How to Avoid Investor Disconnect
By Jeffrey E. Finkle
I recently was asked to judge a pitching competition for CannInvest NJ. The format was familiar, each participant was given eight minutes to pitch their business idea to a panel of judges and an audience of on-lookers. The judges gave feedback and voted to determine a winner.
Most of the presentations missed the mark. They suffered from one of the following afflictions: the story failed to unfold in way that was understood, ideas and acronyms were referenced prior to being defined or explained, facts were presented that conflicted with each other, and some slides were missing altogether.
There are many resources available to learn how to pitch, and message in general, to investors They can be found in the blogosphere, SlideShare, online classes, and by attending meet-ups.
Tech entrepreneurs are aware of them, but cannabis entrepreneurs may not be, unless they are from the tech community.
As a fund manager, and angel investor, through the ARC Angel Fund in New York City, and now, co-founder of the Viridian Members Fund, I have seen thousands of presentations, many of them given to a room of four or five investors. At this point I can nearly predict the point of investor disconnect. The point where confusion takes over, the index finger scratches the scalp, the brain expends too many cycles trying to reconcile what it just heard, and starts missing out completely on what is now being said.
Entrepreneurs need to avoid investor disconnect by communicating to investors thoughtfully. There are conflicting views on how to do this. I have a preferred way in which I like to hear presentations from companies raising seed and series A rounds.
First, let’s dispel a common myth. It’s not the number of slides, it’s the number of points you are making. Some points take more than one slide, but never make more than one point on a slide.
I recommend the following 14 points:
#1 THE PROBLEM SPACE OR UNMET NEED
Convey this in a clear and concise way. Make it experiential. Multiple slides are ok to build a story arc. Video is great.
#2 THE CONSEQUENCE OF THE PROBLEM OR UNMET NEED NOT BEING SOLVED
Ok, I may buy the problem-space, but I need to care. I need to know what is at stake. The consequence can be a lack of productivity, it could be lack of access to a service or a product, or it could be economic; someone is going to lose a lot of money or miss out on making a lot of money if the problem isn’t solved. It is best if it is economic.
#3 THE WAYS IN WHICH OTHER COMPANIES HAVE TRIED TO SOLVE THE PROBLEM, BUT FAILED
If the problem-space is real and there a clear consequence to it not being solved, then it must be a really good idea. So, why aren’t other companies trying to solve the problem. This is not to be a full-blown competitive analysis – that comes later. This is meant to knit together the story that leaves no gaps. Depending on the company, this can be broken up into two parts, legacy providers, and new startups.
#4 INTRODUCE YOUR UNIQUE SOLUTION
Start with a statement about what the solution is, convey its essential features. Most important is that the solution must directly address points these three points: the need, the consequence and the other approaches to the problem. Your solution is the BEST way to solve the problem.
This slide answers the question, “Why now?” Timing is everything. Are you facing headwinds or are you being pushed by tailwind?
If you nail these first five points and investors get it, everything else is easy.
#6 MARKET SIZE
So real problem space that is deeply felt, clear consequence, a novel solution and good timing – cool. Now I want to know how big the opportunity is. Best practice is to use TAM Total Addressable Market), SAM (Serviceable Addressable Market), & SOM (Serviceable Obtainable Market). If you are not familiar with this, just type it into your search bar.
#7A TRACTION: PROGRESS TO DATE
Progress points could be sales, customers, production capacity, development, etc.
#7B METRICS THAT DEFINE SUCCESS
If you have not launched your product yet, skip #7A and go right to 7B. If you have, combine them into one. There should be three to five metrics, more like three and definitely not more than five, that are the right levers of your business. It could be yield for a cultivator or processing company, downloads and average monthly and daily users or attrition rates for a tech company or cost of customer acquisition (CAC) and lifetime value (LTV) for most companies. Think carefully about this. Even if you don’t have traction, it is essential for investors to know that you are focused on the right things and that you are data-driven.
#8 UNIT ECONOMICS
Unit economics will indicate if it’s fundamentally a good business idea. They can be CAC, LTV, Gross Profit, etc.
Charts and X/Y axis graphs are an excellent way to convey this.
This is where I depart a bit from other methods. Some start with team. I don’t advise this. I want to hear the opportunity first and then see if the team is the right one to execute it. I want to determine if there is appropriate founder-market-fit. The opportunity is more subjective, and I want to be grounded in that first and then apply the teams’ capability to the opportunity, not the other way around. In truth though, this could easily be moved up to right after #6. Each member should have four or five lines. Add Advisors, but don’t play them up too much – it’s the operators that matter.
#11 FINANCIAL HISTORY AND CURRENT RAISE
For financial history, convey the date, the amount raised, the form of security (SAFE, NOTE, Common Stock, Series Seed, Series A, etc.), the pre-money valuation, and the milestones achieved. For current raise, convey the amount of the raise, the type of security, if there is a lead, how much is committed and by whom, which investors are returning and for how much, how long it will last and what milestones will be achieved. Do not show a return on investment to your investors and do not use DCF or other methods of justifying your valuation. Investors will generally use market comps and will calculate return on their own, based on their internal models.
#12 USE OF FUNDS
Show this by function: Development, Sales and Marketing (can break out things like regional expansion or new product launch product), G&A. Each of these categories could have a program component and a headcount component.
#13 FINANCIAL HISTORY AND FORECAST
It is not always essential for pre-seed companies and seed companies that are pre-revenue to include this, because really you are guessing. The only number you are surely not going to hit is the one on the slide. For all other seed and series A companies, stick with no more than two prior years and three forward years. Most companies should only show the following lines: sales, gross profit, operating expenses, operating profit, headcount, and cash. You could add one or two lines for revenue drivers at the top, such as customers, resellers, users, etc., to give context to these numbers.
#14 POTENTIAL ACQUIRERS
Show by category (e.g., cultivators, food brands, etc.), example of companies in that category, the dominant logic of them acquiring you (e.g., regional expansion, product-line extension, cost consolidation). You should have at least two or three categories.
It is essential to minimize clarification questions by conveying them in the presentation. This way, the questions asked can be about more significant components of the business and the opportunity.
Raising money is hard. A great presentation can’t make a bad company look good, but it can prevent a good company from being overlooked.
Jeffrey E. Finkle
Named one of the “25 Angel Investors in New York You Need to Know” by AlleyWatch in 2014, Jeff has been a venture investor for ten years, an angel investor for eight years. Jeff is presently Co-founder of the Viridian Members Fund, the first member-managed fund in cannabis. He is also a Managing Member of Viridian Ventures and serves as Chairman of the Evaluation Committee and Treasurer of the ARC Angel Fund. Jeff has been actively advising startups at Reitler Advisory Group and publishes insights to his bog www.finkabout.it. He is a frequent panelist, speaker, and judge on venture investing and pitch competitions in NY. Jeff has also guest lectured and held office hours for many incubators/accelerators including Start-up Leadership Program, 37 Angels, NYU Polytech Incubator (New York City and Brooklyn), DreamIT Ventures, and FashInvest. Prior to his work with angel and seed groups, Jeff was a partner of Odeon Capital Partners, an early-stage venture capital fund. Prior to Odeon, Jeff was an operating executive at CA, Inc., and Cheyenne Software, Inc., where he served as GM of the Unix Division, VP of Corporate Development, VP of Corporate Marketing, and Director of Product Management. Jeff also serves as Chairman of the Board of Promoting Specialized Care and Health (PSCH), a not-for-profit offering residential, clinical, and day programs to 9,000 individuals with developmental, psychological, and behavioral disabilities in NYC’s five boroughs and Long Island.