Designing and Delivering the Perfect Pitch PDF

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BAB015N JUNE 2013

Entrepreneurs are often unprepared to begin the process of raising capital despite having what may appear to be a well-polished presentation. The fund-raising process often takes more time than originally thought, and the due diligence requirements are more detailed than expected. Entrepreneurs tend to focus too much on the finer points of the product or service, leaving critical questions unanswered regarding the solution’s fit with the problem, the market, the industry, and the competitive environment. By aiming initially at reducing the perceived risk that any investor sees in a potential investment, the entrepreneur can begin the process more knowledgeable of the opportunity space and more able to present objective data to answer questions that may arise. Thus, entrepreneurs need to communicate clearly to resource providers their capabilities, the value of their venture idea, and the benefits of engaging with the team. A “perfect pitch” comprises two elements: (1) the content—aspects of the problem being solved, the solution, the value proposition, the business model, and the resources required; (2) the communication—the delivery of the message in terms of voice, body language, appearance, and eye contact. Both the content and the communication are essential to a “perfect pitch.” This note outlines the steps entrepreneurs can follow to develop a perfect pitch: the feasibility analysis, preparation for approaching investors, planning, the content, communication, and follow up.

Before You Begin Entrepreneurs often begin to seek investors before their venture is ready for funding. Research shows that readiness for funding depends on the technology, market identification, and qualifications of the management team.1 To improve your readiness for a pitch presentation, you should first complete a feasibility analysis, which addresses the most critical elements necessary to consider during the initial conceptualization of the venture. It focuses more intently on identifying customers, developing competitive uniqueness, and building a business model. Further go-to-market plans may later arise from the feasibility plan. Any further investigation of the venture will clearly benefit from the research and opportunity shaping done during this feasibility process.2 1 Candida Brush, Linda Edelman, and Tatiana Manolova. “Ready for Funding? Entrepreneurial Ventures and the Pursuit of Angel Financing,” Venture Capital Journal 14, nos. 2–3 (2012): 111–29. 2 Donna Kelley, “Conducting an Early-Stage Feasibility Analysis for an Entrepreneurial Opportunity,” BAB714N (Babson College, 2013)

This Note was prepared by Angelo Santinelli, Adjunct Lecturer, and Candida Brush, Professor, Division Chair, both in the Entrepreneurship division at Babson College, as a basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. It is not intended to serve as an endorsement, sources of primary data or illustration of effective or ineffective management. Copyright ©2013 Babson College and licensed for publication to ecch. All rights reserved. No part of this publication can be reproduced, stored or transmitted in any form or by any means without prior written permission of Babson College.

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Designing and Delivering the Perfect Pitch

BAB015N June 2013 Designing and Delivering the Perfect Pitch

The feasibility analysis should answer several key questions in four major areas of investigation:

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2. Product/Market Fit a. Is there a large and growing market? b. Can the market be reached efficiently? 3. Product/Industry and Competitive Fit a. Is there significant competitive differentiation? b. Are there large and entrenched players? c. Are there barriers to entry/exit? 4. Business Model Fit a. What is the required resource intensity? b. Is there sufficient margin to be made? Early and thorough investigation of these and other questions can help you make an informed decision about whether or not to continue with the venture, or reshape the venture into a more viable opportunity. Entrepreneurs often believe that they have a great idea and want to execute quickly. The desire to execute rather than examine the feasibility of the opportunity can cause the entrepreneur to both ignore negative signals and to omit the critical thinking necessary to avoid wasting time, their most critical asset.3 Essentially, the entrepreneur must consider three things: (1) feasibility—can it be made? (2) desirability—does the target audience want it? and (3) viability—is it financially worth pursuing? A feasibility analysis requires you to talk to customers, suppliers, and experts, and to collect data, both primary and secondary, that validates the idea’s feasibility. Entrepreneurs who write a business plan without spending sufficient time evaluating feasibility almost never succeed. A solid feasibility analysis will document a problem to be solved that has a feasible and quantifiable market size, and it will suggest a viable solution that is novel, hard to copy, but can be economically produced. While the steps in the feasibility process appear to be sequential, the process is highly iterative, with the goal of reducing uncertainty for both the entrepreneur and resource providers, and it serves to help you gain knowledge of the problem and solution, as well as confidence in the opportunity. Each iteration of the process will undoubtedly expose new questions and new information that contributes to the entrepreneur’s ability to shape the opportunity, while amassing knowledge that will help reduce perceived risk when presenting the idea to investors. Feasibility analysis involves a good deal of primary and secondary research. You should especially not ignore the value of primary research. Investors usually respond favorably to potential customer feedback and often challenge research performed by third parties. Though useful in gaining preliminary knowledge of a market space, secondary data is oftentimes outmoded and can signal a lack of intellectual curiosity and depth on the part of the entrepreneur. Customer validation is one of the first steps in any investor’s due diligence

