Mark Neely's Blog – 3rd Horizon

I wanted to shed some light on why so many entrepreneurs find it difficult to “sell” their ideas or venture – especially in terms of obtaining funding.

Two words: information asymmetry.

Almost all business interactions involve information asymmetry: individuals on one side of the bargaining table have much better information than those on the other side.

In many instances, information asymmetry can work in your favour – if you have much better information, this can help you negotiate a better deal, get a better price etc.

When it comes to seeking funding, however, information asymmetry can be the “kiss of death”.

Information asymmetry often leads to what is known as ‘adverse selection’. If you’ve ever bought a “lemon” (i.e. a dud car) from a private seller, you’d know exactly what I mean by adverse selection.

When buying a car from a private seller, in almost all cases, the seller has the upper hand. S/he knows what is good about the car – and also what is bad. Unless you’re a skilled mechanic and have ample time to examine the car, you are largely at the mercy of the vendor to tell you all the pertinent information necessary to make an informed decision.

In a sense, when you deal with potential investors, they are in the same position as the car buyer. You, as the entrepreneur, know a lot more about your business, its future prospects and your capabilities, skills and experience, than they do.

Investors are very aware of this and, to protect themselves against being stuck with a lemon, impose high investment barriers.

When you deal with potential investors, it helps to understand their questions and information requests in the context of this information asymmetry. Investors want to rectify the imbalance, in the same way as potential car buyers will often request a test drive so they can drive the car to a mechanic to have it formally inspected.

Business plans, for example, can be seen as a “pro forma” disclosure document which provides an efficient mechanism for information exchange, bringing investors up-to-speed about your business and the market/environment in which it will be operating.

Viewed in this manner, much of what investors will ask of you is quite reasonable. Investors don’t know what you know. Prudent investors – like car purchasers – won’t assume the “seller” has told them all there is to know.

To increase your chances of securing funding, ask yourself what you would want to know about you and your business if, like the car buyer, you were a little suspicious of the vendor’s intentions.

One point often overlooked by entrepreneurs is the importance of a polished presentation.

First impressions count. If you can’t generate interest in your proposed venture while simultaneously demonstrating your professionalism and the degree of thought and planning that has gone into your proposal, then you are pretty well dead in the water, and almost nothing you say will turn that around. You have, literally, minutes, not hours, days or weeks to make the right impression.

Every entrepreneur seeking capital should have at least two presentations committed to memory: an “elevator pitch” and a 10-minute blitz.

An elevator pitch is a clear and concise summary of your business proposal. It is called an elevator pitch because you will often find yourself giving it on an impromptu basis within strict time constraints (as can occur when you bump into a potential investor in an elevator, riding to their floor – yes, it does happen!).

With an elevator pitch, you need to communicate in broad terms the market(s) and opportunity that you’re targeting, your sustainable competitive advantage, what you are seeking from an investor, and how an investor will benefit from becoming involved in your venture.

Importantly, you need to say all this in no more than 300-500 words and within 2-3 minutes (that is, at an unhurried speaking pace).

Getting an elevator pitch down pat can be an arduous task of drafting, re-drafting and rehearsing. However, once you have mastered your pitch, it can dramatically reduce the pressure you feel when approaching a potential investor, as you can use your elevator pitch to catch their attention and open a dialogue. As elevator pitches leave a number of issues unsaid, they can help you gauge interest by the nature of the follow-up questions you are asked.

You should time yourself while you practice delivering the pitch. It can also be beneficial to present in front of a mirror (or record it with a video camera), so you can practice/critique your “non verbal” communication – making sure you pause in the right places, use the right facial expressions, maintain eye contact etc.

The 10-minute blitz is a more formal presentation (assisted with props, such as a prototype or Powerpoint slides), in which you present your proposal in greater detail, including the opportunity, your strategy for capturing that opportunity, the marketplace, your sustainable competitive advantage, how you will handle competitors, your financial plan and – of course – the anticipated return on investment.

Preparing a good 10-minute blitz is very hard. Most people shudder at the thought of trying to fill a 10 minute presentation. Once you actually try to prepare a formal presentation, it actually requires strict discipline to limit yourself to 10 minutes, especially when you are trying to communicate each salient aspect of your business proposal.

It is very important to focus on what an investor might want to know about your proposal. This requires that you be on top of your financial forecasting. You need to be able to justify the amount of capital you seek, have a solid idea of cashflow, when you expect to become profitable and whether you anticipate having to borrow further capital in future (to fund expansion etc.).

Do not laden your presentation with platitudes. Be factual. Don’t exaggerate figures to bolster your case. Never overstate the potential market, profits etc. Most savvy investors have built-in “BS” detectors – if they suspect one of your projections is fanciful, it will likely taint the believability of anything else you might say.

A number of entrepreneurs wrongly believe they need to present a “perfect” business opportunity, one that is risk free and highly profitable. Most investors will run a mile from a “risk free” investment opportunity, because it is usually a good sign that the entrepreneur hasn’t really thought through all the issues or, worse, they are trying to hide the true risks.

If you have identified risks, be up front about them and detail how you propose to manage or avoid the risks. Investors will feel more comfortable if you can show that you have examined all facets of your venture and that you have plans or strategies for overcoming foreseeable risks, competitor reactions and other potential hazards associated with the venture.

As you work on refining your presentations, you must read Guy Kawasaki’s thoughts on the optimal presentation structure when presenting to investors – the 10/20/30 Rule of PowerPoint.