Investors have money to spend. Founders need money to operate. How hard could it possibly be to get these two groups together? As it turns out, getting them together is not the problem.
The concern is resolving the complexity of clear communications in a world where people under extreme time and option pressure tend to hear what they want to hear. The process of training investors and founders on how to get what they truly require from each other has grown into a new sub-industry known as Investor Relations.
To get more great business models funded despite institutional bias and cultural signaling, we created our own Backstage Capital Investor Day series of meetings in a few cities across the US. In those events, we saw firsthand that most of our most promising startup founders (aka our Headliners) wanted practical insider advice on presenting themselves and their ideas to investors more effectively.
Based on feedback from investors and founders, I’ve compiled a list of tips for founders to help them engage more productively with investors with less heartache and wasted effort.
Take a virtual journey with me to a perfect world where investors—eager to support great startups with funds and advice—meet founders who can present their innovative models intelligently and passionately. Let’s call our founder Angela and our investor Beatrice. Here’s the best way to get from seed from A to B and beyond.
Ditch your pitch
You read that right. However, this doesn’t mean all those sleepless nights and heated debates that went into the perfect pitch deck were not wasted. Investors still need pitch decks to decide who to talk to remotely. It can’t end there, though. The pitch deck should be no more than note cards that you can expand on in person.
Once Angela is in front of Beatrice, that’s where the magic happens. Too many founders refer to memorized scripts and pages on their pitch decks as though that is all, there is to say about company performance. How would you feel if you were to ask Serena Williams about playing tennis, and she referred you to Tennis for Dummies? Immerse yourself in the data to deconstruct it for the investors. Practice taking questions from people who don’t know anything about your business. The pitch deck is nothing more than the ticket to the ball. Now it’s your turn to be Cinderella.
Roll with the numbers.
It can be inspirational that your team overcame obstacles to get here, and the story of how you came up with the idea might be inspiring, but your “founder story” can not and should not be the focus of your conversation. As clearly and succinctly as humanly possible, explain what problem you are solving. Turn it into a Haiku and then summarize that.
Over and over, investors tell us they wish founders could:
- Estimate the market size based on real research they performed (on the second hand, not gut instinct)
- Describe the customer’s most significant pain point in single a compelling sentence or two
- Present evidence that their target customers are already looking for answers and using workarounds
- Spotlight what makes this solution better than the competition or address a developing need no one else has identified.
- Demonstrate that the founders have thought deeply about strategies for barriers to entry and responses to second movers.
- Prove that it already works in the real world and that uptake will be welcomed by the user community using well-founded data + testimonials from live customers.
Just as smart founders seek to eliminate risk wherever possible, smart investors deploy risk strategically. As Carl Sagan sagaciously cautioned, “Extraordinary claims demand extraordinary evidence.”
Reveal how to stay one move ahead of competitors.
Chess is not a game. It’s a training gym for your mind. Look at all the options and that one step ahead to predict how others will respond. If you can keep all that in your mind, think in the two steps ahead, which takes a lot of practice. Look three steps ahead by relying on your smartphone voice memos and phone-a-friend on speed dial. For every claim you make, investors will ask what data you have to substantiate that conclusion, and you should expect that they took the same Logical Reasoning elective in high school that you did. They will ask “why” more than you think and less than they want. Separate correlation from causation.
Investors want to hear that you validated your data with first-hand surveys of the target market and analysis of unstructured data from small group sessions and focus groups. Did end users identify this as a problem? Do they feel pain around dealing with the concern, or is this merely an inconvenience? Did they emphatically state that they found value in your solution and would actively engage in it if available?
Stand on the firm statistical ground when you say that your solutions address an X market where Y% of customers do not meet their needs—and of those, Z% say they love or would love to use Angela’s program. That’s the beginning because investors want to know you have thought two moves ahead. Revenue and Growth are the two key concepts that will carry the most weight with investors. Learn how to relate your percentages to long-term revenue trajectories and how much will likely filter down into profit at various probable growth rates.
