From the Lionesses of Africa Operations Dept

Continuing our look at Pitch Books we again break them down into bite-sized chunks… Last week we looked at what grabs the attention of any potential Investor: The Problem, The Solution, and The Competition.

This week we look at the Engine Room. What is it that will make the Investor both his money back but also give a decent return on top?

The Market Opportunity
The Technology
Traction
Business Model
Financials

This is where we get into the inner workings of your business…

The Market Opportunity

Let’s show the investors a large and meaningful market. Of course if your business is extremely niche then this will not be possible and you will have to search for the few investors involved in your particular area, but for mere mortals, i.e. the rest of us, we must show a large and meaningful market.

For those of you old enough to remember the heyday of the super model craze and the Fab 5 (Linda Evangelista, Christy Turlington, Cindy Crawford, Naomi Campbell and Claudia Schiffer), in the words of Linda Evangelista: “We have this saying, Christy [Turlington] and I… we don't wake up for less than $10,000 a day.”

Investors are the same. A large deal takes the same time and effort as a small deal, it is just a fact of life. Last weekend we showed the Big Problem and your Big Solution that pushes the Competition to one side. This week we have to show the Investors why it is worth them getting out of bed… show them the total market that is available and a chart that will show your view of how the pie is likely to be divided.

Traction

This is where you show the Investors that you are not still in bed…

This is your chance to show this is not just an ‘idea’ or ‘dream’ you are asking them to invest in. There has to be some Beef on the Bone and then show them how you can accelerate this traction…

What have you done so far, so:

Pilot Projects
Early Customers
Strategic Partnerships
Progress on Product Development
Revenues so far
Press / PR
&
Testimonials (although Investors will do their own Due Diligence, it’s always good to show some happy customer’s comments, after all when we rent an apartment from AirBNB we all look at the comments from previous users, this is no different).

The Technology

Nothing excites an Investor more than a patent, so if you have one, show it off here!

Don’t be shy, list the key intellectual property rights you have worked hard for:

Patents
Patents Pending
Trademarks
Copyright
&
even Domain Names (er, yes, please don’t forget to secure the domain name!)

Business Model

How do you make money (might seem obvious to you, but still…).

What is your pricing model?

Here you also show your understanding of the Market (we did the size earlier):

How will you acquire customers?
How much will it cost?
What is the expected lifetime of a customer?
How will you increase your relationship with your core customers?
What is the typical sales cycle between the initial contact and sales?

Understanding of your Supply Chain:

Who produces your product?
Where is the factory based?
Time and cost to warehouse

SaaS based -

Where your software engineers are based
Full time or part time
Salary (fixed cost) or Commission (variable cost)
Expertise

The last one in the Engine Room is:

Financials

You knew it was coming, but look how far back it is in the 15 listed (as shown last week here). Why is this? Just like the Buyer’s Journey that our HoF is always going on about, so the same is true here. If you get bogged down into numbers before you have taken the potential Investor on a journey, then you will lose them. Draw them in. They too want to know the story behind before getting out their calculator.

But here it is, so…

Again don’t be shy. If you have ‘Big Solutions’ to a ‘Huge Problem’ in a ‘Large Market’ and your financials say that in 3 years you will only make $5million yet are asking for an investment of $1 million, the air disappears faster out of the Balloon than you can say ‘Raspberry’. This is just uninteresting and questions the entire raison d’être (taking a moment for a ‘shout out’ to all you cool Lionesses in Francophone Africa!) of your Pitch Book.

But do not be unrealistic…

3 years to go from a standing start to $500 million is pushing it (that is some Patented Technology you have!), as is a 15x increase in revenues with only a 2x increase in operating and marketing costs. A big turn off for investors. Huge!

So:

Three to five year financial projections.

Unit economics (easy to break it down, one Lego brick costs ‘y’, I sell it for ‘2y’, is easy to understand).

Burn rate (yes don’t be afraid of spending the Investor’s money, they want it used, but they also need to know just how fast you will burn through it).

Key metrics that are important to the business (such as annual recurring revenue).

Total revenue and expenses (please remember the investor is not here to award you a large salary. In their eyes you earn through building the business and get paid through carefully controlled dividends - remember our blog on PE & VC is not for everyone? Here it is as a friendly reminder, this is not just a shareholder you are welcoming in through the front door, it is also an ally, a business builder but also a gatekeeper…).

Gross Profit and EBITDA.

Key assumptions. What are ‘Key Assumptions’?

Growth rate of 10% per annum would be one.
Inflation will remain at or below a level ‘c’, not easy in some countries that we won’t mention here, but you know who you are sadly…
That tax rates would stay at the same level (check if there is an election coming and if the opposition are ahead in the polls and are suggesting a doubling of taxes…).
Or industry specific, such as in the household solar market, where a key assumption would be that not only are the rules about the heights of buildings in law, but they are well controlled so that 3 days after you have built your fabulous roof-top solar plant, your next door neighbour doesn’t go and add 3 stories on top of their building therefore blocking your light. Remember, building regulations are one thing, but enforcing them are quite another…