Investment pitches in TV land teach budding entrepreneurs little more than the need to memorise their numbers and come up with an engaging story. But what of the intricacies of the investor’s thought process and their pet hates, preferences and turn-offs?
The ideal place to find out, BQ thought, was at an open event presented by Jonathan Gold – a hugely influential investment figure in the North East as founder of Finance Tree and through his role as director of Rivers Capital Partners.
We joined the assembled would-be entrepreneurs in Newcastle to uncover exactly what he and his peers are looking for in the planning and pitching process.
“Why do you want investment?” Jonathan Gold asks a roomful of businesspeople of varying ages and at various stages of their entrepreneurial journey.
An awkward silence is broken a response from the front row; “to make more money?”
While this is undoubtedly the end-game of most entrepreneurs, it should not be the main motivator, as Gold explains: “Everyone who knocks on my door says I should invest in them to make more money. But the ones I invest in are those that I believe will make money for us and our investors.
“Anyone can draw up a fancy spread sheet that shows you will make me money but the real test is the substance behind that – what assumptions have you used and how have you developed that going forward. Before you go to any investor, take a step back and think where you are now and where you want to go.
“If you only want to make money there are easier ways to do it than setting up your own business. Hopefully you’ve got some passion in what you want to do. Take time to think about it and talk to your friends and family to do a bit of self-analysis.”
Don’t be blind to your competition
According to Gold, the word ‘unique’ is meaningless. Furthermore failure to accept and admit to competition for your business is a sure fire way of leaving your target investor unimpressed. “There will be someone somewhere that has something that looks pretty similar to what you have,” he says. “One of my pet hates in business is when people say there is no competition, which is rubbish. I’ve seen business plans that don’t talk about competition. If there really is nothing else on the market, then your biggest competition is apathy or people doing things as they’ve always done them.”
Build a balanced team
“You’ve got to prove to me that you’ve got a strong management team. I see some businesses in which the owners have recruited clones of themselves.
“It’s an interesting basic psychological human trait but unless you do something to break out of that you’re almost certainly going to recruit people like you because you get on with you.
“A lesson I’ve learned is that you need to know what your characteristics, strengths and weaknesses are. You’re not going to find this out yourself so you have to ask other people and maybe go on the odd course. What we look for is balance in a management team.”
Keep something back
Stand in earshot of an investment pitch and you may hear the abbreviation ‘FFF’ – short for friends, family and fools. With bank funding remaining an elusive commodity, these are the potential sources of financial backing that may get your start-up to a stage where it is ripe for investment.
But personally-sourced funds come with a warning – don’t spend them all up front.
Gold says: “If you do have your own cash, make sure you have some aside for when you talk to the investors. Don’t use it all up before you see me.
“It doesn’t help to lose it in the system and you won’t own anymore of the business because you’ve put more into it upfront.
“But it’s also not a very strong statement to say that you’ve spent all the money already especially as I might not like what you’ve done with it.”
Timed to perfection
In any investment pitch good timekeeping is essential. “When you pitch to me, everything you say is being analysed,” Gold says. “You’ve only got five to ten minutes – so firstly do not run into overtime. There’s nothing more irritating, if you’ve got to see ten people in a row, than people that haven’t finished explaining things succinctly.
“Also, don’t spend three quarters of the pitch talking about the product and then suddenly realising you haven’t mentioned the finances. I would always divide it into thirds. Talk about the business model for a third, the product for a third and the management team and finances for a third. You’ve got to cram it all in so you can’t go into great detail of how your product works.”
Play the long game
Gold advises approaching investors with the full life of the business in mind, not merely the initial start-up steps – and this should be reflected in the amount of funding requested.
“I want to see a business plan that says ‘my proof of concept is over £60,000 but over the life of things I’m going to need £1m before I stop needing to raise money’.
“I’m concerned about the full life of the business, so don’t just say you need £50,000 to get it started. Think about what you’ll need before you no longer need further funding.”
Prepare your defence
IP protection certainly helps reassure potential investors – but Gold warns against the complacent belief that it is watertight. “Whether it’s a new product or an old one, it needs to have something about it that is going to allow it to penetrate the market. IP is about analysing and protecting what you’ve got but you’ve got but it’s also important to remember that IP protection is not a complete defence. People can still breach it and it’s only as good as the effort you’re prepared to put in to defend it in due course.”
Some other insider tips...
Business plans still matter
“There’s a school of thought going round the Twitterverse that it’s becoming trendy to not have a business plan all of a sudden. But you have to communicate your idea to people. The business plan is a communication tool. We invest in businesses, not products.”
The finer details
A cautionary tale from Gold explains why an executive summary in a business plan is essential. “An investor I know has his PA open every business plan that arrives in the post. If there’s no executive summary it goes in the bin,” he says. “It could be the next Google but they just don’t have the time when they’re getting 100 business plans every week.”
Making an estimate
“Do have a go at estimating what my return might be. I’ll probably disagree with you but it shows a certain amount of self knowledge and that you’ve thought about what your business is worth."