10 Key insights to master your next pitch to a potential investor

Getting your small business investor-ready is a crucial step if you are serious about growing and scaling your business venture. Whether you're looking for angel investors, venture capitalists, or other sources of capital, you need to demonstrate that your business is a promising investment opportunity. Attracting investors can be a lengthy and challenging process and it is therefore essential to be persistent and adaptable as you refine your pitch and engage with potential investors.

As an SMME, building a strong business with a compelling value proposition and a clear path to profitability will increase your chances of attracting the right investors. In order to achieve this, careful preparation and thorough due diligence is paramount. Taking a recap at our latest Investor Readiness webinar hosted Serena Davis, co-founder of Hippo Seeds, a venture capital and impact investor fund, here are some key takeaways involved in preparing your business to attract investors:

1. Money does not always = Power. There are other ways that a venture capitalist (VC) can assist your business such as providing access to markets, networks, and knowledge transfer. There are also ways you add value to your VC.  Your ideas are needed and carry a quantifiable value, VC’s know this.

2. Funders want to be partners, not police. The ultimate goal you want to achieve between yourself as an SMME and your investor is a partnership. In a partnership, both the VC and SMME have the opportunity to build the necessary assets for the business together. It’s all about aiming to build a good, open and long-term relationship with your investor.

3. What is the difference between a VC and an angel investor? The main difference is the formality. Angel investors tend to be more informal in their approach. With angel investors, the sophistication of the business is different, the ticket size is smaller, and angel investors are technically more patient. VCs provide larger investments to more mature companies, while angel investors offer early-stage funding with a personal touch. Both types of investors contribute to the growth and development of SMMEs but with different strategies, risk tolerances, and levels of involvement.

4. The 4 stages to securing investment for your small business: It is imperative that you know which stage your business is most suitable for so that you know whether you are a fit for the fund and the investor. The stages are as follows:  

• Preseed: The preseed stage of investment is the earliest phase in the funding journey of a new small business. It typically occurs before a company has developed a fully functional product, established a significant customer base, or generated substantial revenue. During this stage, entrepreneurs and founders are focused on refining their business concept, conducting initial market research, and building the foundation for their small business.
• Seed: The seed stage is focused on helping the business grow and expand, and it involves raising capital to support these efforts. Successfully navigating the seed stage involves not only raising capital but also executing a growth strategy, refining the product, and proving the viability of the business model. Businesses that thrive in the seed stage are often better positioned to secure larger investments in subsequent funding rounds.
• Seedplus: The seedplus stage represents a bridging or transitional phase where a business has typically progressed beyond the initial seed stage but hasn't quite reached the criteria required for a Series A funding round. It provides small businesses with the capital needed to refine their product, expand their customer base, and demonstrate their ability to scale.
• Series A: The Series A stage of investment is a significant milestone in the funding journey of a business. It is a critical juncture in the development of the business  where the SMME has transitioned from the earlystages of business to a more established, rapidly growing business having demonstrated product-market fit, significant traction and signs of being ready to scale its operations. Successfully securing Series A funding requires a compelling growth story, strong financials, and a clear plan for using the investment to achieve further scale and market dominance. Funding in this stage is substantial and would typically be to support large scale growth and expansion of the business.

5. Understanding the “Fund Thesis”: The fund thesis is a guiding philosophy that outlines the investment strategy and criteria a venture capital fund will follow when making investment decisions. Each VC or investor will have a different fund thesis. Only contact VC's whose thesis fit with your product. 

5. It is important that you map out your milestones. Do you know what your business growth milestones are? Are you good at managing and predicting resources to achieve your milestones? If not, it might be time to consider hiring someone to pick up the weight of areas that you struggle with. It’s important to be able to identify your strengths and weaknesses, and find someone who can fill the gaps in the areas that you struggle. These are key areas a VC will want to know you are aware of and actively working on.

7. How to impress your investor? To impress an investor, tell them what you are going to do with the funding you say you need. What is your financial model for your business? What are your core costings? What is your profit margin? Will you be hiring and how many roles will you be hiring for? If it’s equipment you need, be specific about what will be procuring. What is your customer acquisition cost and how are you acquiring your customers? How long will it take you to acquire customers, and how confident are you that they will spend on your product/service? Having the answers to questions like these readily available shows a VC that you have thought, planned ahead and therefore also substantiated legitimate needs of the business.

8. It is easier to get out of a marriage than a VC agreement. From the get-go, determine your VC’s exit plan. Your relationship with your VC will be governed by a shareholders agreement which dictates how you are going to do things during the term of partnership - this includes guidelines on how you are going to part ways one day. When you ask someone to give you their hard-earned money, it is you as the small business that loses freedom in the exchange. Your investor is investing to help you grow yes but primarily, they are investing to see a return. So keep in tune with what their plans are for their exit and that it aligns with you. 

9. Understanding Term sheets: A term sheet is a non-binding document that outlines the key terms and conditions of a potential business transaction, typically used in negotiations between a VC and prospective business. While a term sheet may not be legally binding, it is ethically binding. It serves as a preliminary agreement or a roadmap for a more detailed and legally binding agreement that agrees in high-level terms to things like valuations, voting rights, preferences and investment terms etc.

10. Important questions to ask your potential investor:

• What year are you in the fund?
• How much deployable capital do you have?
• What is your internal process and average timelines?
• What is the standard equity position that you want?

Missed this webinar? Watch it out now on the Innovator Trust YouTube Channel
LINK TO INVESTOR READINESS WEBINAR 2023: https://youtu.be/9SnFsmpvxII