How to remove the risk from your business before seeing investors

De-Risk Your Pitch to Get Startup Investment

De-risking your business is extremely important if you want to get investment, and especially if you want to get a decent valuation. From the investor’s point of view, the more perceived risk they have in your business, the lower the chance they will want to invest. After all, they’re trying to pick a few potential winners out of many people pitching to them … they’re going to choose the one with the minimal amount of risk and the maximum upside.

In the first year or two, there are a lot of unknown elements such as, “Will people pay for this?”, “Do people even want what I’m building?”, “Are we capable of technically building it?”, and “What marketing channels will work the best?” The more of these you can answer, or at least show how you’re going about finding the answer, the more risk you will reduce in the business.

In this article we’ll take a look at some examples of pitches that were not de-risked well and some that were (these are based on real-world events), then break down all the elements you can address to de-risk your startup before pitching for investment and giving you the best possible chance to raise money.

EXAMPLE PITCHES

For each of the examples below, we’ll start with a real-world example of a statement in an investment pitch that we as The Serial Entrepreneurs have seen come up time and again, then follow it with what’s going on in an investor’s head when they hear this.

I’ve got this great idea for car washing on demand, which my mum and friend would definitely use and pay for.

[investor’s mind] Is car washing on demand a thing — do people really need that level of urgency? Your mum and friends aren’t a good indicator of whether there is real demand, let alone will they agree to pay for it. I’ll need to see a lot more customer development than that.

We’re easily going to get people using this by word-of-mouth marketing and buying lots of ads.

[investor’s mind] Experienced marketers never say it’s easy, so they’re underestimating the level of work and complexity involved in growth. This doesn’t appear to be a well-thought-out strategy, and just throwing generic terms like virality and buying ads is worrisome. Where’s the evidence they’ve really thought this bit through and tested some assumptions?

Myself and two friends are working on this in our spare time while in full-time employment, and we’ve built a great business model and drawn some wireframes.

[investor’s mind] Okay, so you’re a group of friends that know each other well, although I wonder if you’ve actually worked together before. I’m a bit apprehensive that you’ve really only been doing planning and nothing really hands-on, even if it is in your spare time. The issue here is that I don’t see clear evidence you’ve all taken some personal risk — leaving your job with savings for a few months or actively tried to put your plan into action and build something. How do I know you’re all not just looking for an investor to pay your salaries for the next year or two so you can have a “more fun” job?

In the first year we’ll only spend £100,000 and break even in 18 months, before making £5m of profit in year 3.

[investor’s mind] £100,000 doesn’t sound like a lot, especially for a year, so they’re probably underestimating how much things cost and how important building a team is. I’d need to understand more about what they’re trying to build and what milestone they think they can get to before that money runs out. If it’s just the two of them for another 6 months to prove this amazing tech they’re building actually works, then maybe we could agree £150,000. Also, this grand statement about breaking even in 18 months doesn’t fill me with confidence that they’re going to invest energy and any profits into real growth and truly make this a more valuable and interesting business.

5 Steps You Can Take Now to De-Risk Your Business

This is really just a mindset thing about how you approach and answer the questions for yourself at each key point. You can center around 5 key elements where most risk is focused in the early stages of your business:

1. Customer Development
2. Product
3. Team
4. Early Traction / Marketing Channels
5. Assumptions

1. Customer Development

Customer development is really proving that you have identified something that is a pain. So rather than saying “Car wash on demand is a thing,” ask “Did you know that 80% of people say that they like to get their car washed more often, but never find the time?” or that “The biggest challenge car washes have right now is around customer loyalty and how to get people to come back to them on a regular basis.”

Then you show by delivering data that you have gone out and surveyed 150 people and showed that they would use a car wash more often if someone would come around to the house — perhaps you surveyed people queueing up for a car wash, stopped people in the street, or used online tools like Google Surveys.

Even better, you can then tell them that 30% of these 150 people already bought from you and pre-ordered an on-demand wash when you asked them. There is nothing better than paying customers, as it shows people aren’t just saying that would buy but actually have taken the plunge.

You may have also looked at industry market research reports (the British Library lets you access a lot of these for free) and used that to back up your data. You might have also sought out owners of existing car washes or other people in that field and asked their expert opinion about the state of the market and the challenges they face.

Ultimately, investors don’t really know if your business is a good one. What they do want to know is that you have proven that your customers really have this pain you’re talking about, are willing to pay to alleviate it, and that you have a solution that works for them

2. Product (Your Solution)

Showing there is a real pain point or market opportunity is one thing, but coming out with the right solution to fix it is something else entirely.

Years ago, it may have been enough just to have the idea and a few slides because things were expensive to build (and that is still the case if you want to start a more traditional business that has a lot of upfront cost). Now, though, the tools and services are widely available and cheap so that there is no excuse for not having done a lot of work on the product before even presenting it to an investor.

At a minimum, you’ll have good-looking designs, wireframes, and user journeys mapped out, but in reality you should have a working prototype or a live pilot trial taking place of your proposed solution (with some data). Sometimes not even that is enough and you also need to show you have a clear and interesting distribution (marketing strategy) lined up too.

Remember, this is about de-risking things, and building something helps an investor understand how good your team is at executing, how you think about user interaction design, how you think about things, and if your product is actually being used by real people and how. If one team has all this and you only have a business plan and some slides … which one is an investor most likely to feel comfortable with?

