Why elevator pitches don’t work with investors

What’s the problem with elevator pitches?

For one thing, investors don’t care much about them, according to Dan Mothersill, a Toronto-based serial entrepreneur and angel investor who has advised and funded numerous tech start-ups.

“The problem with elevator pitches is than no investor cares what you do,” said Mothersill. “It’s not that you’ve built a better mousetrap – it’s what pain does that mouse trap solve in the marketplace and whether or not there’s a buyer for it.”

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Mothersill, a founding member of the National Angel Capital Organization, a nationwide group promoting the development of angel investor community in Canada, recently held a workshop entitled Money Chase 2011: Pitching for Today’s Capital at the Innovation Synergy Centre in Markham.

Speaking to room full of small and medium sized business (SMB) owners, Mothersill said many start-up operators make the common mistake of falling into an elevator pitch type of presentation during their initial formal meeting with the investors. This essentially means sticking to a theme that answers the question: What do you do?

Your most important 20 minutes

When business owners are invited by angel investors or venture capital investors to pitch their business, they are typically given up to 20 minutes to do a presentation, according to Mothersill.

During these 20 minutes, investors are not looking for a lengthy discussion about the company, he said. Investors expect a quick snapshot of the company and its proposal to help them decide if it is worth a second look.

At this point, there is no need to inundate the audience with reams of data and technical information. The point of the initial meeting is to hook investors in to asking you to come for a second meeting. “It’s in that second meeting when you can expect the investor do their due diligence and really drill down through your numbers of your business plan,” said Mothersill.

“This is going to be your most important 20 minutes,” he said.

Unfortunately, Mothersill said, many business owners waste away this time in talking about how “groundbreaking or unique” their product or service is. Mothersill told his audience that investors have a credo: “The net sum value of a killer technology, disruptive science, breakthrough product or compelling service idea is zero – unless you can demonstrate how you will turn it into a significant profitable business within the next three to five years.”

Proof of profit

A former owner of a start-up school bus company agrees that it is vital to prove to investors that a business will be profitable.

“Investors want to make sure that their money will be secure and that they will get a profit out of their investment,” said Marnie Walker, owner of 401 Bay Centre a full service business centre offering office space in downtown Toronto. 401 Bay Centre was the business Walker set up after she was able to sell her extremely profitable Student Express school buss service.

In securing financing from the bank for her school bus company, Walker had to prove it was a viable venture.” Before I went to the banks for money, I secured a contract from the York District School Board. This proved to I had clients,” she said.

But not everyone has the luxury of a client right off the bat, according to Shabbir Yussuf, vice-president of Echologics Engineering Inc., an acoustics signal processing firm in Toronto.

Echologics was able to gain government funding but it was not easy. The company has spent four years developing a hardware and software system that reduces packet signal loss and speeds up online delivery of various files. “But because we are just a start up, it’s very hard for us to get the bridge funding to take us to the next level – getting our product to market,” said Yossuf.

Breaking out the dead lobster

Instead of slipping into elevator pitch mode, Mothersill advises that business owners to break out the “dead lobster” and lay it on the table.

“The dead lobster is that thing about your business that catches everyone’s attention and answers the question why they should invest in your business,” he said.

Start-up owners need to:

  • Clearly define a current pain, unsatisfied trend or unfulfilled demand in market.
  • Tell investors your solution. What is it that you do better than the competition?
  • Show that people are or will be willing to pay for what you are offering

“Business owners should be able to deliver their dead lobster in as much as five sentences,” said Mothersill.

Another angel investor agrees. “Traction not technology is what will get investors to open their wallets, according to Rob Kotourbash, managing director of Maple Leaf Angel Investment Group, a Toronto-based angel investment group.

Proof of viability such as contract, letter of intention from potential clients, or market research showing sales and projected cash flow weighs heavily on an angel investor’s decision of whether or not to fund a venture, said Kotourbash.

An initial presentation before potential investors should not be more than 25 pages long, said Mothersill. It should be written for the average reader and text must not be laden with jargon or tech talk. The document should include references and source and deal terms.

Twelve items that should be included in the presentation document are:

  • Document cover (showing your company, date of the presentation and name of the company you are presenting to)
  • The dead lobster (pain and solution explanation)
  • The market (overall size, your niche and your market share)
  • Description of product, technology or science
  • Before and after diagram defining how the world will look like with your product
  • Go to market strategy
  • Your company team
  • Milestones (what have you done so far)
  • Target milestones (what will you do with the funding, where will your company be with the funding you intend to get)
  • Competition (why are you better than your competition and who can kill your business – sometimes investors want to know if you are a good takeover target)
  • Financials (three to five year projections
  • Investment highlights (key points that investors should remember)

Nestor Arellano is a Senior Writer at ITBusiness.ca. Follow him on Twitter, read his blog, and join the IT Business Facebook Page.

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