Talks Sprints, Not Cascades
Nothing is ever over. While there is life in the business, you can continue to survey market segments and figure out how to improve the customer experience. Pay close attention to how visitors interact with your solution in ways you never imagined, and refine, refine, refine. It can be tough to go back and identify those initial markets and need numbers later on down the line. The time is now. Identify them as early as possible. Group your startup development strategy and features into sprints, so you can tell each sprint story to investors as things change in real time. Present new data when you see investors or their friends again on what you’ve done to secure Q users or gained R capital.
Lay out why you are confident that features S and T will be key in the next sprint to attract other U customers with V revenues. Prove you are working the Build-Measure-Learn loop by continuing to refine your prototype. The size of the active investor community can be shockingly small to founders, and news (good or bad) travels at the speed of a text blast. Buzz can make or break you.
Hone in on maximum impact in a minimum viable product or MVP.
Too many founders think investors want to see phenomenal, best-case numbers, so founders often take an overly optimistic and fish-eye perspective of the startup’s potential. Don’t pump up the hype. Get real and get narrow. Find hard numbers on M customers for a specific city, like N.Y.C. or LA. Start with a process that works perfectly in a single location, then scale, scale, scale. Draw up numbers on what it will take to enter cities N and O or introduce feature F to your existing customer base.
The question of “What can this bring to me about other investments in my portfolio?” is always top-of-mind for investors.
Handle it on your own: Bootstrap.
Bootstrapping, in the beginning, will win you respect and fans in the investor world—and serve as an accomplishment for you. Before investors hand over their cash, they want to see you discuss your actions to do all you can with your resources. This doesn’t mean taking it right to the limit where you have to choose between Wi-Fi and food. Waiting too long to seek financial partners is just as reckless as jumping the gun. Plan and prove that you aren’t the type to run out of runway. When you show reliable revenue, it makes sense to investigate your options for operational funding. Just remember not to shirk on maintaining a cap table and a statement of cash flows with six-month projections.
Show up for your network
In startup mode, it’s important to find and maintain relationships. It’s tempting to put your head down and work, avoiding interactions with the public until you are ready to talk about your startup. Don’t cheat yourself and your future partners this way. Go to events, listen to speakers, pull subject-matter experts on the side to talk, and engage with investors. Go early and leave late. Introduce yourself to influencers, even those in sectors you think are unrelated to your current work.
You are not just meeting people; you are meeting potential brand advocates and strategic advisors.
Research the speakers beforehand so you have common ground to open a conversation. You can always spark a dialog around J.K.L. college or a quote from the speaker’s latest video. Everyone in the community will be more receptive to you once you establish trust with commonalities and the act of showing up for them.
Be in sync with your co-founders.
You don’t need a co-founder. Too many people look to a co-founder for the skills they don’t have or for motivation to keep going. If you have a co-founder or co-founders, you must be aligned in vision and goals, or you will have to make the hard decision to parkways; the sooner, the better. A study by Crunchbase found that 53% of companies that found financial success had only one founder. The company hired the talent they required. Another 30% of successful firms had two co-founders, so it can work if conditions are just right.
Only 17% of the companies with a successful exit had three or more co-founders, so the odds were against it. If one partner is gung-ho while another has other priorities, the entire ship will likely shake itself apart under the stress of operations.
Be in it to win it
Investors want to believe in you and what makes you special. They are hungry for exciting stories and founders who care and are all-in about solving problems. The flip side is that investors are counting on you to grow the company and bring them a better return than they could get by squirreling away their cash in a low-risk money market fund. If you are the key to success, you are also the key to growth. Can they rely on you to be there? Are you in it for the long haul or just until you can cash out with an M&A? If that’s your plan, that’s fine, but investors want to know that everyone is upfront about what they want.
The ABCs of Funding
Funding decisions often turn on whether founders are prepared to answer hard questions from investors on the spot. Never forget that plans may fail, but planning is everything. Programs like our Investor Day events have proven that there is plenty of investment funding available for contagiously energetic founders who know precisely what problem they are solving. Our Investor Days find alignments, get the best-fit groups talking to one other quickly, and turn more of those discussions into deals.