By Rick Chapman, Entrepreneur-in-Residence
Rick Chapman, discusses how best to answer the question: Am I ready for investment? He explains how investor readiness is a process of passing through three distinct tiers and explores the importance of each one.
New companies often ask me if they are ‘investment ready’. The answer invariably is ‘that depends’. I break down investor readiness into three distinct tiers. By guiding companies through each one, they can prepare and develop a much stronger investment strategy and gain confidence in their pitch.
Let’s dive into your pitch deck, how it differs from your actual investor pitch and the importance of due diligence on your way to winning investment.
Tier 1 Are You Pitch Ready?
Many entrepreneurs, once they have a pitch deck and a story, believe they are ready to meet investors.
Instead, assuming the pitch is good, this is simply ‘Pitch Ready’.
There are many events such as Venturefest, Silicon Gorge, TechSW, and our own Tech-Xpo where a pitching competition forms part of the event. If a company is Pitch Ready, they can tell a good story, outline the problem they are solving, cover the size of the opportunity and generally excite an audience. However, at many of these events there is little or no cross examination, often just two or three minutes of Q&A from a mixed audience. Most good Pitch Ready companies and entrepreneurs should be able to handle this.
I often encourage entrepreneurs to take advantage of these opportunities. You’ll get a feel for how your pitch is landing, if it’s engaging, understandable – but you won’t be put under the level of scrutiny and questioning of an investor pitch. You are honing your pitching skills in a relatively low risk environment, so that when you pitch to investors, i.e. when it really counts, your story and pitching skills are both strong.
Tier 2 Are You Investor Pitch Ready?
You now have a pitch which you can deliver with confidence and you know the messages land with an audience. At the next stage, you will be invited to pitch your business and investment proposition to an angel network or a VC (Venture Capitalist). Here, you may use the same deck, or it may be a slightly different deck. For example, you may add in some information on finance being raised, return on investment and exit plans that were not part of the standard public pitch.
Whether you go with the same deck or not, you should certainly expect a much more rigorous Q&A from your audience at this stage. The questions will stretch you, challenge your thinking and probably expose legitimate weaknesses in your proposition. Being prepared for this environment, and being able to progress beyond is ‘Investor Pitch Ready’. Now it starts to get more complex.
Depending upon the stage of the company, the amount being raised, whether you are addressing angels, VCs or corporates, the expectations on your answers may vary. It will be accepted that earlier stage companies will have more unknowns, but they’d better have strategies in place to close the gaps in knowledge, resource or capability if the investment proceeds. So it quickly becomes clear that Investor Pitch Ready is a variable definition depending upon the factors above.
To summarise, being ‘Investor Pitch Ready’ has three elements:
You need a great pitch deck, delivered well, very often beefed up to address investor specific concerns.
You will now need to ‘defend’ your pitch, with clear, thought out strategies to tackle any weaknesses head on. You don’t need to fear the unknowns – these vary from company to company, but you must be able to help investors grasp the risks.
Tier 3 Due Diligence Ready
The third stage is even more variable! If you survive the investor pitch and Q&A session with credibility and excitement intact, and they wish to proceed, you will enter Due Diligence (DD), the process where the potential investors look at the company in detail, generally for any reasons not to invest. Having decided they liked your pitch, they now need to quantify risk. Again, different investors will do differing degrees of diligence, but in general terms, the amount performed will be proportional to the amount being raised.
For angels, it may be a couple of detailed follow up meetings and then delivery of key documents, e.g. Business Plan, Financial Plan, the last 12 months of board minutes etc. For a VC and a Series A raise, the list will be much more extensive – customer contracts, director service agreements, the NDA register, loan and overdraft agreements, financial analyses and risk registers. However, I’ve seen both ends of the spectrum – angels that ask for an extensive list, and VCs with a more relaxed attitude – at least initially. Some will expect all documentation to be ready before DD even starts, some will anticipate you generating fresh material as the process progresses. For larger rounds, DD may last several months as a deal goes through levels of investment committees etc. So the third tier – ‘Due Diligence Ready’ – is also context dependent.
If you have a deeply technical proposition, DD may include independent experts conducting interviews, assessing your technology and reporting back to the investors on their findings. I have also encountered specialist financial DD experts, legal assessments and more. It all depends upon your sector and the complexity of both your business model, your proposition and the market in which you operate.
Are they trying to say yes or no?
Most investors see many many pitches. Most pitches will be quickly discounted, i.e. they will say no to the majority. Those that really stand out and excite will progress to the next stage – Due Diligence. From then onwards, the investors have effectively picked the few propositions they really want to understand. At this point they generally want to say yes, unless they discover a large risk, in which case they will potentially step away. They are investing their time and resource in the discovery process, so only the best pitches get through to here. Although investing is clearly a business that deals with risk – they will not progress if DD shows too high a level of risk.
Your job as an Entrepreneur therefore changes throughout the process too. Firstly, you have to stand out, be credible and foster excitement. Then you have to be solid, dependable, able to provide professional documentation, evidence and support throughout a potentially lengthy engagement and diligence process. You have to be pro-active, re-active and still have the energy to be active!
So, am I Investor Ready or not?
For all these reasons, there is no such thing as a definitive list of what you need to prepare to be ‘Investor Ready’. There are many checklists – we certainly have our own – but because of the need to understand the context, i.e. the amount being raised, the investor type, the company stage and more, I certainly prefer to speak at a more granular level.
Are you Pitch Ready, Investor Pitch Ready or Due Diligence Ready? Investor Readiness is the process of passing through these tiers with the lowest possible friction to a successful fundraise, and it’s different every time!
If you push me for an answer, I would have to say – it depends.