- BRW Lists
Published 08 November 2012 04:42, Updated 21 November 2012 07:10
Hit the target: Get straight to the point with all your financials in place Photo: Louie Douvis
It was 3am and Matthew Ho couldn’t sleep. Ho, 30, couldn’t get the story of the educational mobile phone application developer he’d co-founded, Native Tongue, out of his head.
Few had been spared his Native Tongue pitch – he had given it to overseas visitors staying at his house in Sydney, tried it out on people at his church, workshopped it on friends. And after all this, in about six hours he was pitching to a panel of industry leaders and successful entrepreneurs.
“It’s a bit nerve-racking,” says Ho.
Getting a pitch right is hugely important for a start-up company. It could attract seed capital from an angel investor – wealthy investors who provide capital for businesses in their infancy in exchange for equity – that could allow the start-up to take off. For more advanced companies, it could attract venture capital funding to quickly expand the scope of their operations and potentially lead to dramatic profit increases. Or it might just help a young business better refine its strategy and widen its business network.
So what makes a good pitch? BRW spoke to a host of angel investors to find out. The key themes that came out were structure, simplicity and immediacy. Along with this was the quality of the idea itself: is it an interesting piece of technology or a truly disruptive product? And of course there was the financial case: what is the opportunity for the investor?
The co-founder of the Sydney Angels, Mathias Kopp, has a clear template for pitches. First, the entrepreneur needs to outline a problem and then they need to talk about how they have developed a solution to it. Then they need to unpack the business case – the market, target customers, competition, business model, team, roll-out strategy, finances and capital required.
“That’s the structure every entrepreneur needs to follow,” says Kopp.
Brisbane Angels director Jim Kalokerinos encourages a similar structure. “Issues, solution, opportunity,” Kalokerinos advises. He says entrepreneurs need to remember that they are pitching to investors, not scientists. Many pitches get bogged down in the intricacies of the technology.
“Investors just want to know why this is a solution,” he says.
Getting to the point early in a pitch is crucial. Angel investors and venture capitalists sit through a huge number of pitches. They are busy, successful people and do not like wasting time.
“Whoever you’re pitching for, you have to assume they have a really short attention span,” SeaPoint Ventures general partner Melissa Widner says. Widner conservatively estimates that she has seen 3000 to 4000 pitches, in Australia and in her native America. And she knows both sides of the process. In the mid-1990s, as the co-founder of enterprise software company 7Software, she was pitching for capital herself in Silicon Valley.
Her main advice to entrepreneurs is to get to the point. You have to grab attention and grab it early.
“Keep it really simple,” she says.
She has been in Australia for 3½ years and says the local angel investing scene has become a lot more sophisticated in that period as angel groups have imported best-practice structures from the US and Britain.
Along with a clear structure, investors want to see that the entrepreneur is passionate about their business. Enthusiasm can help with the engagement of an audience.
“Engagement is the big word. If you don’t engage your audience, they are not going to engage in Q and A and are very unlikely to invest,” angel investor and managing director of Proto InvestStuart Fox says.
Entrepreneurs also need to know their limitations. The demands of a start-up can stretch the skill sets of a small founding team. “If you don’t have experience in that space, get advisers,” says Widner.
Being able to look at your business objectively is difficult, particularly when it consumes your life, as a young business most often will. This is why it is important to seek out others in the industry to test and refine the idea. The process of pitching itself can help this. It can also help with the identification of competitors.
“Awareness and acknowledgement of competitors is important,” says Fox. “A lot of people say they don’t have any competition. That might be right but it might be ignorance. It makes me wonder: What else are you ignorant of?”
Investing in the infancy of a company is hugely risky. The director of New Territories Investments, Mark McConnell, says that for this reason he sometimes describes angel investing as corporate philanthropy. To justify getting involved with such risk, there needs to be a possibility of lucrative returns. Angel investors want to partner with big ideas.
“Is this widget nice to have or is it disruptive in its market?” is one of the key questions McConnell applies to every pitch he sees.
Angel investor Guy King, the co-founder of coupon website Retailmenot, is of a similar mind. He says that one of his most common complaints after pitches is the size of the idea. He says he is not interested in investing in a business that is pitching to occupy a modest niche.
“An example might be, ‘Australia’s most comprehensive site for shoelaces’,” he jokes. While such a business might make financial sense, he doubts the returns would be high enough to entice an angel investor.
The management team is as at least as important as the idea itself. An idea is worth investing in only if it can be realised, so investors are looking to hook up with entrepreneurs who live and breathe their business.
“People who have convinced their parents to mortgage their house,” McConnell says.
Ultimately a pitch is most likely to turn on the financial case made by the entrepreneur. Too often this is not done well. Kopp says that in one recent pitch, the entrepreneur, when asked about the financial statement he provided, said that he had just “plucked the numbers out of the air”. The angel investors were not impressed. He says those who pitch to the Sydney Angels are told to outline their financial projections on one slide, showing revenue, expenditure and earnings before interest and taxes (EBIT) over five years.
Widner agrees that entrepreneurs need to spend plenty of time on their financial projections. They should be as transparent and as rigorous as possible. She is forgiving of their accuracy. “They are going to be wrong,” she says of projections done by fledgling businesses. She says she spend a great deal of time preparing the numbers for 7Software: “And the only thing I got right was the rent!” But she says the exercise itself is very important.
The numbers are revealing for investors, giving insight into how an entrepreneur thinks.
Ho didn’t end up sleeping very much that night. He got up, did a few hours of work at his computer and then went back to bed to try again. A few hours later he had given his pitch. It went well. He didn’t secure investment but he did make some useful contacts. And he got some helpful feedback on how to refine his business and his pitch.
He says there’s a saying that it takes a hundred cups of coffee – with peers and leaders in the industry – to get a pitch right. “I’d say I’m about one-quarter of the way there.”