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How to ace the all-important investor pitch

How do you convince investors to fork over money for your new business concept? A detailed 'needs inventory' is critical, says SearchCIO small business columnist Bryan Barringer. Patience also helps.

After twenty-five years of starting and growing small businesses, I can attest that other than coming up with a name for a company, getting funded is the hardest part.

The first step toward securing funding and giving a successful investor pitch is to accept that no one understands or knows your business idea better than you do. Furthermore, no one is as passionate about its success as you are. Therefore, no one is going to give you money until you can convince him or her of what you already know, but that won't be easy.

The gap between what you know and what they don't know is vast. It's important that you understand just how wide that gap can be and how much information you'll need to close it. Many startups fail to take flight simply because the ones with the great ideas can't grasp why the ones with money don't just fork it over.

It took me at least three failed attempts at seeking funding before I began to understand that the failure was on me. I walked out of early meetings thinking these guys were complete idiots. In truth, the funding sources were very shrewd and intelligent. I was the idiot. I had failed to properly break down my idea to a point where an investor could see what their hard-earned money would get them for a return and by when. Not until my third attempt did someone give me the following advice: "With money does not come the ability to read minds." He laughed. I didn't.

So, how do you go about breaking down your idea to investors?

No matter what your source of funding -- loan, venture capital or crowdfunding (e.g. Kickstarter) -- you will first need to create a detailed inventory of what it will take to launch your business. You will use this "needs inventory" to build a pro forma that details your expenses and potential revenues in order to show investors that your idea can be made into a financially viable business. Additionally, this exercise will help you assess if your brave plan to start a business is worth your time. If it is not worth your time, then it is not worth anyone's money.

Three-step 'needs inventory' forms basis of investor pitch

Let's get started.

1.     Begin by focusing on the skills you'll need to launch your business idea. A good starting point is to identify skills you don't possess or are unwilling to deploy, due to time constraints or because you just don't enjoy using those skills. Be mindful that you will want to keep the team to the fewest number of people as possible to keep expenses down. But also be mindful of the key success factors for your business and don't forego the right people just to save a dime.

2.     Once you have your team, decide how each of the team members will be paid for their time and contribution. It is strongly suggested that you don't offer equity to every person you bring on to the team. Often, your first selection of personnel does not remain the same team down the road when the business is in operation. If you provided equity to someone that is no longer providing value, then you are basically paying someone for nothing.

My rule of thumb is that if a team member is going to contribute tangible intellectual property and that skill or contribution to your business is a long-term asset, then cut them in on some equity. Otherwise, an investment of seed capital is the only other way for a team member to be awarded equity. Anything that is related to just getting a job done gets paid from payroll. Finish the team portion of the skills inventory by listing each team role and what each will earn during the pre-launch and operational stages of your business.

3.     Next, add in your other (often overlooked) non-personnel expenses. Some examples are:

  • Legal fees for incorporation documents and other legal advice
  • Incorporation filings, trademark filing fees, copyright fees, etc.
  • Insurance for assets and personnel
  • Office space, location leases and supplies
  • Technology for both the creation of your concept, as well as ongoing operations
  • Marketing for pre and post launch

Pro forma: Get the money part right the first time

Once you have gathered all this information, compile the pro-forma financial statements investors will want to see in order to calculate the potential value of their investment. This spreadsheet should show the period of time and costs needed to create and launch your business, plus a minimum of 24 months of operation. Make sure you are showing at least 12 to 18 months beyond the break-even point. The information should be as realistic and reasonable as possible, because the goal is to get a true financial picture of what it will take to launch your business.

Spend as much time as you can on this step of the process. Tweak and hone it daily. Be sure to bounce your idea off trusted advisors that can point out expenses you may have missed. I go by the philosophy that you can only go to the money well so many times, so you'd darn better make sure to bring as many buckets as you can the first time. In other words, the amount of investment is limited, and asking a second or third time for more money will cause your investors to lose faith in your concept or ability to get the job done.

Coming up

In the next article, I will discuss funding options. There are several methods for funding these days, more than ever before. Meanwhile, stay true to your new business ideas and convictions and keep peeling the onion, as the say.

About the author:
When he's not starting new businesses, Bryan Barringer is an independent enterprise mobility consultant and speaker, specializing in mobility, user adoption, UX/UI design, customer acquisition, product design/management and strategy and business development. Most recently at FedEx, he was in charge of evaluating mobile solutions for operations and sales professionals and leading FedEx Services' Office of Mobility and Collaboration.

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What is the single biggest mistake you can make giving an investor pitch?
I'd say making big claims that you can't back up with data - you can be caught in that pretty quickly.