Entrepreneurs live on a super-sized serving of passion, commitment and courage. They commit their lives while investors offer dollars and perhaps some time. Those same qualities can silently lead an entrepreneur astray when pitching investors.
For example, what seem like a series of strategic pivots to an entrepreneur, an investor could view as an endless quest for a sustainable business model. As I’ve mentioned before, pivoting and rotating in place are two sides of the same coin.
Having listened to countless pitches over the last fifteen years, what makes these errors particularly irksome is 1) how frequently they occur; and, 2) how easy they are to avoid.
1. Confusing effort with progress and therefore, valuation
Long hours, diving catches and heroic wins are all part of the entrepreneurs’ journey. From their perspective, no one is sacrificing more nor working harder. They measure progress by looking back in time and comparing where they are now to where they’ve been.
Investors don’t share that personal experience nor the effort it took. Investors compare this startup to other ventures they’ve seen at a similar stage. Investors are more interested in what the next inflection point is and when they’ll reach it.
Technologists, in particular, are prone to measuring progress internally. They’re problem solvers at heart and recall every bug, speed, stability and capacity improvement. Investors get excited by external success such as marketplace traction and competitive positioning.
Valuation works the same way. Ultimately, the market determines what a company is worth; not how much effort was put in by the startup team.
When pitching investors, use your past progress to build confidence in your ability to execute but focus your pitch on defining the external inflection points and the path to reach them.
2. Confusing having answers with gaining investor confidence
There’s nothing that irks me more than an entrepreneur who has a quick answer to every question investors throw their way. While they’re intending to demonstrate how diligently they’ve identified and mitigated risks, when every answer starts with, “we’ve looked at that, here’s how we’re handling that” it actually worries investors.
Experienced investors know that the path forward rarely plays out as originally laid out. For starters, everything seems to take longer and cost more than planned. More importantly, the most valuable technical and market fit experiments illuminate new paths versus confirming current direction.
Investors’ questions test how startup leaders think and respond to unknowns. There’s a thin line between being prepared and unintentionally arrogant. A good response is to describe your current approach and the assumptions that need to be tested. Better to ask the investor for their take on pivotal concerns than always having an answer.
3. Confusing technology with customer value
Value is what a customer gets out of a product or service. Technology is a means for delivering it. We frequently see pitches that confuse cool technology with customer value. This shows up as “science projects” or “technology push” companies.
Science projects have potential, but they’ve barely left the lab. Stability, scaling, cost and supply issues have yet to be addressed. Technology push projects have left the lab but are still searching for a viable customer use case. A common clue is when the entrepreneur cites innumerable potential uses but hasn’t tested or achieved product-market fit with any.
Entrepreneurs would do better if they start by putting themselves in their customers’ shoes and ask, “What is the job they’re struggling to do?” Getting that job done faster, cheaper or better is what matters. Only in selective cases such as pharmaceuticals, is technology itself, a likely end.
Even when technology will obviously help do their job better, technology adoption is not a given. Be it a pad of paper or an electronic spreadsheet, customers have a current solution. It may be slow, costly or underperforming but like a bad habit, it’s the devil they know.
Habits are tough to change. Adopting a new technology might look obvious to the entrepreneur but by itself, it doesn’t account for the real and imagined switching costs. Ask yourself what do customers have to give up to adopt the new solution?
4. Confusing early traction with sustainable momentum
Landing that first customer is an exciting and enticing achievement. They validate the entrepreneur’s thesis but only to a point. Early adopters, by definition, do not represent the mainstream market. For whatever reasons, they see enough value to offset the risk of buying from a young, unproven company.
Early adopters often take a leap because of a prior connection to the startup. Perhaps they worked with the founder in a prior setting. That connection provides the trust that compensates for the startup’s immaturity. It also signals why they are not representative of the broader market. Truly new customers don’t share that trusting history.
Investors want customer validation that extends beyond past relationships. At a minimum, early adopters are more impressive to investors when they’ve increased their buying significantly beyond initial orders. Even more impressive are referrals that come from early adopter recommendations.
Entrepreneurs should leverage their past relationships but recognize their limited reference value. Use them to bridge into truly new customers or volume.
5. Confusing market entry strategy with different business models.
It’s rare that a startup has the credibility to sell to large enterprises. They begin with baby steps but often underestimate the challenges they’ll face moving upstream.
For example, many SAAS companies start with a “freemium” strategy hoping to convert satisfied users into paying customers. Alternatively, entrepreneurs will initially target small and medium size businesses (SMB) and then try to move up-market.
Both approaches can work. The challenge is keeping focused on making the second step. Current customers provide feedback and ask for improvements that if addressed too aggressively, can anchor the startup too firmly in the initial market. What was a stepping stone morphs into a blocking boulder.
Not only are the requirements of up-market customers more robust, it’s difficult to consider those who had the guts to invest early in your firm as disposable. It sounds harsh, but scaling requires focusing on the requirements of the next horizon.
For most, the answer is not to try and penetrate the enterprise market earlier. The exception would be if one has the financial backing and strategic footing to do so; go for it. That’s usually limited to serial entrepreneurs with deep connections.
Rather it’s important to recognize that without discipline, early customers can quietly lure an entrepreneur too deeply into the entry market. To use SMB as a launching pad, startups have to be willing to jettison early adopters when greater opportunities present themselves.
Minds over Money
In sum, your best investors are like the Farmers Insurance spokesperson. They know a thing or two because they’ve seen a thing or two. Your company needs the fuel that dollars provide but you’ll get a far better return if you engage investors’ intellect and experience along with their checkbooks.