8 Factors To Pay Attention to When Pitching a Startup to an Investorby@fayanastasia
21,890 reads
21,890 reads

8 Factors To Pay Attention to When Pitching a Startup to an Investor

by Anastasia FaizulenovaApril 17th, 2024
Read on Terminal Reader
Read this story w/o Javascript
tldt arrow

Too Long; Didn't Read

The article explains 8 key factors that can help your startup get considered by investors, especially in the early stages. In summary, these are Pitch Quality, Market Potential, Startup Traction (Metrics), Scalability of Business Model, Team, Vision and Adoption, Competitive Advantage, and Exit Strategy.
featured image - 8 Factors To Pay Attention to When Pitching a Startup to an Investor
Anastasia Faizulenova HackerNoon profile picture

In the dynamic world of tech entrepreneurship, there are characteristic and indispensable factors that can make the biggest difference when seeking to raise capital or attract investor interest. As a technology startup entrepreneur myself, I have raised over $3 million in investment, and two successful exits have given me the experience to understand the interests and factors behind the minds of investors. The important question stands still - how can you persuade your potential investors? In this article, I would like to share my real-life experience and strategies with you.

But before we dive in, let’s break down a crucially important term in this article - the so-called “pitch”. To put it simply, a pitch is a short introduction to your business that you make in hopes of attracting investment capital. We can also define it as the ability to express a business idea in a short interval of time, usually an effective presentation that the entrepreneur makes to potential investors in any space, for example, in an elevator ride, the latter called an Elevator Pitch.

In most cases, any entrepreneur understands that bootstrapping is the initial funding either by family and friends or equity, but we must understand what type of investment we need or are looking for to increase the potential of the startup. When discussing venture capital, it typically means that you need to define your stage: pre-seed, seed, Series A, Series B, etc. Investors at each stage expect different metric milestones to be achieved.

Once we have identified our stage, we can proceed with these eight strategic factors that I consider important for attracting an investor’s attention to your startup.

1. PITCH QUALITY: Keep it Brief, Clear, and Simple

This goes without saying, but you should place only the most crucial information in your business presentation. I could not stress it enough – check the content of your presentation from point A to point Z at least a couple of times. If your pitch does not have a good structure, you will easily end up losing all the attention before even getting a chance to show the potential of your startup. Make sure to check out successful pitches of other companies that once started down this path. I have seen cases where pitches were given as an assignment to inexperienced employees and the results have been disappointing. Take the time to listen and understand your pitch as your main task is to control the audience and focus their attention on the most important aspects of your startup.

  • Speak clearly. Anyone listening to you should be able to understand what you are saying. Use basic vocabulary and common terms. I recommend that you “test” your pitch on various audiences beforehand in order to identify your weak points and strengthen them.

  • Being visual and putting the text right on your slides will help greatly to reduce the cognitive load of the message you are transmitting. This way, your listeners will be more willing to perceive the information. Remember that the text area in your slides shouldn’t take up more than 40 - 60%.

  • Try this simple framework to organize your thoughts:

Understanding and analyzing these factors can be key to increasing the chances of attracting the attention of investors.

2. MARKET POTENTIAL: Illustrate the size of the market

This wouldn’t come as a surprise, but investors are more likely to put their money into growing markets. Thus, one of your biggest priorities should be to demonstrate that your startup has long-term growth potential. Try calculating such metrics as Total Addressable Market (TAM), Serviceable Available Market (SAM), and Serviceable Obtainable Market (SOM) to showcase your real value to potential investors. Make sure to only use the correct data, as your priority is to be transparent, stay honest with your investors, and create the trust that you need.

To sum up, what investors are looking for are solid growthing markets, where they can see how well you know your audience, the potential, size, trends and opportunities in the target market, and the adaptability of technological, social, economic and regulatory changes.

3. THE LANGUAGE OF METRICS: Showcase Your Viability with Numbers

You may be wondering what kind of elements you should include when presenting your startup's traction.

First and foremost, investors love to see revenue numbers. That’s why your goal here is to demonstrate metrics such as MRR and ARR. MRR (Monthly Recurring Revenue) can help you visualize if your service or product revenue is stable and reliable. Meanwhile ARR (Annual Recurring Revenue) is designed to showcase the long-term growth of your startup. This data is vital for investors.

