Raising Capital – What to Say and What to Avoid in an Investor Pitch

Venture capital investments in healthcare continue to soar.  The record high set in 2014 of $7 billion was matched in 2015, and the first half 2016 looks on pace to continue the trend.  Of all reported angel investments in 2015, 23% were made into early stage healthcare companies, the most active year since the data has been tracked.

Access to capital for innovative, early stage companies has never been so fluid.  The choices of capital providers are unprecedented.

Yet thousands of companies go unfunded every year.  It is true, many are not fundable because of lack of true innovation, poor business models, under developed management teams or simply too early to market.   However, many companies have the right product for the right time but just miscommunicate their solutions and needs to investors.

Investors see dozens of new pitches each week, and their jobs are as much to cull bad pitches as to find exciting opportunities.  How do you stand out in the crowd and get funded?

Speak the language of the investors.

The initial pitch to investors is just the start of the conversation.  The key to the first meeting is to get the second meeting.

What Investors Do NOT Want to Hear

To start, it is worth discussing what investors do not want to hear.  Investors see as many as 25-50 pitches per week. Part of their work is to quickly eliminate those deals that do not fit their investment criteria, perceived losers and the nut jobs.  There are a few statements and indicators that will cause an investor to politely end a call or meeting with the sad statement, “We’re going to have to take a pass on this one.”

  • Lack of Progress—Smart, early stage investors rarely invest in turnaround opportunities. They invest in growth stories.  If your company, through sales, pilot projects or other early adoption evidence, hasn’t been able to show traction after the initial seed round, it is probably not going to get funded. No traction, no funding.
  • No Clearly Defined Exit Strategy—To generate a return, investors eventually have to exit the investment. That usually means the entrepreneur will sell the company.  (Do not suggest, as an exit strategy, that you will go public.  See the next bullet point.)  The exit will likely be to a competitor, a customer or someone that serves your customers in a similar way but does not have your capabilities.  The exit strategy should be well thought-out, logical and clearly defined.
  • Overblown and Grandiose Statements—Venture capitalist are used to big egos. They are also used to entrepreneurs over promising and under delivering, so they are sensitive to grand statements of one product changing the face of the industry without clear evidence.

What Investors Want to Hear

Most investors start every entrepreneur meeting with eager anticipation.  They hope to get the lead on the next investment that will drive a 10x return and change the industry. Designing the first 10 to 15 minutes of your discussion around the following 5 points will enhance your chances of getting to the next level with investors.

  • Current Problem and Your Solution—This is the crux of your story—what problem are you solving and how are you solving it? You must succinctly convey:
    • A clearly defined problem
    • The market size
    • Your solution—exactly how you do what you do
  • Monetization and Profits—No matter how simple the business model, always include a section specifically titled, “How We Make Money”. It is better to spell it out for investors rather than to have them guess or assume.  Investors start with the financial model, and from there, they begin to understand the nuances of the business and marketing strategies.
  • People, The Team— The solution could be the greatest ever, solving the biggest problem at the highest price, but if the leaders are no good, there will be no deal. Poor leaders and folks with sketchy backgrounds normally do not get funded.  Institutional investors especially like to see partnerships if you are asking for $2.5 million and up.  The higher the ask, the deeper the executive bench is expected.  While the founder is important, investors know it takes a village.
  • Traction—Now that you have them excited, they are hoping you have traction and have shown some progress with your initial funding. Certainly there will be bumps in the road, but ultimately, to convince smart investors to invest, stair step progress is required, be it a prototype or a successful pilot project or sustainable revenue growth.
  • How Much and What Milestones—One of the mistakes entrepreneurs make when pitching to investors is not providing a clear ask of how much capital they need and exactly what Milestones they will be able to achieve with the capital. Sometimes entrepreneurs will bring two plans to a pitch. “If you give me $x, we’ll use plan A, if you give $y, we’ll go with plan B.” Investors want to know that that you have a mapped out your path and know how much you need and how you will use it.

The initial pitch is the just the start of the conversation. Your focus for the initial pitch is to get the next meeting.  Many entrepreneurs make the mistake of trying to say too much in the first encounter, leaving the investors unsure what the company even does.  The key is telling a story that checks the boxes so you can continue to the conversation and negotiations. It’s all about speaking the language of the investors.