For entrepreneurs the chance to pitch to an investor is one of the most critical moments in their early business. The pressure is on to sell your product, your business and even yourself.
But as CircleUp capital markets principal Michael Graver reminds us, knowing what to expect eases the pressure. The founders who understand what investors are looking for and prepare accordingly have a much easier time making their pitch.
Michael spends much of his time on calls between emerging consumer brands and interested investors. He has a wealth of information on how to understand what investors are looking for and how entrepreneurs can be ready. We recently sat down with him to ask a few questions about what entrepreneurs should know about institutional investors.
What is the difference between retail and institutional investing?
Michael: Retail investors are usually high-net-worth (HNW) individuals that rely largely on their own network to send them opportunities, perform their own research and high-level diligence, and make their own investment decisions. Investing for the majority of HNW people is not a full time pursuit.
Institutional investors are professionals that invest on behalf of others in a pooled Fund structure. Since Funds charge fees (likely an annual % of assets plus a performance incentive), they are typically looking for outsized returns (5x or more) over the course of their investment. They often work closely with their portfolio companies to ensure they are successful.
The most important difference is that retail investors seek more modest returns than institutional investors. If you’re seeking funding from an institutional investor, you need to be prepared to scale very quickly.
What type of companies are institutional investors looking for?
Michael: Institutional investors look at all sizes and stages of private offerings, but in the Consumer space specifically, most institutions look to add fuel to the fire of companies that have already ticked a few important boxes:
- ‘Proof of Concept’—they have a $1m+ in sales (or a quick path to that) and the product is solving the problem it set out to solve.
- The product has early scale—the company has at least some regional retail distribution and/or strong online sales.
- The founders are capable—the management team have shown they can execute on their plan and learn from their mistakes. What many entrepreneurs fail to realize is they are as important, if not more, than the product. Business plans can pivot, people cannot.
The common thread is that the company’s revenue has the potential for explosive growth, and the right team is in place to execute it. Both need to come together for institutional investors to get excited.
If you’re seeking funding from an institutional investor, you need to be prepared to scale very quickly.
What is the first conversation like between an institutional investor and an entrepreneur?
Michael: Let me preface this by noting that a majority of first calls don’t necessarily lead to a second. Entrepreneurs should understand the high hurdle rate of Venture Capital discussed earlier, but also understand they can maximize their chance of success by being prepared and energized for the conversation.
CircleUp arranges 45 minute intro calls for the parties to connect. Investors have the company’s presentations and financials beforehand, but that is not a guarantee that they’ve read them in any detail. Usually, founders open by giving a brief overview of why and how they started the company. This can be important insight into the mission of the product and passion of the founder, so shouldn’t be glossed over. Here’s an example of a recent opening statement:
I was born in Italy and emigrated to the U.S. when I was a kid. My parents always raved about authentic Italian gelato and espresso which they just couldn’t find in the States. About 10 years ago, my wife and I took a trip across Italy to experience for ourselves and absolutely fell in love with gelato, especially the true Veneto style. We’d never had anything like that before, so we decided to investigate the potential for bringing it to the US market and making it locally. We’re now doing just that, making it with all the same fresh ingredients and bringing an authentic Italian experience to a new market.
The conversation is next usually directed by the investor who dives into specific product and supply chain questions, growth strategy, financial metrics and sources and uses of potential capital.
Don’t be intimidated, be prepared. It’s the key to having the confidence and information investors will want to see during your pitch.
Should early-stage companies be thinking about an exit strategy?
Michael: An exit, whether it be from a PE buyout, strategic acquisition or a public IPO, is how Venture investors ultimately make money. While best saved towards the end of the first conversation, proactively mentioning the exit opportunities for your business shows you understand your investor’s end goal and helps both parties get aligned.
What are investors looking to see from a founder?
Michael: Passion, basic financial competence, and the ability to articulate your vision. Make it obvious that successfully growing your company is your indistinguishable desire. While many Consumer founders don’t have a financial background, know your annual revenues, monthly sales cadence, burn rate and what needs to happen to hit your forecasts (I suggest having your financials in front of you for every call). Finally, practice your pitch—in the mirror, in front of friends and co-workers—whatever you need to do to speak confidently and knowledgeably about all aspects of your business.
It’s also a good idea to come prepared with questions for the investors. Founders should ask about how an institutional investor can help them grow. What resources and relationships can they provide? How have they scaled businesses in your category previously?
Don’t be intimidated to ask questions like this. It shows you’re genuinely interested in finding the right partner, not just capital.
Read more about preparing a great pitch deck from entrepreneur Evan Baehr.
Can you provide some sample questions that an entrepreneur should be prepared to answer?
1. Who are your biggest competitors? (Know as much as possible about your competition including their strengths, weaknesses and growth strategy.)
2. How are you different from (and going to compete against) [competitor]?
3. Who are your customers? (have demographic and survey data ready)
4. Can you talk about your retail strategy and associated costs?
5. Where do you need strategic help?
6. What are your gross sales vs. net sales?
7. How much capital has been invested to date?
8. What is your cash position? Burn rate?
9. Can you describe your use of proceeds in specific detail?
And if any of these apply be prepared to discuss:
10. Why has growth been slow (or negative)?
11. Why are your margins thin? What costs can be decreased?
12. Why are investors from your previous round(s) not re-upping?
13. Why have you decided to change sales/growth/distribution strategy?
14. Have you made changes in company leadership? Why?
15. Why is your cash position low? Why is your burn rate high?
Any closing thoughts for entrepreneurs seeking institutional partners?
Don’t be intimidated, be prepared. It’s the key to having the confidence to make the best impression possible.