Differentiating your business

Source: Stock Market Digital

Date :30/06/2008 17:05:03

The “dos and don’ts” of pitching to investors

Written by Alex Macpherson, Chief Executive of Octopus Ventures

Dragon’s Den might not be the most realistic representation of the pitching process, but it does show that preparation is everything.

When pitching to potential investors, there are a number of issues that ought to be considered, as they can all play a critical part in ensuring young businesses capture attention and secure the desired level of funding necessary to make their concepts become reality.

The most important thing for entrepreneurs to remember is that any business plan must be geared towards demonstrating how investors can make an investment in their business, how the team intend to grow and develop the business, and how investors will be able to sell their investment in the longer term.

The first time an investment team comes into contact with a business proposal, it normally takes the form of a written business summary. The ability to summarise what the business does, the market potential, the size of the business opportunity and who the management team responsible for executing the plan are, in a clear and concise manner, is crucial.

Spell it out

The assumption of knowledge is often dangerous. All business plans need to demonstrate clearly what the company does, how it does it and why it will be successful.

It is essential to include an overview of the market opportunity: so where the business has come from, where it is going, the gap in the market place and how the business can be developed in order to harness its full commercial potential. Being able to demonstrate the experience of the team that is going to fulfil and execute the plan is also vital.

Clearly, detailed financial modelling needs to form a major element of the information provided. We see a lot of plans that have the classic hockey stick approach to financials -going from relatively modest revenues to huge revenues in a very short period of time.

Projections must be realistic, so making sure that you can demonstrate where those revenue streams are coming from and how you are building out your current client base, is essential to the justification of your financial modelling.

More granular detail on the technology and processes behind the product or service comes out during the due diligence phase.

Keep the door open

The one area that a lot of business plans are very weak on is the opportunities for exit. They can often just say ‘trade sale’ or ‘flotation’ without going into any detail.

Businesses need to remember that a flotation does not necessarily mean an exit for existing investors and almost certainly not for the founders. In general, they, the investors, remain invested in the company following a funding round completed at flotation.

Any reference to a potential trade sale needs to be thorough. Typically, investors will be looking for detail on who the potential universe of acquirers is and why they would be interested in buying the business.

Realistic business valuations are also important. There are a huge number of businesses with greatly over-inflated ideas of what they will be worth in the future and why they are worth millions today. The reality is that whilst the market opportunity plays a key role in your valuation, your track record today is also a major factor, so young companies need to think very carefully about their enterprise value.

Do your research!

Just as it is important to tailor your business plan to meet investors’ requirements, a knowledge of who the investor is, understanding why they want to see you and why they would make an investment into your business, should play an integral part in preparation ahead of any meeting.

When it comes to the actual meeting itself, if using PowerPoint, don’t read the slides, talk to the slides. In addition, always answer the question that you are asked, not the one you wanted to be asked as the question will only be asked again!

Throughout the entire pitch process, if you can put yourself in investors’ shoes and work out what it is that excites them about your business, then you are a long way down the road.

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Octopus Ventures, a subsidiary of Octopus Investments, is a venture capital company with support from a dedicated Octopus Private Investor Group.

The Private Investor Group was formed by a group of successful entrepreneurs and businessmen in order to provide capital and business expertise to small, fast growing companies. Since receiving FSA approval in June 2000, the Octopus Ventures team has invested £17.7million into 27 companies and has achieved an annual rate of return of 61 percent per annum.