(and what you might want to say instead)
Optimism is an indispensable ingredient for any successful entrepreneur. It is undeniably necessary for entrepreneurs wanting to change the world, take on larger competitors, or break new ground with new products. Optimism is the absolute friend of innovation, but it isn’t always the best friend of the entrepreneur in the pitch meeting. As I reflect on the thousands of company pitch meetings I’ve participated in with entrepreneurs over the last twenty years, there are a recurring set of topics in which entrepreneurs are often overly optimistic – despite their best intentions. Entrepreneurs can and should be confident about their businesses, but realism in the pitch meeting is more friend than foe. Here are my top five most common “unbelievable” things said in pitch meetings, with some suggestions of alternate approaches.
I. Our financial projections are conservative
The most common word entrepreneurs use in an investor pitch meeting to describe their financial projections is “conservative”. They understandably want to convey to prospective investors that their projections are realistic and attainable. However, I’d estimate that easily 90%+ of companies don’t end up meeting their stated financial projections and many of them miss their projections quite materially. Yet, despite that, an entrepreneur has never described their financial projections to me as “optimistic”. Therefore, go into your pitch meeting appreciating that most investors will be skeptical of any financial plan, even if it is labeled “conservative”.
My suggestion to address this is rather than presenting one set of financials and calling it conservative, present three scenarios: a downside case, a base case, and an upside case. Start by laying out the key drivers or variables in your financial model that are most impactful on overall performance. For your base case, make the inputs for those key drivers the actual current performance of your company today (or the actual performance of similar companies). Your base case will be grounded in actual results which will earn credibility with your prospective investors. For your downside case, presume degradation in those inputs. And, for your upside case, presume improvement in those inputs. Even if you want to emphasize that the base or upside case is the most probable outcome, having built the other scenarios demonstrates a level of objectivity that builds credibility. This approach will stand out with investors as reflecting a detailed understanding of your business which may be even more valuable than presenting an optimistic set of financial projections.
II. We are going after a multi-billion dollar market
The most common approach to determining the market size in a pitch deck is to define the market as broadly as possible and to find a third-party source with the largest market size for that sector. Therefore, a high majority of the companies say they are going after multi-billion dollar addressable market opportunities. This happens so commonly that it seems as if entrepreneurs presume investors won’t be interested if they don’t show a massive market size. This isn’t always the case. While we have certainly invested in some great companies that legitimately were playing in multi-billion dollar markets, we’ve had many more winners who, in reality, gained meaningful market share of much smaller markets.
If your business is to achieve $50 million in revenue, for example, I’ve actually found it to be more common for that to occur because the company has secured 10% of a $500M market rather than 1% of a $5B market. Therefore, consider using your market size analysis to demonstrate a keen understanding of who is and who is not your customer rather than to project that everyone could be your customer. Take that large market size number and articulate why various segments of the market are not your ideal target customer and thus not really part of your addressable market. While this approach will systematically narrow your market size number, it will reflect that you really know your target customer, which is infinitely more important to the success of your business.
III. We are the market leader
Most companies that come into pitch, regardless of size or history, will declare themselves the market leader in their respective industry. They will often show the 2×2 matrix with their company in the upper right leadership quadrant. Perhaps this is done with good reason – saying you have a solid lock on 5th place in your market doesn’t usually win the confidence of prospective investors. However, while there are some exceptions, usually young companies are not in fact market leaders. That’s ok – what’s more important than trying to convince investors that you are the market leader today is convincing them that you have the potential to be the market leader tomorrow. How do you do this?
Focus less of your pitch on your competitors, and focus more of your pitch on your customers. Convince investors that your product or service brings tremendous value to your customers through clear examples. Explain why there are many more prospects just like those customers and how you intend to pursue those prospects. Demonstrate how you have a unique and defensible ability to deliver that value to customers over the long run. If you are able to convince investors of those three things, they will believe you can be the market leader without you even having to say it.
IV. We have a great management team
Undoubtedly, the quality of the management team is critical to the success of any business. Therefore, most companies project that they have a complete management team that is filled with A players across the board. It is perfectly understandable that you want to give prospective investors confidence that the company is immersed with the best and brightest talent possible. However, experienced investors know that most management teams are incomplete and inevitably not everyone on the team is an all-star. Believing that your team is perfect (when it probably isn’t) is not what gives prospective investors confidence.
Investors don’t need complete management teams to back a company. First and foremost, they need one or two talented entrepreneurs or executives as the backbone of the company. Secondly, they need both realism and high standards on the state of the rest of the team. Therefore, consider being open about where the holes are in the team and what specifically you’re looking for in those roles. Talk with some detail about what standards you have for the roles you intend to hire. It’s quite possible that the investor may know great talent for those roles and being able to imagine your company with those people involved may make the opportunity all that more attractive.
V. We have reasonable valuation expectations
Many entrepreneurs, when setting their own valuation expectations, find the most favorable comparable transactions and apply those multiples to their business to derive their expected valuation. They comp themselves against the best financing/M&A multiples and the highest-priced, publicly-traded companies in their sector, saying they are being “reasonable” by adopting those multiples for their own business. There’s nothing wrong with this approach – I’d probably do the same thing if I was in their shoes.
However, the reality is investors know all too well that for every great comp, there’s a bad comp. For every company that trades at a premium multiple, there are companies that trade at depressed multiples in the same sector. Investors also know that large, market-leading companies that are being acquired outright or are freely tradable public companies often deserve and get premium multiples. Those aren’t characteristics typically embodied in young emerging companies. So, appreciate that your definition of “reasonable” might not be the same as the investor you’re speaking with. My suggestion on this topic is quite simple: Don’t say that the valuation you want is reasonable, say that whatever the market decides is reasonable and leave it to the investors to decide. The market may decide that your valuation expectations are spot-on, too conservative or too aggressive – in either case, what the market decides is the true reasonable valuation for your company.
And those are the top five, based on my experience. When optimism is grounded in realism, it makes the optimism that much more believable, which is a great step towards winning the support of a prospective investor.