What startup pitch phrases do investors hate the most?

I have 3 that stand out as most common:

 

  1. We have no competition: If there is no one else doing what you are doing, how are the consumers currently solving the problem? E.g. in a online food ordering business, if there is no other brand does not mean that there is no competition. ‘Calling up the restaurants using menu cards available at home’ is your competition.
  2. “We are cheaper, hence we have a stronger value proposition”: Well, in many instances what the entrepreneurs meant was that they will sell cheaper.. which is different than being a lower cost producer. And, at least in my observation, most often the assumption of ‘we are cheaper’ was based purely on being a smaller and hence leaner company and not based on any fundamental competence or process that allowed them to retain the cost advantage, if any at all.
  3. “According to Gartner, the market is USD 80 billion by 2015”: Now, this has no relevance to a startup. More so if any case all you were trying to achieve anyway was USD 10 – 20 million in revenues in 2015. Startups should build their model ground up and not top down. I.e. they should think in terms of how much it costs and what does it take to acquire and service one customer and hence what is the possible revenues within what you are trying to do.

 

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Understanding term sheets – video or a webinar

Audio Recording of the telenar on “Understanding term sheets” conducted on April 21st by The Hatch -Virtual Learning Centre

 

 

Terms of a term sheet

Term
Simple explanation
Implications to early stage companies
Liquidation preference Liquidation preference defines how monies received on liquidation are going to be split between different classes of shares. [Just like different categories of creditors will have different rights in terms of liquidation.]The term sheet will specify what ‘preference’ the investor will get over ‘common stock’ owned by the entrepreneur/founders/existing share holders. E.g. the term sheet may suggest that, in the case of a liquidation, the investor will get 2x their investment before the balance, if any, is split between common share holders.

A liquidation preference may also allow the investor to instead convert their holding into the proportionate % of common shares and sell, if it is higher than the money they would get on selling at the price they would get if sold at the preference value.

In some cases, if the term clarifies, the existing investor may be allowed to convert to common stock and hold their holding. They would do this if they believe that the new buyers of the company will increase the value of their holdings.

Liquidation is not necessarily only if the company fails. It could be merger or a strategic sale or whatever. In these situation, what level of preference multiple is offered will decide what is left for the entrepreneur [and other common share holders] in case of liquidation.In case where the investor is allowed the option of converting to common shares AND holding on to their shares, it may casue issues with the acquirer if they do not see value in the investor holding on or if there is a strategic interest clash.

As with every other term, the negotiating power of an entrepreneur with a proven track record [professional career record or previous successful entrepreneurship experiences] wil be higher than the negotiating power of a relatively newer entrepreneur. In bad times, the prefernce multiples asked could be ridiculous.

Drag Along This term requires the minority share holders to sell their equity to an acquirer if a majority of the shareholders agree to a sale.To illustrate with an example, if an entrepreneur owns 40% of the company with 2 VC firms holding the balance 60%, if they decide to sell their stake, this clause will force the entrepreneur to also offload his/her shares, even if he/she did not want to exit. Implications are obvious. If the company does not do well and if the investors decide to bail out with whatever value they can realize, the entrepreneur would be forced to sell his/her stake even if they believe that there is merit in continuing with the venture.Sometimes an investor may want to exit because the venture [or the domain] does not fit into their strategic thinking any more. In this case, if the investor wants to exit, even if the going is good, the entrepreneur may have to sell his/her stake.
Preference shares Preference shares are shares that enjoy more previliges than common shares. These could be in availining dividends before common share  or preference share holders may also have greater rights to the company’s asssets and proceeds in the event of liquidation. Here too, the implications on the entrepreneur are based on multiple factors including the multiple of liquiditation preference, if it is included, etc.In most cases, simple preference shares which give an investor rights over assets in case of liquidation and dividends before common share holders are not considered unfair by entrepreneurs as it represents only a fair demand that the investor is seeking to protect his/her capital and the entrepreneurs acceptance indicates a high level of confidence in the venture to allow an investor to protect his/her capital.
Indeminity Well, this is a pretty straight forward one in which the investor who sits on your board seeks an insurance cover to as an indeminity cover should there be a legal case and the investor needs to protect himself/herself. Depends on how much protection is sought and how much the insurance premium is, and how that amout is in relation to the amount that is raised.I.e. the investor and entrepreneur need to evaluate if and if yes, how much, indemnity insurance makes sense. Especially if it is going to cost a lot and if the amount of capital raised is little.

