Getting the Attention of Investors
After investing in 90 lower-middle market companies over the past 28 years, the pitch from a business owner that most resonates with River Associates is one that conveys a true desire for partnership with an institutional investor such as ourselves. Further, we want to understand what characteristics have made and will continue to make the business successful. These characteristics may include such attributes as competitive advantage, barriers to entry, product differentiation, and pricing power. Perhaps most importantly, a business owner needs to convey an actionable plan for organic and/or acquisitive growth as we are investing in the future of the business as opposed to the past.
Lucy Beard, CEO and co-founder of Feetz, Inc., a 3D-printed, custom-fit shoe company, had one of the best pitches I’ve heard. Admittedly an introvert and actuary in her former career, Lucy had a rolodex of more than 20 pitches in her toolkit to cater to different audiences. She said her secret to her eventually strong and compelling pitches, where she exuded confidence and a terrific command of her product and business, was that she practiced non-stop each time before she hit the stage. Even though she made it look effortless and flowing, she had her pitch down to a science and every nuance memorized and practiced over and over. During one pitch, her presentation failed to load, but she had her pitch down so completely it didn’t faze her. She could tell the “why” story in just a few slides and quickly get to her innovative solution and the value in her business model (strong intellectual property, fully integrated solution, customer discovery/traction, and market strategy).
One of the best pitches we’ve received was a company that had 10 locations up, running and profitable, and they wanted to open 10 new locations every month for the next three years. That’s a business model with long legs! The company’s product/service was in high demand and had strong gross margins. Operationally, the company had reasonable overhead and growth that did not consume excessive working capital nor growth that demanded excessive capital expenditures. The business model was easily understood and growth could be accurately estimated in a forecasted monthly balance sheet, income statement, and cash flow statement. Beyond that, our client had credibility that was built on a past track record of success. The client possessed deep knowledge of the industry, an ability to invest his own capital, and the willingness of business associates to commit capital to the venture as well. We secured subordinated debt which along with the founder’s equity convinced the bank to enter into a lending arrangement that allowed the capital to achieve the forecasted growth. The company today has over 1,000 locations.
Selling a company is a once-in-a-lifetime transaction for most business owners. Often, it personally impacts them, as well as their employees, spouse, children, and grandchildren. To create the perfect selling pitch – and achieve the best value – FourBridges counsels following the “Four Ps”: Preparation + Positioning + Process = Price of the business. 1) Preparation: Assess the factors that drive the value of a business (intellectual property, patents, marquee clients, etc.); assess risk (one large customer, commodity type product, etc.); understand the tax implications of a sale; make sure your corporate records and financial statements are accurate; recast your financial statements in a favorable light (don’t just hand out tax returns); and create a detailed, professionally prepared Confidential Information Memorandum (CIM). 2) Positioning: Understand – and clearly communicate – why buyers might want to own your business; provide credible and consistent information to prospective buyers; and let the prospective buyers know that you have options and aren’t doing a fire sale. 3) Process: Stick to a tight timeline for “going to market” – if things drag out, rumors will start; let prospective buyers know they have a short window to engage and make offers; engage an advisor to guide you through the process, so you can focus on company operations and maintain sales and profits; and engage an experienced M&A attorney who can go toe-to-toe with any attorney hired by the potential buyer.
A great pitch captures and retains an investor’s attention and hits five points: 1) explains why the founding team is the best founding team to capture the opportunity; 2) clearly explains the problem; 3) shows and explains why the startup’s product/solution is better; 4) shows bottom-up and top-down understanding of the market opportunity; 5) explains a go-to-market plan (how will the startup get customers?).
As Chattanooga’s entrepreneurial ecosystem continues to grow, my advice to any founder would be to prioritize nurturing a resilient and balanced team that is passionate about the company. An excellent pitch, whether to an investor or customer, centers on the strength of this team. They buy why you do what you do and who is building it, not just what you do. Great ideas are a dime a dozen, but for the ideas to become reality, there needs to be dedicated champions to pull it off. When evaluating a pitch, questions I ask myself are: What is their work ethic? Have they had success before in major projects or other entrepreneurial efforts? Does the team have both hard dollars in the deal and in sweat equity? Are team members and advisors all actively engaged in implementation? Answers to these questions will begin to establish trust between the persons giving and receiving the pitch.
Three pitches I’ve personally delivered, though not all good, show how candor, persistence, and a carefully honed message can make a difference. At the Tennessee Venture Forum in 2004, one candid slide got us funded: “First, here’s everything we screwed up.” We also vowed to be the last booth standing at the conference, and the two last investors there wound up being our first two investors. In Houston circa 2007, my pitch was a dud. I got grilled and didn’t have all the answers. We decided we weren’t leaving until we got funded and lingered in the office all day to try to share an airport taxi with the venture capitalists. We may have missed our plane, but we got funded. Last, in a meeting with a well-known investor and entrepreneur in 2012: All that was on the screen was PriceWaiter’s title slide: “Negotiate, anywhere.” He walked in the room and said “Yeah, I’m in!” He invested. That was the only slide we showed that day.
There are three critical areas to consider when evaluating a venture pitch – opportunity, resources, and team. Opportunity is determined by both the market potential and strength of the entire business model. Resources include both human and financial capital, while the team includes the founder, as well as other key members who provide critical support needed for venture growth. Some investors may place the team first; others may consider the opportunity most significant. Personally, I think the opportunity and the team work in tandem. The market and business model must be robust enough to support significant growth; however, opportunities are shaped by the founder and his or her team. The team must be open and flexible enough to pivot as needed to develop a venture with the greatest strategic value. The resources, while important, come last. As I tell my students, if the opportunity and the team are there, the resources will follow.
Having spent over 15 years evaluating large and small businesses for investment, there are three key elements that are consistently present in a perfect pitch. 1. Highlight a problem that is familiar – Is your company solving for an unmet need or an achievable opportunity that is well-known in the market? Great pitches start by creating a connection with the investor to build sense of empathy around a relatable problem. 2. Demonstrate a solution that people can understand – Can you make complex ideas simple enough for non-experts to understand? You must connect the dots to show investors how your solution directly solves the problem, while making money and beating competition. 3. Exhibit likable and credible behaviors – Are you passionate and capable? Tell investors a story that makes them believe in you and why you are doing this. Investors want to know why this problem and solution matter to you, and more importantly, that you are the person that can make the business successful.
At Alderman Holdings, we are looking for investment opportunities where there are win-win outcomes for all parties involved. Win-win characteristics that we look for in a pitch from a company include untapped business potential, great talent with strong integrity, a history of reinvesting in the business, and a sincere desire to complete a transaction. In return, we pitch to the owners: a commitment to the business for the long-term, to developing the people and team, and to preserving the company’s legacy. As we raise capital, we pitch investors the opportunity for meaningful returns over time and a regular dividend payment. We also pitch the opportunity to participate in the growth of our local economy. We believe this dual emphasis on financial return and local impact creates a compelling investment opportunity.