some technical know-how and can think on their feet. You demonstrate how the solution can be implemented to industry standards (Elsbach, 2003, p. 119).
Be an artist
The vibe is: shy and socially awkward
It’s a yes please because: you have boundless creativity but are not fussed on the practical side of things. You get the audience to buy in by getting your audience involved in a demonstration of how the solution can be implemented (Elsbach, 2003, p. 119).
Be a neophyte
The vibe is: inexperienced and eager to learn
It’s a yes please because: you present yourself as someone unencumbered by “how things should be” or what is possible/impossible. You get audience buy-in through enthusiasm and optimism (Elsbach, 2003, p. 119).
Avoid this
Being a pushover
The vibe is: You’d rather unload an idea than fight for it (Elsbach, 2003, p. 119).
It’s a no-no because: It gives the impression you don’t care and just want to get “it” over and done with. It’s your brand, business, product, service, you should care about it. You should care about it very much.
Acting like an automaton
The vibe is: presenting your pitch in a way that’s too cut & paste as if you’ve memorized it from a how-to book (Elsbach, 2003, p. 119).
It’s a no-no because: It’s your idea, not a menu. Being professional does not mean that your pitch should sound emotionless and detached. You need to be able to go “off script” so to speak and actually sound like you are the originator of the solution.
Sounding like a used-car salesman
The vibe is: obnoxious, argumentative and arrogant (Elsbach, 2003, p. 119).
It’s a no-no because: It gives the impression that your inflexible, aren’t capable of listening to others and that you left your manners in the pocket of your others pants. If you want someone to acquiesce to your request you need to be capable of envisaging you might not be right 100% of the time.
Acting like a charity case
The vibe is: pleading, begging or being needy (Elsbach, 2003, p. 119).
It’s a no-no because: As much as you may want to get your audience to invest it gives the impression you’d do just about anything for the audience to acquiesce to your request. There should be conditions to what concessions you’d be willing to make in order to get financing.
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In this article, we’ve explored how to pitch a business idea to an investor so that they will say yes to your ask. We’ve gone over the investment cycle, how to craft your pitch and some tips on what to do and not do in order to ensure a successful pitching process. Hopefully, you are walking away from reading this feeling more confident and positive about your ability to pitch your idea. Good luck!
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References:
Angilella, S. & Mazzù, S., 2015, ‘The financing of innovative SMEs: A multicriteria credit rating model’, European Journal of Operational Research, vol. 244, iss. 2, pp. 540-554, viewed 29 August 2019, https://doi.org/10.1016/j.ejor.2015.01.033
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Elsbach, K.D. 2003, ‘How to Pitch a Brilliant Idea (how screenwriters propose ideas to producers can apply to business marketing techniques)’, Harvard Business Review, vol. 81, iss. 9, viewed 29 August 2019, <http://search.ebscohost.com.ezproxy.lib.swin.edu.au/login.aspx?direct=true&db=bth&AN=10687954&site=ehost-live&scope=site>.
Johnson, M.W., Christensen, C.M. & Kagermann,H., 2008, ‘Reinventing your business model’, Harvard Business Review, p. 51-59, viewed 29 August 2019, hbr.org
Kim, J-H. & Wagman, L. 2016, ‘Early-stage entrepreneurial financing: A signaling perspective’, Journal of Banking & Finance, vol. 67, pp. 12-22, viewed 29 August 2019, https://doi.org/10.1016/j.jbankfin.2016.03.004
Meer, J. & Rosen, H.S., 2011, ‘The ABCs of charitable solicitation’, Journal of Public Economics, vol. 95, pp. 363-371, viewed 29 August 2019, doi:10.1016/j.jpubeco.2010.07.009
van Werven, R., Bouwmeester, O., & Cornelissen, J.P., 2019, ‘Pitching a business idea to investors: How new venture founders use micro-level rhetoric to achieve narrative plausibility and resonance’, International Small Business Journal: Researching Entrepreneurship, vol. 37, iss. 3, pp. 193–214, viewed 29 August 2019, https://doi-org.ezproxy.lib.swin.edu.au/10.1177/0266242618818249