Also, if the capital is raised for, say, concept testing where the exposure to liability is nil or limited, then it may not make sense to invest in insurance premium [again, if the capital raised is limited]

Anti- Dilution Anti dilution protects the investor’s capital in case the entreprenur decides to, for reasons of market conditions or strategic relevance or whatever, to accept capital from a new investor at a valuation that is lower than that at which the investor had invested.In a situation where a subsequent round is raised at a lower valuation, anti dilution right allows the company to revalue the original valuation and thus issue additional shares to the investor. This, in my view, is a fair clause and entrepreneurs should be condifent enough and acccept it. Fighting this clause would necessarily mean lack of confidence in estimating a higher value for the equity in subsequent rounds.

Pitching to investors

Apart from having a good business plan, which is of course the most critical thing, HOW you present your case to investors will determine whether you will get their attention and interest or not.

Because investors often listen to very bad presentations, good quality presentation itself offers a substantial edge while presenting to investors.

The most important thing to remember is that YOUR FIRST PRESENTATION IS AN ELEVATOR PITCH… NOT A FULL SCALE BUSINESS PLAN PRESENTATION WITH EXCEL SHEETS, TECHNICAL SPECIFICATIONS AND OPERATING DETAILS. In the first meeting, investors want to quickly judge whether they are interested in investing in the company.  Hence, the focus should be on communicating the concept and the potential and not the finer details.

Here are a few quick things to keep in mind

Start by introducing what you do and for whom… without any preamble

Investors will be interested in the details AFTER they have got excited about the concept, the scale and the team.

Hence, while presenting, ensure that your pitch focuses on what you intend to do, how you plan to implement it, how you will make money from it, what your scale of aspiration is and why you and your team is the one they should bet on. In fact, your opening statement should clearly state what you do and for whom. I.e. “we are an online music discovery platform where independent artistes upload their music and consumers buy or listen” or “we help small companies manage their sales processes”.

Most entrepreneurs make the mistake of diluting the pitch with a lot of detail of the operations, which of course will be of interest to investors… but only after and only if they have an interest in participating in your journey.

The initial pitch presentation should not be more than 8 – 10 slides. Click here to see template of the investor pitch presentation.

Investors are interested in the business case… not just details of the concept or the product

A concept and product is different than the business case for the same. Most first-time entrepreneurs make the mistake of thinking of the concept as the business. E.g. for someone presenting for a e-tailing venture, the investor would be interested in knowing your competencies or plans on supply chain, warehousing, procurement, customer acquisition, etc. Not just about how cool your web platform is.

One common mistake made by many first-time entrepreneurs is to elaborate on technical details. Technical details of your product/concept, and operating details will be relevant in the subsequent presentation… which will come about only if the investors get excited about the opportunity and you as a team.

Focus on key aspects rather than fluff around your business case

In most cases you will get a 20-30 minute window to present. You will have 10 – 15 minutes to make your case with 10 – 15 minutes for Q&A. In fact, in most cases, you would have either got their attention or lost them in the first few sentences. Rehearse your opening lines… once you get through this, the rest is the easier part. If you don’t get their attention and interest in the first few sentences, the rest really won’t matter that much.

“According to Gartner the market is 8 bn USD globally” has no meaning

At startup stage, investors are interested in knowing what you are going to do in the next few quarters. Of course, they would be keen to know whether the market is large and how large. But in most cases, industry reports on the size of the industry is no indicator of the size of the opportunity you are addressing.

