What is the most important factor in an investor's decision whether to invest?

I know there are several things to get across in an investor pitch, including problem, solution, size of market and team, but what is the most critical thing to emphasize? Is it the team or the market or something else?

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5

What counts the most is "confidence" - confidence that there's a chance to make a return on the investment. That's simple, but then things get fuzzy rapidly. First, there's "return." Most investors want a financial return, especially for larger investments, but some are looking more broadly (i.e., "to change the world"). You need to tailor your pitch to this. Further, there is a time value to returns and you need to fit the investor's timeframe. (For many VCs, the fund expires at a certain point and they need an exit before then.)

Then you get to "confidence there's a chance." There are many aspects here: market, value of problem solved, value capture (business model), intellectual property... and team. The first set can be summarized by effectively answering two questions: "Where's the money?" and "Who's going to make it?" (These I got from my strategy professor, Rebecca Henderson.)

Finally, there's the team. Investors evaluate a number of things here, all of which impact their assessment of what chances you have. First, do you have all the people you need to execute the current phase of the business? (Experience matters: investors prefer people who have made mistakes and learned to ones who will make mistakes on their dime.) Second, can you attract great people as you grow? And, last but perhaps most, is the team credible, smart, charismatic/evangelical, and committed enough?

It's that last thing that you can't plan to pitch - you either (know how to) click with the right investors or you don't. Therefore, it's always best if you've established the relationship... that you'll click... well ahead of the pitch.

5

I spent a few years covering startups as a business reporter. One question I always asked VCs was this: What really was the deciding factor for investing in a particular company?
The answer was always the same: An entrepreneur who was determined to succeed. (Most also agreed the majority of business plans they saw weren't worth the paper they were printed on.)

4

The most important factor in their decision will vary depending upon several factors including the type of investment and the stage of the company.

However, don't expect them to make a "buy" decision in your pitch. The goal should be to generate enough interest that they will want to take the next step.

From our work with clients, we've determined that for early stage companies- two conditions always exist before the check is written.

What are these conditions?

3

Simple really : three things.
1. The people : their background and can you trust them with your money.
2. The product : does it improve the lives of your target end-user.
3. The protection : ip protection and can you build a deep enough moat around the product/service to make it impregnable by the competition.
GOOD LUCK, you'll need a lot!

3

There's not just one aspect, Carrie. There are many. What matters most will vary by investor, by industry, and by a variety of factors that neither of us will ever know about. If you are the one making the 'pitch,' you'd be wise to have a chunk of your own net worth invested already. You'd also be wise not to try to pay yourself much of a salary - 'sweat equity,' it's called.

You need to be seen as serious, trustworthy, knowledgeable, stable, and honest. If you fail on any one of those, no sensible investor will invest with you. If you can't tell the truth when telling the truth is painful, you're in the wrong line of work. In case someone asks--and if I were in your audience, I'd ask--you'd better be able to cite some real-life examples of when you did that.

A pitch asks people to invest risk capital. The greater the perceived risk, the higher the expected return they're going to demand for investing. If you don't already know that risk and valuation move in opposite directions, you need to know that. We see it every day in bond markets: risk (interest rates) move up (or down), and valuation (bond prices) move down (or up). Moreover, Morningstar's 'cost of capital' dataset, which goes back to 1926, shows very clearly that, on balance, smaller companies are far riskier than bigger one. The few exceptions that are out there prove the rule.

You'd also better be able to explain (a) the 'burning need' that your business will address, (b) why your business can do that better than any other business can, (c) who your competitors are (pay special attention to potential competitors), (d) how big the market for your company's product or service is ("I don't know" is unacceptable - you'd better have a heck of a good estimate AND be able to cite the sources and analytical techniques you used to develop that estimate), (e) how fast that market is growing, (f) what special knowledge and experience you bring to the party, and (g) who else is on your team and what they bring.

You'd also better have some very conservative financial forecasts, and not just the P&L. You need pro-forma P&Ls, pro-forma balance sheets, and pro-forma statements of cash flows. Be ready to defend your choices of accounting conventions; whatever they are, they had darned well better comport with GAAP. You'd be wise to have a CPA firm look over your projections and vet them; expect to pay for that. And for goodness sake, make sure there are no math errors in your forecast. I've seen those in pitches, and they're killers.

Finally, you will do yourself a big favor if you already have a Board, either of Directors (which means you will need 'D&O insurance') or of Advisers (a pro-forma Board of Directors. . .without the authority and legal exposure of an actual Board). Be sure to have some wise people in that group, and provide their backgrounds as part of your 'pitch document'.

Hope this helps.

3

Hey Carrie,
Wow. You have answers here that, when taken together, amount to: Everything Matters. The reality is there are a lot of pieces that need to come together to get an investor, Angel or VC, to commit. If you can avoid the red-flags that can kill a deal you'll be doing great. In other words, don't give them a reason to dismiss your opportunity; doubt is your enemy. Inspect everything for things that would make an investor nervous.
As far as what to focus on, I'd lead with those things in which you have the greatest strength. Once you've described the problem talk about your approach, leaning on your traction/IP/team depending on where you are strong. Traction is probably the most critical, particularly if you're an 'Internet' company. That you are being paid for your service is huge. So, focus more on your strengths but don't leave any space for doubt on the 'weaker' items.

2

From my experience of investors, its how much money they will make and the risk profile..... They are after the end game after all. And of course "An investor" isn't a specific creature with definite habits some are risk averse, some are risk crazy, some will want to be sold the dream, some will be hands off and say here's my money if I don't make 10 million out of you I will hate you.... and every shade in between

2

While getting return on investment is always a priority, I've seen investors look more to where key personnel can take the company. The best performing companies rarely do now what they initially intended (Google and Facebook are obvious examples). If you can make money early with a killer application, know how to maintain market share, have good ideas on how to grow in other sectors, and be flexible and creative in a long-term commitment, I'd think you'd be a tempting investment.

2

It is how much money you will make. But that has several dimensions -- it depends on (how big is) your market, is the team credible (I.e. can they execute your plan to make a lot of money), is there a real need for your solution, or is it just a nice-to-have? Basically you have to show that you have a solution to a big problem and a team that can deliver a solutions and doing so will make a lot of money.

Our workshop can help you hone your message and will introduce you to investors. www.baeworkshop.com.

Ralph Patterson

1

#1 - How long before the investors money will be returned/regained (projected). Then the long term estimated financial growth/profit of the company.

#2 - Risk estimate. How risky is the venture. Is there a high likelihood the invested money wont be returned? What is competition like?

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