Communicating With Investors

Your business idea is starting to take off.  After several years of success with your original target market, you can see that there is room for growth in a different segment. 

But, you’re going to need investment capital to get there. 
Armed with your business plan in one hand and your heart in the other, you begin knocking on the doors of venture capitalists and institutional investors.  But there seems to be some disconnect.  During your presentation, they frown, cross their arms or drum their fingers in boredom.

Don’t they understand your passion? 

Not if you are using language that is distracting or cliché, according to local venture capitalists.

“There is a risk in translation between entrepreneurs and providers of capital.  When one tries to deploy industry phrases, they come off as clichés,” says Mark Lewis, principal at Advantage Capital Partners, a venture capital firm with offices in Clayton. 

The following are common phrases entrepreneurs use, along with what investors actually hear and what entrepreneurs should say instead.

What you say:If you’re interested, we will send you the terms.

What they hear:
I’m naive about how this process works.  “The institutional investor or venture firm is accustomed to proposing the terms.  Saying this makes you look naive about how the process works,” says Tom Melzer, managing director of RiverVest Venture Partners, a St. Louis-based venture capital firm specializing in innovations in life sciences.

What to say instead:
Here is the amount of money we will want to raise, and here is how we want to use the capital.  We want to work with you on where the pricing of the capital makes sense. 

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What you say:
Basically, we are on plan.

What they hear:
We have a revenue shortfall of at least 25%.
“Saying this means that you have not lived up to your plan,” says Lewis.  “It usually means that they have a revenue shortfall.  What does ‘basically on plan’ mean?  Does that mean you are close?  If you are on plan, it will be in the numbers and projections.”

What to say instead:
This is what we have done historically, and we have a projection that illustrates what we can do with more capital.

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What you say:Our projections are conservative.

What they hear:
Our projections are not conservative enough.
“That is a pretty common refrain, and it is very unusual that they are indeed conservative,” says Melzer.  “It doesn’t make sense to characterize projections one way or another.  Anyone doing their homework in the deal will make their own judgments and look at it to see if they are conservative or not.  Generally speaking, a venture firm is not going to accept on face value without doing their own stress testing.”

What to say instead:We have made the projections, and this is what we believe we can do with more capital.

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What you say:
We have no competition.

What they hear:Either I have not done my homework on substitutes to my product or service or I am trying to make my market need sound bigger than it is.
“There is always competition because there are substitutes,” says Lewis.  “If that is truly the case, though, the reason that there is no current competition is that there are not feasible economics for the service or product.”

What to say instead:
We believe our product fills a gap in the marketplace.  This is what consumers or businesses are doing presently, and here is why we will take business from them.

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What you say:
I am talking to a number of interested players that would provide us the capital.
What they hear:
I’m trying to create urgency or an auction event.  You’d better move on this opportunity.
“Usually with venture capitalists you will end up with a scenario where we will work together,” says Lewis.  “You’re better off to be inclusive.  Venture capitalists are collaborative and spread out the risk, so encourage collaboration.”

What to say instead:
 Do you work with (insert investor)?

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What you say:
We are going to get to breakeven by (insert date).

What they hear:
We are trying to make you more comfortable as an investor by telling you when we will be cash flow breakeven.  That doesn’t work?
“Most entrepreneurs think this provides comfort to the investor,” says Lewis.  “But my question is always:  ‘And then?  What does it mean for your venture at that point?  You won’t need capital anymore?  Why does that make me comfortable as an investor?’  In this day, ‘breakeven’ doesn’t mean that much to me.  I want to know when you project that you will be self-sufficient.”

What to say instead:
Here are our projections.  We anticipate that by (date) we will not require additional capital, and at that point we can (raise another round, attract debt financing or be so profitable we won’t need more money).

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What you say:
We are addressing a billion-dollar market need.

What they hear:
Aren’t you impressed?  I said the word “billion.”
“For some reason, ‘billion’ has become a magic number.  You have people throwing out ‘billion-dollar’ market opportunities,” says Melzer.  “It has become so ingrained that you have to paint your idea as a big opportunity, but in a lot of these situations, once you start to break it down, you are talking about an addressable segment of that big market.  Calling it a ‘billion-dollar opportunity’ does not add creditability.”

What to say instead:
We are going to start by addressing the needs of a targeted market segment and then expand.

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Finding the right attitude balanceIn most of the above cases, the entrepreneur was attempting to generate excitement about his idea.  Although it is important to show passion and enthusiasm, Lewis and Melzer agree that salesy speech needs to be balanced out with some realism about how the process works.

“Everybody wants to sell.  If they are entrepreneurs that are passionate and all they need is growth capital, they will want to be in the selling mode,” says Lewis.  “Too much in the selling mode will turn off a potential investor.”

Melzer points out that some degree of enthusiasm is expected.  Nobody wants to invest in a company that doesn’t have any confidence.

“Propose your idea with the same enthusiasm.  Investors want to back someone who is enthusiastic.  To a degree, I expect to be promoted the idea.  It’s not like any measure of that is going to be negative,” says Melzer.  “It’s important to understand that you are going to get a lot of nos.  Open as many doors as you can and present, present, present.”