I’ve had to pitch in my time, and I’ve seen a few pitches (real and for competitions), and occasionally someone comes to pitch their startup business idea to me.
When judging the value of a pitch, here’s what I look for…
1. Solves an existing/large customer problem
The first thing I look for – is there a clear, sizeable customer ‘problem‘ this new idea is solving? So many pitches look like they are describing really cool ideas, but dig down a little deeper and there is no obvious problem being solved. I’ve fallen foul of this myself. Launching aussiehome.com, we had an idea we were solving the problem of property searching, but our paying customers were real estate agents. There was no problem of property searching for them, buyers came to them anyway (and had done so for years) through newspaper advertising. We may have been solving the problem of property seekers, but they weren’t our customer, they weren’t paying us any money. It was real estate agents who paid (through monthly subscriptions) for our service. Once we got to know the real estate agents’ problems, we launched services for them. That kept us a alive (just)… but it was a close run thing, and an important lesson learned.
* Please note – if you can’t answer #1, do not bother going any further! *
2. Scalable, protectable idea
OK, so you have identified a clear, sizeable problem you can solve for customers who are going to pay you to solve that problem for them. How easy it is going to be to protect that position? How scalable is it? Are you capable of taking the idea to scale and extracting the value? Will you be swamped with competitors and imitators who will take the market from you? When we did our startup we thought we had 3-6 months before someone would copy our map-based property search idea. It was actually much longer than that (18 months or so), but in fact the maps had nothing to do with our competitive advantage. It was the speed of client acquisition, keeping the clients on and keeping them happy that made our business protectable. By the time realestate.com.au and others came to town, we were 3 years old, had great client relationships and could protect ourselves. Before then, we were vulnerable. It took 5 years to really make any money from the business, such we could actually pay dividends to shareholders from the profit earned.
3. Rivals’ reactions factored in
Speaking of competitors, you must recognise that all markets are dynamic. As you enter the market with your services, your rivals (and potential ones, yet to launch or move into your market) have a vote too. They can react in various ways, moving on product, price and promotions. Have you thought through how their moves could affect your strategy? Have you innoculated your clients against the changes your competitors can make? What would you do if you were them? Think a few moves ahead. I meet people who seem to forget that markets can change. The current status quo is just a series of conversations making up a perpetual ebb and flow.
4. IP or secret somehow protectable
Allied to this last point, is there some legally protectable ‘secret sauce’ at the core that makes your idea a knock out? I presume you have the right trademark protection around your brand name, logo design (this easy to acquire, but also very important). Have you some patent on some important process or innovation that you are using? Is the patent secured, or on its way to being secured (“pending”)? Is it reasonable to suggest that what you have (as an edge) is giving you an unfair advantage over incumbents and any potential entrants?
5. A clear market opportunity
Without a clear market opportunity, with potential customers wanting to buy your products at a price you can make a living on, then you don’t have a business. What makes the opportunity an opportunity as of now? How long will that opportunity stay open for (what’s your ‘window of opportunity‘)? Remember, markets are dynamic. Do you have weeks, months or even years? How is it that you (and your team) are going to be the people to exploit this opportunity? You need clear answers here, and do not fall into the ‘China numbers’ trap. I hear so many people say “Oh, the market is huge, $5.6 billion in Asia-Pacific alone, and if we only got 1% of this market then our revenue would be $Xxx million”. Better tell me how you are going to get your first 10 paying customers on board, how you are going to service them, and then tell me how you are going to scale from this 10 to multiples of 10, and 100, and 1000.
6. A great team
Often the investors do not necessarily understand what you are doing, the opportunity you have and how you’re going to do it, but they do know people. They will want to know who your team members are, what they bring to the table, and why you and your team are going to be the winners in this particular case. In the end, this is what they are investing in. People. The sort of people who will do what it takes to bring in the plan, make the sale, stay up late, work long hours, tweak the pricing model, adjust the product from feedback, be patient and persistent.
7. Cost of production & client acquisition as compared to price
Once we are sure you have a market, then some pretty straightforward economics come into play. How much is it going to cost to make the widget, or provide the service, compared to what you are going to charge (and customers are willing to pay)? Average costs may come down with increased output, so how many paying clients do you need to ‘break even’ and make the profits you are hoping to reap? I’ve had potential investors triple my costs and half my projected revenues, and only then decide whether to invest, so make sure things are robust. There should be clear daylight between your running costs and the projected revenue, but also guard against the unrealistic “hockey stick” revenue projections so often seen in pitch decks. Reality is rarely a hockey stick, it’s usually a slow, hard climb up a very long shallow mountain.
How much does it cost to acquire a new paying client? Hopefully, this cost will fall over time as you gain scale and your reputation grows. Ultimately you will want your clients to do the selling for you (by referring your service to their contacts), but well before they do this, investors will want to know what assumptions you are making around promotional activities which lead to sales, and the cost per new client as distinct to what it costs to then provide the service. All this needs to be covered by revenue. I’ve seen SaaS (software as a service, or subscriptions) products launched where the cost to acquire a new client is well in excess of what that customer is paying per year. That’s a journey you don’t want to undertake.
8. Strong clear business model
Investors will want to look at your overall business model. My favourite for online business is subscriptions (SaaS) which includes a monthly or quarterly or annual payment, which renews automatically, and where the new client coming on just starts paying upfront and uses the service without much human interaction. No expensive sales force or marketing plans required, it’s a slow organic build, but once past the point of break even, every new client is almost pure profit. Believe me, it took us 5 years at aussiehome, but on the other side of that hill are beautiful green pastures, bubbling brooks and gamboling lambs. You can sit under the tree strumming your mandolin, the sun is shining and it’s heavenly. Well, maybe not quite, but you get the picture. I’m not saying advertising or etailing cannot work, they can, but subscriptions models are wonderful, and the ones I favour.
9. Disruptive to existing market
This is not a prerequisite, but often in the area of tech startups you are disturbing an existing market, and forcing it off in another direction. Uber, Netflix and AirBnB are classic examples, and have each become billion dollar businesses in a relatively short period of time. It’s the tech subscriptions model at scale which is wonderful, and in each of their cases, they did not have to invest in heavy capital things like cars, TV stations or hotels. They thought about an existing market in a different way and used the power of online connectiveness to create value. Each one started out in a niche market before scaling to national, regional and global size. How I would have loved to have heard their initial pitches. I wonder if they truly understood the massive new business they were creating. I’d like to think not. They have a problem they wanted to solve it, and went out there and explored.
10. Exit opportunity
Remember, investors are also thinking “how realistic is it that I am going to get my money back, how many times over, and when?” Investing in tech startups is about as risky as betting on a horse, but even with a horse race you have a realistic understanding how you might get some money back, and when. You presume it’s gone, but if it returns, it returns many times over, and it’ll be a few minutes time (or not at all). Angel investing in startups is often a patient activity. Besides a dividend at year 5, it was 6 years before our investors even got a sniff of an exit opportunity, and 10 years before the final trade sale. If you are taking money from investors (and there could be very good reasons NOT to do this at the very stage you’re at) then it’s a responsibility you should not undertake lightly. For them, it’s an investment opportunity, that’s all. They need to know what realistic avenues they have for crystallising the/any value in their ownership, and when – a trade sale, dividends, an IPO, a merger, management buy out… all of the above?
I hope this is a useful list. It adds up to 10, as it happens, which is a fluke. I have probably missed some important factors, or over played others. But to me, with 15 years experience on all sides of tech startup land, it’s what I deem to be the major factors I look for these days …