It’s easy to find guides on how to fundraise. In fact, the internet is full of them. However, as vital as it is to follow the advice of the experts on how to seek start-up capital, it’s just as important to know what not to do. Here are our top 5 examples – straight from the mouths of experienced angels – on what any start-up or scaleup founder should avoid when seeking equity investment and pitching angel investors:
1. Far-fetched forecasts and extravagant exits
This is known as the ‘hockey stick forecast’: sales are flatlining, it’s all gone quiet, but with your investment, I promise things are going to shoot right up… no experienced investor is going to be fooled by this strategy. Another pitfall to avoid is forecasting sales as a small but significant percentage of a very large market; the odds are that you’re not the new Facebook and – quite simply – start-ups do not suddenly grab 1% of a multi-billion-pound sector. Sales forecasts are about the business’ future; the best use of them is to track actual results over time, regularly reviewing the plan versus authentic outcomes and controlling the underlying expectations with management programmes. Likewise, the average founding to exit period is well over six years, so promising your shareholders that millions are to be made within a short space of time, tend to be viewed with more than a little cynicism.
2. Too much emphasis on the product, not enough on the investment opportunity
An entrepreneur naturally thinks their creation is the bee’s knees and will make the world a better place. An investor’s thought process, however, is primarily focused on how this opportunity will make them rich. It’s therefore vital that when pitching for investment, the start-up presents a business plan and presentation that addresses this critical aspect. Likewise, with the management team: the most successful investors know that business is less about the product, more about the people.
The company may be the founder’s pride and joy but overpromising and overvaluing are common blunders in start-up pitches. The valuation needs to be proportionate with the risk of investing; an expert angel will compare a business’ worth with not only other private companies but those listed on the AIM. In the words of one seasoned business angel – with over 35 years’ experience in investing – ‘You look at some of these valuations and you just shake your head and think you’d be more likely to see a flock of pigs flying past’.
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The best fundraising pitch in the world will not result in any money unless supported by an analytical, logical and credible business plan. This should include a comprehensive and persuasive executive summary covering the problems the start-up will be solving, the scope of the market, a maintainable competitive advantage, truthful revenue forecasts and – crucially – explains how an investment in the start-up will make its investors a healthy return. Spontaneous adlibbing just won’t make the grade.
5. Cliched jargon
The reality is that overused catchphrases rarely help explain ideas to potential investors. Instead, they harm the entrepreneur’s integrity and impair their likelihood of a successful fundraise. Terms to use with extreme caution include:
- ‘One stop shop’
- ‘Disruptive business model’
- ‘Highly conservative’ sales forecasts
- ‘Best of breed / best of class’
- ‘This product will market itself’
- ‘Revolutionary / ground-breaking / transformative’
Cringeworthy cliches don’t work and should not be included in any pitch.
Scott Haughton is the co-founder and COO of Envestors. Envestors connects startup and investors network. Envestors launched a fundraising platform Envestry, through which start-ups and investment networks get a personalised site to promote deals, raise finance and engage with their investors 24 hours a day, 365 days a year.