The Big Pitch

Wooing big-time investor capital takes time and talent. By Carolyn Kmet | Fall 2016




Stock indexes are near record highs, GDP is touching multi-year lows, and companies seeking big-time capital investments are feeling the pinch.

But according to a report published by PricewaterhouseCoopers LLP and the National Venture Capital Association, $58.8B in venture capital was deployed across the United States in 2015, marking the second highest full year total in the last 20 years. So the challenge isn’t that there’s no money, it’s that there’s significantly more competition for those dollars.

“Ten years ago, investors were putting money into initiatives that were just on paper, or that were very rough prototypes,” explains Manish Shah, entrepreneur and founder of New York-based AcceleWeb, which creates digital products and marketplaces, and whom himself is creating a new platform to attract users and investors. “Today, investors are being conservative and shying away from unproven models; investors want to see not only a functioning product, but also real users using the product. Developing working prototypes for digital products often takes at least three to six months, but it’s becoming a necessary hurdle.”

According to Zachary Weiner, owner of Emerging Insider Communications, a Chicago-based startup consultancy, investors are pulling away from dotcoms in favor of other industries promising high returns, including e-health, cyber security, alternative energy and green technologies.

“We will see more and more of green tech, and we will also see anything that can innovate natural resources,” he predicts.

Others familiar with the venture capital market say that today’s major investors are looking to invest only in business models that have proven 10-times or greater returns. “Number one is always SaaS, Software as a Service. These are your Mailchimps, your Buffers, your Slacks, and so on,” says Khuram Malik, chief strategist and founder at Stratagem.io. And, in fact, according to the PricewaterhouseCoopers/National Venture Capital Association report, the software industry saw $4.5B flow into 369 deals in Q4 2015, the highest level of funding of all industries.

It’s not only where capital is flowing that’s changing; it’s how it’s flowing as well. Traditionally, venture capital firms have been the largest investors as they seek to invest in, grow and then divest their interests in companies. “However,” says entrepreneur and investor Lisa Song Sutton, “there is definitely a wave of smaller angel groups that invest in niche markets, whether geographical or industry based.” In fact, we’re seeing syndicate investing become more commonplace, where smaller investors pool their resources together to reduce risk exposure. “And in the private sector, we’re seeing Russian oligarchs make very large tech and media investments,” Weiner adds.

The level of involvement investors expect to have in the companies they invest in is also changing. Today’s investors are savvier, and looking for ways to drive growth. One example is Chicago-based VC firm Lightbank’s strategy of combining investment with guidance and direct involvement. Per Lightbank’s website, “If you just want a check, you probably aren’t in the right place. We look for opportunities to provide substantial value to the entrepreneurs that we partner with, and we’re big proponents of entrepreneurs getting to know their investors.”

On the flipside, many entrepreneurs say their biggest challenge today is getting in front of investors. Shah suggests the best way to get their attention is to “know someone who knows someone.” For those not in the know, scouring LinkedIn and angel investor networks like Funded.com, and getting involved in incubator associations that try to connect entrepreneurs with potential investors, is all part of the hustle.

Of course, a little positive press coverage never hurts either. “If potential investors see press coverage, if they see that a company has successfully launched into the market and generated general intrigue, they’ll take that idea more seriously,” says Weiner.
But what happens once you land that critical meeting with a potential investor?

Jeff Ellman is a Chicago-based entrepreneur and co-founder of UrbanBound, a provider of relocation management software. Along with business partner Michael Krasman, Ellman has raised nearly $40M between the two companies they co-founded. His advice for wooing investors: Solve an actual problem.

“When selling the vision, don’t share ideas,” Ellman explains. “Ideas are meaningless if they don’t address a core problem that someone is willing to pay you to solve. Share problems and your solutions.”

Having a commanding grasp of your business’ metrics helps as well. “Investors are more cautious than they were a decade ago. Investors are no longer just looking at financial performance, but also at customer conversion rates, user engagement rates, and much more,” Malik emphasizes. “They’re assessing your business more holistically than before. They’re also evaluating the potential of your business model against other similar success stories.”

Ultimately, however, it all comes down to ROI. Every investor wants to know, “If I invest one dollar in your business, how much will I get back?” To help answer this question, Malik advises preparing an accurate calculation of customer lifetime value (CLTV) and cost per acquisition (CPA). CLTV is the net present value of the revenue generated by a customer over the lifetime of their relationship with a business. CPA is how much it costs to acquire a customer. “Both of these metrics will reveal how much it’s going to take to get your business to where you want it to be,” says Malik.

Sutton adds that transparency is critical in attracting investors. “If I sit down to hear a pitch, or open up a deck that doesn’t mention numbers, it makes me wary,” he explains. “Numbers are details. If the founder isn’t interested in sharing the details of the company, why would I want to give them my money?”

Ellman also recommends knowing which three terms your investors want to negotiate before even meeting. For Ellman and his business partner, those terms were valuation, options pool and board control. “Start off your negotiation by learning what terms are most important to them. This guides conversations down the path of swallowing the largest frog first,” he advises. “If you can’t agree to your top three terms, you likely won’t have a deal.”

Entrepreneurs also need to be aware of how relevant their business is to the potential investors’ portfolio. In a previous pitch, for example, Ellman referenced one of the investors’ former clients that generated a successful exit. “This brought back positive emotions for the partners while we explained to them how our business would likely get similar results. This resulted in a term sheet immediately,” he explains.

Ellman also suggests that bringing your team to the pitch yields better results. “Going at it alone is a red flag,” he says. “Investors want to invest in a team.” The rationale behind this approach is that no single individual can do it all; companies need sales, operations, finance and marketing people.  

One final tip for founders—there is no line delineating personal and professional lives. Sutton warns that risk-averse investors are very likely to dig deep into the backgrounds of the people and companies they’re considering investing in. This means that all information is fair game, including anything on social media.

“Information is available right at our fingertips,” Sutton explains. “We can easily Google a founder. If a founder’s social media is filled with expletives and sloppy, drunk photos, most investors will definitely think twice before taking that pitch seriously, if at all.”