Know Who You Are Pitching To

In past weeks we have discussed who can help you support the capital raise effort and how you can prepare for the important task of pitching your company or idea to the investment community.

The next steps prior to pitching your project are identifying who you are pitching to and understanding what each type of investor is looking for. Many entrepreneurs develop marketing materials and a pitch with no specific audience in mind. When doing this you can easily disqualify otherwise well qualified investors. Understanding each group or individual’s information and structural needs is critical.

Investors can be all sorts of companies, groups or individuals. Below we address some of the more common types of investors you may be pitching to and generally what they are looking for in an investment.

Individuals/Angel Investors – This is a local investor or group of local investors who are open to talking with budding businesses in the area. There is a great amount of variety in the level of complexity and sophistication needed to work with this group based on the range of motivational factors driving their interest. Some angels (usually retirees with large personal balance sheets) are looking to put their capital to work in a project they believe in. Oftentimes this group will look to be semi-active in the business (attending board meetings, reviewing monthly financial statements, introducing new opportunities) helping to grow it to the next level. They usually have a large circle of influence and can introduce you to key people (new investors, suppliers, salespeople, etc.) that can be very beneficial. Other angels look to be less involved and simply want a return on their money that beats what they can get in the capital markets. This group usually has limited involvement as long as their investment is driving the returns they are looking for.

In any case, angels are often less concerned about large rapid returns than other professional investment groups – though they are still want a positive return – and can be a good hands-on addition to your team locally. Because of this difference in investment goals, angels can be a nice fit if you are still in the development phase of your business idea.

Pros:
• Accessible
• Often provide valuable feedback
• Can introduce you to multiple parties that can help drive growth
• Legitimize your business
• Available at almost any stage of business growth, from idea onward
• Often lower ROI expectations

Cons:
• Less formal process, which can delay getting funding
• Often less resources than a professional investment group
• Often higher level of personal involvement (this can be both a pro and a con)
• Decision making process can actually take longer

If you have a very early stage idea, need an operational partner, or have a great small- to mid-sized business idea, most angels can be the best fit.

Venture Capital – First off, let me just say it – Venture Capital is not a bad word, don’t go run and hide. It’s my personal opinion that VC’s get a bad wrap in the early stage world because they are misunderstood. VC’s all have their own strategy, but often it boils down to something like this: Out of 10 investments they expect most to fail, a few to break even and one to be such a big success that it offsets all the losses from the other 9 investments. Because of this strategy it’s not unheard of for a VC group to look for projects that can carry and expected internal rate of return of over 1000%. They are not trying to steal your idea, your soul or anything really, they are just trying to support a strategy similar to the one listed above.

Pros:
• Well funded.
• It is the job of a VC to transact; they have a formal process, a clear vision and need to deploy money to earn a management fee from their limited partners.
• Potential plug and play synergies that can grow your business or idea tenfold basically over night.
• Often high visibility, allowing your company to gain both product and PR traction.
• The ability to invest additional capital in later stages of the business’ growth, saving the founders the costly task of raising another round of growth capita.l
• Top tier management support – These guys want you … need you to make money and will do whatever is in their power to help you and your collective business venture.

Cons:
• Can be difficult to reach and engage. Big VCs see hundreds if not thousands of deals a year, sometimes they just won’t get to yours.
• May have an aggressive take on valuation and typically could end up holding between 20-50% of your early stage company (there are always exceptions to this rule, if you are talking about valuation you are already moving along nicely in the process).

VC’s have a standard process, and often want to see an initial teaser document that covers the industry, the idea basics and some top line financial information. This is often sent to them blindly. Should they respond to one of your follow-ups, expect to deliver an in-depth finance focused presentation at or prior to meeting with anyone from the VC group. A VC is a great partner for an early or later stage growth company that has a big potential upside and a huge potential market. Each group has a specific charter, which governs what they look at for investments. Knowing what group invests in your space, or product, and what groups own holdings in companies that could rapidly create value for your company and the portfolio company can increase your chances of getting some attention. If I only invest in real estate deals over 10 MD in California why would you send me your startup tech pitch to raise 1 MD in Texas?
Good prospect research goes along way when working with VC’s. It can save a lot of time, and significantly increase your chances of talking to people who will value and listen to what you are saying.

Private Equity- The bigger older brother of VC’s. Private equity typically looks to invest in more mature concepts or businesses that have already proven traction in the market place. It is not uncommon for private equity groups to buy larger profitable businesses in order to combine them with other holdings they have. I have included private equity in this article because they often will look at deals that are smaller than their normal target transaction if it adds value to a company they already own. Private equity groups tend to look for slightly more modest returns and focus on areas that are often less risk intensive.

The pros and cons of working with private equity are similar to that of a venture capital group, however private equity often has larger fund bases. Both Private equity and venture capital groups are comprised of analysts and partners just like you and I. As I mentioned above, it is their job to deploy funds. If they don’t do this they don’t get paid. Remember this when you are pitching: These are regular people, treat them with respect but do not let your fears or nerves get to you. It’s their job to listen to people like you in order to capture opportunity.

There are many differences and subtleties between every investor and investment group. Understanding what these are and who is investing in what/where is a necessary step to ensuring you are using your time wisely when raising capital. Before you send out any information to anyone you should have a clear understanding of why someone is on your prospect list. If you don’t, then you shouldn’t contact them.

About the author:

Ed Graffin is the director of research at CapTarget, LLC. CapTarget provides investor and deal flow research for the M&A, Private Equity and Entrepreneur communities. To learn more about CaptTarget’s services please visitwww.captarget.com or follow up on twitter @CapTarget