Lately, I’ve been very interested in understanding what it takes to attract investment from outside sources. If you’re growing a business, this is probably always on your mind—if not now, then it likely will be sometime in the future.
Fundamentally, the notion of attracting outside investment is both an extremely challenging endeavor and an incredibly simple one. On the challenging side, one must convince another party to give up their limited resources (money) to hopefully make a required return on that investment sometime in the future. This investment comes with the hopes that your venture, among other things, will beat out aggressive competitors, adapt to ever changing market conditions, manage future growth, and ideally expand into the next big thing in the business. Of course, the issue from an investor’s perspective is that none of these things are known or guaranteed. On top of this, said investor likely has multiple options to consider when deciding where the BEST place is for his/her/company’s money (other ventures, stocks, bonds, savings, plain-old cash—all with varying degrees of risk and expected returns). So from square one, it’s a competitive, uphill battle to convince someone to cough up their hard earned cash on your venture.
On the other hand, attracting outside investment is also very simple. On the surface, you just need to explain to said investor exactly how and why your venture is the right option for them (easier said than done). This post by John Greathouse initially got me thinking about the “simpler” side of the topic. What struck me is that, from his perspective—which is one of the most trusted in the venture capital world, early-stage investment is not as complicated as it seems.
Here’s an excerpt from his blog post:
Business Plans are dead. Most sophisticated investors ignore them, focusing their attention on an entrepreneur’s pitch and presentation materials, financial forecast and executive summary. As noted in Entrepreneurs Shouldn’t Pitch Their Ideas To Venture Capitalists, most sophisticated investors place their bets on people rather than opportunities.
Entrepreneurs routinely seek my advice regarding their executive summaries. In most cases, I provide some combination of the following advice:
Brevity - Maximum length: two pages.
Visuals - Given the limited space, use images, graphs, charts and photos to tell your story; team pictures, logos, etc. work well.
5th Grade - Many entrepreneurs use overly dense, academically oriented language. As best-selling author Stephen King once said, “Any word you have to hunt for in a thesaurus is the wrong word.” Most newspapers are written at a third-grade reading level, White House press releases average a fourth-grade reading level and the New York Times is easily digestible by the average fifth grader. Apply the Flesch-Kincaid Readability Test to your executive summary to ensure the average 5th grader can understand it.
Buzzkill - Overuse of buzzwords and jargon convey an entrepreneur’s professional immaturity; it can also confuse a 5th grader, so use plain English.
While the points above demonstrate that attracting outside investment is simpler than most people think, it should be noted that “simpler” doesn’t mean easier…in fact it actually means quite the opposite.
Yes, this is also another Shark Tank related post (you can find the original one here). Several things brought this on. First, Shark Tank is back on TV for another season—and I couldn’t be happier! Second, after reading John’s blog post, I re-read a great series of blog posts by former Shark Tank-pitcher Fleetwood Hicks from Villy Customs that revealed the exact process he went through to prepare for the show—and in turn to pitch potential investors. The end result: he walked away with the investment he needed. The most fascinating part: by connecting his preparation with the pitch on the show and John’s blog post, one can begin to breakdown the fundamentals of what it takes to get an investor to say yes.
Check out his Shark Tank pitch here (skip forward to 31:20 into the YouTube vid):
Now let’s rewind a bit to see exactly how he prepped for the show here:
The interesting thing, which connects back to John’s blog post, is that his pitch was simple, convincing, and confident—yet it also took months to craft and years before that to get the business to the point where it was the right opportunity for the right investors! So while simple seems easy, it required an immense amount of work, planning, and iteration.