You should focus on your plans and what you intend to get to in the next few years.

Be prepared with answers to questions

It is critical for entrepreneurs to know your business better than anyone else in the room. Be prepared with answers to questions, especially around assumptions about your business.

Know your business inside out. Know who the competitors are, know their business models, know the size of markets, know why consumers buy, know what the problems are with what your consumers are solving their problems currently with.

Explain why you are qualified to do this business

Investors are keen to know what you and the founding team brings to the table. So, a listing of your resume and career graph is not relevant. What is relevant within that is what you have done to make you a good candidate to pursue this venture. E.g. for an online retailing company, that “you have 11 years of professional experience in blue chip companies” is not as relevant as “I have handled supply chain and established relationships with vendors across the country” is important for investors to hear.

Be passionate. Early-stage investors, angels as well as VCs, invest in people

At the startup phase, investors are largely taking a bet on YOU and your team. They are betting on your ability to create a large company around the concept you are presenting. Hence, it is critical for them to see your deep commitment to the domain and your passion for the space.

Be clear about what you expect

Tell the investors clearly about how much money you need and what you intend doing with the money and what milestones you will achieve with the money that you are asking for.

End with a recap – end strong

Don’t end the presentation with slides of excel sheet numbers. End with a strong recap of what you have told them. Summarize what your concept is and say why this is a good business case.

Remember all the basics of good presentation skills

  • Few words per slide
  • Good looking slides attract attention – put some effort in designing the presentation well… at least it has to be clean and well-structured
  • Speak clearly and speak slowly
  • Be confident and passionate
  • Let one person present while the other handles the computers – don’t try to do all things together
  • Decide who will answer what questions
  • One person should present – don’t try to distribute the presentation among 2-3 co-founders – remember, the first meeting will be only 20 minutes or so. Others should participate in the post-presentation discussion.
  • Don’t go with an army of people if the others are not going to participate in the discussions – but ideally all co-founders should be present

Understanding term sheets

A Term Sheet is a document that defines the terms of the transaction between the investor and the company. It outlines terms for the following broad categories:
  • Valuations
  • Control
  • Exit options
  • Downside protection

 

While most first-time entrepreneurs are more focused on the valuations, the terms and conditions that cover the valuations are as critical. E.g. a company raising USD 100,000 at a pre-money valuation of USD 400,000 may not necessarily have a better deal than a company raising USD 100,000 at a pre-money valuation of USD 300,000 if the terms of the second company are more favorable than the first.

 

While there are several terms that will require understanding, here we have outlined a few that are of importance to entrepreneurs. Disclaimer: Please consult your lawyer when dealing with a term sheet. If you need any information, write to us at startup@applyifi.com and we will try to provide you answers.

 

 

 

Term Meaning
Liquidation preference Liquidation preference defines how monies received on liquidation are going to be split between different classes of shares. [Just like different categories of creditors will have different rights in terms of liquidation.]

The term sheet will specify what ‘preference’ the investor will get over ‘common stock’ owned by the entrepreneur/founders/existing share holders. E.g. the term sheet may suggest that, in the case of a liquidation, the investor will get 2x their investment before the balance, if any, is split between common share holders.

A liquidation preference may also allow the investor to instead convert their holding into the proportionate % of common shares and sell, if it is higher than the money they would get on selling at the price they would get if sold at the preference value.

In some cases, if the term clarifies, the existing investor may be allowed to convert to common stock and hold their holding. They would do this if they believe that the new buyers of the company will increase the value of their holdings.

 

Liquidation is not necessarily only if the company fails. It could be merger or a strategic sale or whatever. In these situation, what level of preference multiple is offered will decide what is left for the entrepreneur [and other common share holders] in case of liquidation.

In case where the investor is allowed the option of converting to common shares AND holding on to their shares, it may cause issues with the acquirer if they do not see value in the investor holding on or if there is a strategic interest clash.

