You are pitching your business, the brainchild to which you have dedicated blood, sweat, tears and a majority of your time. You are wanting to elevate your business to the next level by raising capital in order to push your product to the world but once again you have been rejected and cannot quite decipher the reason from the vague and general feedback given by the venture capitalist.
As the 20-year-old investment officer at Halkin Ventures and the judge, elevator and mentor at various startup pitching competitions, I have experienced the harsh world of startup investing many times over. The most common questions I receive are “How do I differentiate myself from the rest of the competition?” and “How do I demonstrate an authenticity without sounding like a salesman?”
My response is always the same; “Avoid the Honesty-Pride Paradox. Any investor with a head on their shoulders is fully aware of the struggles of a new business.”
I coined the term Honesty-Pride Paradox to describe the complicated dichotomy which I noticed most startup founders experience. Often the founder is caught between demonstrating the brilliance of the business and its various milestone successes while juggling the need to convey a potentially bleak future due to lack of funding.
The mixed messages cause investors to lose confidence and trust in the actual position of the business thus leading to the founder’s actual message being buried behind the smoke and mirrors of the presentation. You may be thinking “Surely these are just the contrasts of the startup world and cannot be avoided!” However, by following three simple steps, startups can convey a greater authenticity and thus find an investment partner aligned with their vision.
Realistic forecasts with some flare
Too often I will be looking at a spreadsheet generated by founders wherein the revenue figures will be growing exponentially within the first year of commercialization with very little increases in any corresponding expense columns. These revenues are often completely based on optimistic assumptions or are subject to certain unlikely events occurring.
As you take someone with a background in finance or accounting through an inflated forecast, you will keep getting the same question. “yes, but how did you get to that figure?”. Any slightly unconvincing answer will be blood to a shark and the answer to your pitch will be a resounding “NO!”. If you can’t trust the founders in the most fundamental area of their business, the numbers, how can you trust anything else about the business.
I am definitely not saying that demonstrating the potential of profitability and revenue is a bad idea. I am encouraging founders to do it in a transparent way. My big tipis to create situational forecasts. Create your ideal forecast and state openly that these figures are inflated to demonstrate what you believe could be achieved with the correct funding in ideal conditions thereby demonstrating your strategic vision for the company.
On the same spreadsheet create a realistic or conservative forecast with specific cash flow requirements. This will indicate to investors that you have your finger on the pulse of the business and understand its short-term requirements within a minimized revenue paradigm.
Raise what you need. No more, no less
The concept of bootstrapping post raise seems like a juxtaposition, right? Why run your business on a shoestring budget after you have finally landed that cash you need so that you can upgrade from that 1985 Toyota Camry with windup windows.
The answer is two-part. Firstly, and most obviously, you want to avoid dilution as much as possible. Raising capital which is not used to add-value to the business leaves you with a business that maintains the same value of which you own lesser proportion. That is a lose-lose for both you and the investor.
This second point is that it demonstrates to investors that you know what the injection is going to be used for. Rather than raising a lump sum of a couple of million for “further technological development”, show the investor on a section of the forecast how that capital will be used to push that product to commercialization.
Another top tip I like to give pitchers is to make the numbers visual. A simple pie chart mapping your percentage usage of the funds in various areas of the business will go a long way to satisfactorily avoid that honesty-pride paradox by showing you know exactly what funding your business needs and where it needs it most!
Show that you do it better
A common output of the paradox is a perceived lack of confidence in your own business. It manifests as worry about the competition, the actual demand/need for your product and concerns around the future of the industry that you are in.
Instead of overcompensating by showing all the issues with the competition, show how the startup you have created solves an inherit industry problem and demonstrate how it is different. I often ask pitch presenters about their competitors and I am often shocked by the negativity of their responses.
It is said that “if you are slinging mud, you are losing ground” and concur; rather than show how much worse the current industry and/or competition is, demonstrate how much BETTER it will be with your product, or how you are going to revolutionize the way things are currently being done. Demonstrating an informed confidence in your businesses place within the industry will be sure to instill an excitement in investors.
Instilling and safeguarding confidence within startup investors requires equal parts sureness in the quality of the product or service provided by the business and trust regarding the validity and genuineness of the founder’s message. Adopting these simple steps will ensure your business stands out with regard to the latter!
Bailey Harper Myers is a 20-year-old Investment Officer at Halkin Ventures, a venture build company that focuses on investing in businesses in which it can make an active difference by providing expertise and management staff to help founders achieve their goals. Bailey has a passion for startups, particularly within the AI and Fintech space and has brought a fresh perspective to the outdated and inefficient investment protocols and ideals prevalent within the venture capital industry.