Another metric to take into consideration is your user adoption in digital products such as apps and websites, namely DAU (Daily Active Users) and MAU (Monthly Active Users). These two factors illustrate how well your product is adapting to the customer and are measured by the rate of active services being provided. The investor will know if your digital service can keep your audience active and will be able to make projections according to your analysis.

Your profit margin is another important metric. It describes the gross margin or the percentage of free revenue after deducting production and service costs. It's important to know that early-stage startups are rarely profitable, and investors are aware of this. If you can't show immediate profitability, demonstrate the perspectives for reaching the break-even point with scalability.

Next up, your Churn rate – a metric, which shows the percentage of your clients who stop using your product or service. A high churn rate indicates to the investor that something is not working properly. To reduce your Churn rate you can resort to practices such as customer service or quality testing.

Additionally, if your startup has a B2B or B2B2C model, you can also mention your number of strategic alliances or integrations with other companies.

Remember to select the metrics that are most relevant to your business model - not all the metrics I have mentioned are applicable to all startups.

4. SCALABLE BUSINESS MODEL: Sustainability of Growth

This means that your business model should show significant potential for scalability to investors. Several factors help define scalability potential, such as:

  • Market Potential and Competitive Advantage: Identifies a unique value proposition that meets unfulfilled customer needs in the market, offering an opportunity to carve out a growing, sustainable niche or outperform competitors.

  • An important factor in your infrastructure is the flexibility with which you can increase the production capacity or scalability of your service without significant delay, inconvenience or cost.

  • If your business model is sustainable you may be able to acquire new customers at a lower cost without altering the LTV (Lifetime Value), indicating that your business or startup is scalable in terms of marketing strategy.

The scalability potential can be unique for each product, but the fact remains that it is one of the main considerations for venture capital.

5. EXPERIENCED TEAM: Power as a Whole

What kind of team do you have? When an investor is looking for a startup to invest money into, they look for a strong level of commitment and strong skills, both of which prove that the team has the right amount of confidence in achieving the goals and driving the startup's potential.

The success of any startup lies in the team that sustains it, meaning that if you want to boost your business model you must have an excellent team of people, who can help you achieve your goals.

Once you are clear about your company's needs, you can start looking for people who have the skills and experience to deliver them. Investing time and effort in building an exceptional team lays the foundation for unprecedented innovation, exponential growth, and remarkable achievements in the fiercely competitive startup landscape.

6. PRODUCT VISION AND ADOPTION: The Potential in the Marketplace

Based on my experience, your product vision reflects the ambition of your startup. It describes the purpose and intent of your product or service, indicating what it aims to achieve in the long term. It helps ensure a common understanding among team members and potential partners, investors, and customers about why the product exists.

The absence of a clear vision of the product can have detrimental consequences, such as a lack of focus in the team and difficulty in identifying important tasks. The crucial elements of your product development process should be based on your product vision. When creating a product vision, make sure it is ambitious, achievable, customer-focused, concise, and clear.

7. COMPETITIVE ADVANTAGE: One Step Ahead of The Adversary

In any market, it is essential to know your competitors. Pay close attention to the movements of your competitors. This will allow you to focus on highlighting the advantages that your business has to offer compared to other alternatives on the market, either with unique pricing models, dynamic service methods, etc.

There is one comment made by Peter Thiel, an American investor and co-founder of PayPal, that has been stuck in my head ever since. Thiel suggests that all startups should aim to become monopolies, as the barriers to entering the market can seem rather discouraging. One way startups can achieve that is through effective channel partnerships or by partnering uniquely and beneficially with existing companies that might acquire them.

8. EXIT STRATEGY: What Investors Are Expecting from You

Last but definitely not least, as a startup founder your main goal is to lead your business to a successful exit. Whether through an initial public offering (IPO), selling your business to a larger company, or choosing another option, the right exit strategy demonstrates the exact way investors can make a profit from their investment. What’s more, ultimately, an exit plan highlights that you, as a mindful business person, care about your investor returns by prioritizing strategic planning and long-term viability of your project.