As with every other term, the negotiating power of an entrepreneur with a proven track record [professional career record or previous successful entrepreneurship experiences] wil be higher than the negotiating power of a relatively newer entrepreneur. In bad times, the preference multiples asked could be ridiculous.

 
Drag Along This term requires the minority share holders to sell their equity to an acquirer if a majority of the shareholders agree to a sale.

To illustrate with an example, if an entrepreneur owns 40% of the company with 2 VC firms holding the balance 60%, if they decide to sell their stake, this clause will force the entrepreneur to also offload his/her shares, even if he/she did not want to exit.

 

Implications are obvious. If the company does not do well and if the investors decide to bail out with whatever value they can realize, the entrepreneur would be forced to sell his/her stake even if they believe that there is merit in continuing with the venture.

Sometimes an investor may want to exit because the venture [or the domain] does not fit into their strategic thinking any more. In this case, if the investor wants to exit, even if the going is good, the entrepreneur may have to sell his/her stake.

 
Preference shares Preference shares are shares that enjoy more privileges than common shares. These could be in availing dividends before common share  or preference share holders may also have greater rights to the company’s assets and proceeds in the event of liquidation.

 

Here too, the implications on the entrepreneur are based on multiple factors including the multiple of liquidation preference, if it is included, etc.

In most cases, simple preference shares which give an investor rights over assets in case of liquidation and dividends before common share holders are not considered unfair by entrepreneurs as it represents only a fair demand that the investor is seeking to protect his/her capital and the entrepreneurs acceptance indicates a high level of confidence in the venture to allow an investor to protect his/her capital.

 
Indemnity Well, this is a pretty straight forward one in which the investor who sits on your board seeks an insurance cover to as an indemnity cover should there be a legal case and the investor needs to protect himself/herself.

 

Depends on how much protection is sought and how much the insurance premium is, and how that amount is in relation to the amount that is raised.

I.e. the investor and entrepreneur need to evaluate if and if yes, how much, indemnity insurance makes sense. Especially if it is going to cost a lot and if the amount of capital raised is little.

Also, if the capital is raised for, say, concept testing where the exposure to liability is nil or limited, then it may not make sense to invest in insurance premium [again, if the capital raised is limited]

 
Anti- Dilution Protection Anti dilution protects the investor’s capital in case the entrepreneur decides to, for reasons of market conditions or strategic relevance or whatever, to accept capital from a new investor at a valuation that is lower than that at which the investor had invested.

In a situation where a subsequent round is raised at a lower valuation, anti dilution right allows the company to revalue the original valuation and thus issue additional shares to the investor.

 

This, in my view, is a fair clause and entrepreneurs should be confident enough and accept it. Fighting this clause would necessarily mean lack of confidence in estimating a higher value for the equity in subsequent rounds.

 
Right of First Refusal

Or ROFR

ROFR allows investors the right but not the obligation to invest in the subsequent round of fund raising. With this clause, in the next round(s) of funding all things being the same i.e. as long as the existing investor too is offering the same value, the company will have to accept investment from the existing investor.
 
Vesting Vesting means that the stock will be available to the person after a pre-determined time or on reaching a pre-determined milestones.

 

Often used for stocks offered to employees e.g. ‘xx’ number of shares will vest on completing 24 months of employment.

 

Vesting is also common in the case of early-stage companies to protect the investors from one or all founders quitting the company after the funding. In the case of vesting for employees, the term sheet may specify a ‘cliff of a year’ followed by monthly vesting thereafter. This means that if the entrepreneur leaves within the first 12 months, he/she would get no equity. However, on completing 12 months, the entrepreneur would get a significant portion of his/her equity and the balance will vest monthly over a period of the next 2-3 years.

 

In the case of vesting though, there will be clauses which protect the entrepreneur in case of events like next round of funding, acquisition or even firing by the board.

 

While it seems unfair, it also provides protection to the entrepreneurs. For example, if one of the founders leaves or does not perform as expected and is asked to leave, then vesting ensures that he/she does not get the full benefit of the equity due and gets only as much is vested till leaving or being asked to leave.