Sometimes, in some of the very best investment pitches, a particular point, idea, concept, fact, or story suddenly transfers from entrepreneur to investor. Call it resonance.
The word resonance comes from music. Think of a tuning fork resonating at a certain frequency. If you play the guitar, think of how you tune it by playing the same note on two different strings. Read more
I hear maybe 50 pitches a year as a member of an angel investment group and a judge of MBA-level business plan contests at the University of Oregon, Rice, and University of Texas.
Still, when caught having to lay down with my feet up for a full weekend (skiing accident), there I was watching Shark Tank, the show. I saw about a season’s worth of episodes on Hulu.com. Here are some things I noticed:
- I loved it when Mark Cuban interrupted a guy starting to talk about “a $32 billion market.” He waved him off. “Don’t tell me about the big market,” he said (I”m paraphrasing), “tell me about your sales.” I couldn’t agree more. (I think this was with Eric Corti of The Wine Balloon, but I apologize if I got it wrong.)
- Closely related: on the show, the sharks go quickly to sales for validation. It usually the first question: “how much of this have you sold.” There is no better validation than sales. Being capable of executing a business key, and sales is an important metric in determining this.
- In the second episode of the second season, when entrepreneur Brian Spencer of vurtegopogo.com wants to take his extreme pogo sticks to a mass market, the sharks agree as they advise, strongly, against it. Stick to the specialty market, they tell him. Charge more, not less.
- There’s an exchange in Episode 302 when shark Lori asks Raven Thomas, making specialty pretzels, why she should invest. Raven starts talking about how she’s showing her children about life. Shark Kevin stopped her and pointed out that she’s saying nothing about why anybody should invest. And I’ve seen this many times: entrepreneurs think investors want to hear about their personal commitment and results, when what they want to hear is how spending money will generate money. Raven recovers by suggesting maybe she should have instead mentioned she needs the money to fill a $2 million order, and she ends up getting investment.
- I like the emphasis on defensibility. In several episodes, entrepreneurs with good ideas had to prove they could defend them from competition. “What if somebody else does the same thing?” is a frequent question.
By the way, watching Shark Tank with my background reminded me of the day I asked my brother the assistant district attorney what he thought about the show Law and Order. He said it was remarkably accurate in many ways, but “they just compress the time frame.” He wasn’t referring to the fact that an episode takes an hour, but rather the impression that the process from crime to verdict takes a few days, instead of weeks, months, and so on.
And my assessment of shark tank is that it’s good entertainment, not wildly unrealistic, and of course it compresses time. More important, out here in the real world we do a lot of due diligence on an investment, so decisions take weeks or months, not minutes, and there is a ton of hard work and investigation in between. If entrepreneurs survive the summary phase and the pitch phase, then there is detailed legal investigation, market investigation, talking to customers, looking at contracts, and so on. It takes time. Investments aren’t influenced by in-the-same-room, in real time, competition between investors.
But if you’re looking to pitch angel investors, watch a few episodes. The setting, the format, and the people will be wildly different. But the underlying questions will be similar.
I just picked up on a great reminder of how “it all” got started: Gordon Moore and eight others formed Fairchild Semiconductor in 1957, and how that led to the model for outside investment:
Little to anyone’s knowledge at the time, how it was formed would set the model for almost every Silicon Valley company that would follow it; unleashing a wave of innovation that continues to this day. Besides inventing the first practical microchip, Fairchild was also the first venture backed startup. Read more
- Boring. You’re reading the bullet points to me, half the time with your back turned to me. It’s like watching a speech with the teleprompter showing. Look at me, put a picture onto the screen to add emphasis, and talk to me.
- Bull. You’re quoting crazy numbers out of context. You’re assuming I won’t connect dots, or that you’re the only one in the room with background. You’re thinking that just asserting some huge opportunity makes it true.
- “If we can get half a percent of this market, we’re a $50 million company.” That line went out in the 1970s. Count your numbers from bottom up, not from the top down.
- Too rehearsed. Talk to investors like you’re talking about your own business, like you could talk all day and all night if you have to, with the only problem being how to summarize for them. Don’t let it sound like a salesperson’s script. Don’t memorize, talk.
- Half truths. In a room with 10 or 20 investors listening, every half truth increases the odds that you’ve stepped on a topic one of them knows very well. And a single half truth, discovered by somebody in the group who knows the whole truth, is taken as the tip of an iceberg. If you’re wrong on that one thing, aren’t you wrong on everything.
- Where’s the beef? Don’t tell me about your team or your technology or your huge market until you’ve told me a story about how somebody needs what you’re going to build. One of my fellow bloggers on this site, Martin Zwilling, explained this problem very well recently in Investors fund solutions rather than technology, on Examiner.com.
- All pitch, no plan. I hate it when the pitch is all there is, rather than a summary of a plan. I want to see that you’ve connected the dots in the background, so that you know the unit economics, the cash flow traps, the lead times, the selling cycles, and the head count, in detail. Not that I don’t expect you to change it or tweak it, when I ask a detailed question or somebody makes a suggestion that might be interesting. But a pitch is supposed to summarize a plan, not substitute for planning.
- All that passion and persistence stuff. Please don’t sell me on how committed you are. Businesses work because of the value they offer, the solutions they offer, the disruption of existing markets; I assume you’re all passionate and committed. Don’t tell me that like it is supposed to make a difference.
- Dumb profits. Don’t tell me you’re going to make 50 percent profits on sales. Nobody ever really does that. It means only that you’d don’t understand the business.
- Big secrets. If you can’t talk about it, don’t. Stop talking, apologize, and leave.
All opinions expressed are those of the author, and do not necessarily represent those of Gust.
A couple of days ago a friend asked me whether I’m in favor of startups getting angel investment. He pointed out this post on this blog, which is me writing about five good reasons not to seek investment. My answer is that – like so much else in this field – it depends on the specific situation. A business that can grow organically and stay independent probably should; but there are also times and situations that call for ramping up a business as fast as possible, and that, in turn, means you need more money faster. So in those cases, forget bootstrapping. Read more
First, I admit it: sometimes I exaggerate for effect. And I just did, with my title here. In truth, you still need those summaries.
By the time you’re here on gust.com you’ve probably figured out that the relationship between business plan and short summaries is something like between movie and movie trailer. Investors don’t read the whole plan if they didn’t like the summary. Read more
Here’s an interesting question. It came up Tuesday night in an angel investment meeting:
My question is which looks better to investors: A higher burn rate with three great people on the business plan, or a lower burn rate with only two great people on the business plan? Two of the three want salary, not equity, and one of those two has a skill set that we need later, in growth phases, and not so much right now, in development phase. Also important to mention; we have three amazing advisors on the plan to beef it up as well.