3 Donna Kelley, “Conducting an Early-Stage Feasibility Analysis for an Entrepreneurial Opportunity,” BAB714N (Babson College, 2013)

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1. Product/Solution Fit a. Does the solution solve a large and important problem? b. Is the target customer able and willing to pay?

BAB015N June 2013 Designing and Delivering the Perfect Pitch

process, so it’s better to accelerate the process for them by speaking to potential customers early and often. If you really want to capture an investor’s attention, present a valid purchase order for your product idea.

Approaching Investors

Entrepreneurial Speed Dating

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The process of meeting qualified investors more closely resembles the process that one uses while on a dating site—carefully reviewing each individual’s likes, dislikes, and personal traits before initiating contact. Once again, the propensity to execute often leads to using the less efficient process of sending an executive summary, or teaser document, to a large list of investors and waiting for a response. As with dating, your chances of meeting the right person are greatly improved if you get a warm introduction from someone that they know and trust.

Understanding Investor Types Understand that not all investors are equal. A careful review of an investor’s website should easily reveal information about the individual’s portfolio of investments, investment stage and size, as well as geographic and industry focus. If you are focusing on an angel group, most angel groups also have websites indicating the target industry segments, as well as stage of investment preferred. The same is true for corporate venture capitalists and institutional venture capitalists. You should use existing networks of entrepreneurs to understand more about the personalities, politics, and processes of various investors. Investors may differentiate themselves based upon stage or size of investment. For instance, most angels and some venture capital funds will focus primarily on seed- and early-stage projects. Their investment size may range from several thousand to several million dollars. Other investors may focus primarily on later-stage investments where the range of investment may be in the millions or tens of millions of dollars, but some of the start-up risk may have already been mitigated, making the valuations larger. You should understand the stage and typical size of investment before approaching an investor. Geographic and industry segment focus is yet another way that firms may differ. Seed- and early-stage investors will usually have a narrow geographic focus, preferring to invest within a short drive of their office. This is done less for convenience and more to address the hands-on nature of seed- and early-stage investments, where an investor’s network plays a major role in team development. Last, investors may choose to focus somewhat narrowly on specific industry segments, such as software or telecommunications infrastructure. This may be driven by macro forces in the industry or the background and expertise of the investors in a particular firm. All investors have a reputation and investment process all their own. Speaking with other entrepreneurs who have done business with the investor will reveal important data about the 3

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Approaching investors requires a thoughtful plan and approach. Not all investors are the same, in that some seek to invest different amounts, others seek to invest in different technologies, while others have different outcome expectations. Taking care to understand approaches to meeting investors, the different types, and their needs is important to successful investment.

BAB015N June 2013 Designing and Delivering the Perfect Pitch

personalities within the firm and the investment process. You should understand how investment decisions are made and who influences the decision. You should also understand the investment process and where your project is within the process or deal funnel. Once again, you should do your own due diligence to understand thoroughly the investors you are considering prior to approaching them. This will save you time and minimize the risk of appearing disorganized in your approach to finding the right partner.

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In addition to the items noted above, you should understand how an investor views risk and return. Seed- and early-stage investors accept more risk in a project and will require a higher return for assuming that risk. This translates into a much higher degree of control, most often gained through equity ownership and board representation. Though the expectation for returns is much higher, seed- and early-stage investors take a long-term view with regard to the timing of those returns. Depending upon the amount of risk that remains in the business, later stage investors might accept a less than controlling share of equity, but will usually seek other mechanisms of control and subsequently expect a smaller return, but one that will occur in the relatively near future. Here again, it pays to understand each investor’s needs and expectations for ownership, control, and the timing and size of returns before scheduling a meeting.

Funding Sources and Amounts Financing Round Seed

Definition

Typical Amounts

Who Typically Plays

Prove a concept/qualify for start-up capital

$25,000 –500,000

Individual Angels Angel Groups

Start-up

Complete product development and initial marketing

$500,000–3,000,000

First

Initiate full-scale manufacturing and sales

$1,500,000 – 5,000,000

Select Individual Angels Angel Groups Early-stage Venture Capitalists Venture Capitalists

Second

Working capital for initial business expansion

$3,000,000 – 10,000,000

Venture Capitalists Private Placement Firms

Third

Expansion capital to achieve break-even

$5,000,000 – 30,000,000

Venture Capitalists Private Placement Firms

Bridge

Financing to allow company to go public in 6–12 months

3,000,000 – 20,000,000

Mezzanine Financing Firms Private Placement Firms Investment Bankers

Source: VSS Project Angel Investors: a joint HBS/MIT study on Angel Investors; definitions taken from Pratt’s Venture Capital Guide ©1999 MIT Entrepreneurship Center

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Understanding Investor Needs

BAB015N June 2013 Designing and Delivering the Perfect Pitch

The Content The “content” of your pitch includes several components, described below:

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Executive Summary: The executive summary provides a vehicle for describing a new business idea in a clear, concise manner. If your summary is well done, anyone who hears it should be able to understand, and even paraphrase, the nature of the opportunity after hearing it. If not, then the summary needs further refinement. The executive summary is essentially your value proposition. The value proposition is the foundation of any new business idea and must be carefully thought through and prepared. It must answer five critical questions: What is it? Who is it for? Why do they need it? How does it work? What makes it unique? The question of uniqueness is often poorly described. You should apply a few simple rules when considering what makes your product or service unique: Can it be easily copied or purchased? Does the uniqueness resonate with the target customer and alleviate their pain? Can you substantiate the benefits delivered by the product or service?4 You should also note the extent to which you have achieved milestones, such as prototyping, beta testing, or customer sales. Note that a value proposition is not a tag line or mission statement. This is your opportunity to set the hook that makes your audience anxious to learn more about the product, market, and business model.

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Team: Though we recommend that you begin by having each key member attending the meeting do a 90-second personal Rocket Pitch, it is also important to summarize on a slide the backgrounds on the team. In many instances, the entire core team will not be present at an investor presentation; therefore, fully documenting their positions and backgrounds is useful. Demonstrating that you can recruit a high-caliber team is the most effective way to reduce perceived risk. The extent to which you can quantify the experience of the team, and directly relate the team’s experience to this venture is very important. You need to provide an answer to the question, “why is this team uniquely qualified to run this venture?” Small photos of the core members are useful in allowing the investor to recall each individual. As stated previously, investors are hoping to make easy connections between your team and their network; therefore, provide details with regard to education, employers, positions, roles and responsibilities, and accomplishments.

4 James

C. Anderson, James A. Narus, and Wouter van Rossum, “Customer Value Propositions in Business Markets,” Harvard Business Review 84, no. 3 (March 2006): 90–99.

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Prior to meeting with an investor, most require the submission of a “pitch deck,” executive summary, and financial statements. If you are applying to an angel group, this will usually be to an online website where members of the angel group will review the documents and rate it. Your application may possibly be “desk rejected” at this point, if the reviewers believe that the business is too early for funding, or does not fit the strategic focus of the group. In other cases, an application may be desk rejected because it is not appropriate for equity funding, but rather more appropriate for grant funding, debt financing, or family and friends. When you are invited to attend a pitch meeting, you will need to think about both the “content” and the “communication” aspects of the pitch.

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Market Opportunity: Begin by describing the market problem or pain that customers experience currently or in the future. Communicate the size and importance of the problem, using numbers to quantify. Sometimes a story to illustrate or describe the problem can be useful. Provide information on the market size and growth for each market segment and identify your entry point into the market and how market penetration might evolve over time. A well thought through market analysis, where the assumptions are based upon objective data and clearly documented, goes a long way to convince investors that you have studied the market in detail and understand the forces that will drive growth and demand for your offering. Merely showing an analysis performed by a third party without knowledge of the underlying assumptions used to develop the market analysis is a mediocre substitute for your own critical analysis. If you have collected customer data, testimonials, and primary market research, include it as well.

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Product Description: Where there is customer pain, there must be a remedy (i.e., your product or solution). Explain, at a high level, how your product or solution alleviates customer pain. Highlight key features and functionality that contribute to your differentiation and deliver upon the value proposition, but avoid getting overly technical at this stage. Investors will want to understand the degree of difficulty in developing your solution, the timeline, and the risks introduced by new technology or other key resources. They will also want to understand how thoroughly and efficiently your solution al...