3. The Team

To de-risk you have to show that your business is not a group of people who are part-time, but rather a group of people who are committed to the business, that they have some experience in the sector (or at least are learning fast) and that you have some unique insights / an edge that others don’t.

Some startups start with a solo founder, but this is no longer idea, as there is simply too much work to do, and the journey will have so many emotional up and downs that you really do need to have a team to support you. It also shows that you have already sold your idea to at least one other person, or a small group of people, and convinced them to believe in your vision. If you can’t even build a small team or find a co-founder, it’s unlikely that you can build a large company with your current idea.

Another important element of de-risking the team is that you’d need to prove that you have grit and hustle. You need to prove that you are the type of team that would do everything and anything to make this work, and that investors would believe this. Demonstrate ways you have thought differently and done something extraordinary to get over a challenge that presented itself to you.

Explain the insights and knowledge your team have that relate to your business idea. Perhaps it’s an opportunity in the sector you’ve spotted by working in it for a while, or you’ve been at the leading edge of research in your field. It may just be you’re passionate about the sector and have learnt more than most people about it. Find that edge.

Lastly, you would need to prove that you’re really good at selling + building, which goes back to the customer development and traction points mentioned above.

4. Early Traction / Marketing Channels

This builds on top of the product work you’ve done and helps an investor see if there are enough people who care about the solution you’re offering.

Bring out the numbers and customer comments. How are people using what you’ve built, what are they saying, what is it missing, what are you learning? Investors are not asking for full detailed numbers, but they would like to see that you have a Minimum Viable Product that at least sells and solves someone’s problem. (Note: remember that Minimum Viable Product does not mean build the least you can, but rather build the right thing to show that enough people care about your solution).

Back to the car wash on-demand example we mentioned earlier. Do you have data around how many people have called you to get a car-wash done, what time of day / week was it, who are the customers who did this, how much did they pay, what did they say could be improved after you did it, did they book again, would they recommend you to a friend? These are just a sample of data points you can capture to show some traction. How much did it cost you to perform the work (staff, travel time, expenses …) and how does this scale?

The main thing here is to de-risk all these questions by having some early data and demonstrate what you’re learning from it and are going to do next.

Marketing channels refers to the different channels that you will use to attract people to your product with the ultimate aim of them buying from you.

You cannot be generic in your pitch when speaking about marketing channels. Often when you’re just starting out you don’t really know which channel is going to be most effective. That’s okay; what investors are mostly after is seeing a process. So likely you identified different channels, such as flyers, ads on the internet, writing a lot of blog posts, etc. The main thing is to make sure that you show that you have researched how much it would cost, what resources are involved, what you’re measuring, and that you have a robust methodology for testing about 10 channels over a 6–8 week period.

Let’s assume that from those ten channels, you’ve highlighted 1 to 3 channels where you have some early, promising results. For these 1 to 3 channels you know what you’re going to do next to grow and optimise these. The idea here is to simply show to investors that there is a process behind this and that this process works — that they can trust you know what you’re doing when it comes to user growth.

5. Assumptions

It’s very hard to know what the right metrics are for many aspects of a new business … how much people will pay, what conversion rate you’ll get through your sales funnel, and how many customers you’ll get in the first few months. That’s okay and normal, but you do need to make sure you understand how to come up with reasonable assumptions and what happens if they’re lower or higher than what you originally thought as time progresses.

In one of the the example pitches it was mentioned that you would have £5 million profit in year 3. The key here is that it’s not about the finite value, but rather it’s about showing that you know the triggers and the levers that affect the business — what do your assumptions look like to enable you to achieve this number? If it’s 100 sales a month with a team of 2, that’s highly unlikely! If it’s made up of converting 3% of your visitors to buying something with an average value of £35, that’s much more realistic.

Show realistic assumptions for your industry, have low, medium, and high variants of them, and communicate you know which are the most important ones you can affect and some ideas about how you will go about doing so.

So, What Does a Good Pitch Look Like?

Let’s go back to those original examples and have a go at composing a much more realistic pitch that shows you’ve thought about and attempted to de-risk your proposition:

• Did you know that 80% of people would like to have their cars washed more often but often lack the time to go and do so? 75% of car wash businesses expressed that their biggest challenge is around customer loyalty and getting people back on a regular basis. * You’ll have proper stats and sources to back all this up
• The market is growing at 10% a year as more people value the time of using a third party to look after their car. We also estimate there is a nascent market of people who would pay for this if it was less hassle (* kind of)
• With the rise in mobile devices and the trend that people value convenience more, our proposed solution is to offer a car wash on-demand service directly to people’s homes. With the tap of a button, you can get a professional car cleaner to come out to you at a time of your choosing (they are independent or from the car wash business locally). Payment is done through our app, you give feedback about the service you got, and you earn loyalty rewards the more you use it.
• There are three of us in the team: Sue has been running a chain of car washes for the past 20 years and will head up operations. I’m the CEO and this is my second venture in the on-demand space and I’m focusing on marketing and sales. Ed is our CTO and built large, scalable systems of this nature for the likes of {big brand}. We’re all working on this full-time using our personal savings. Our edge is that we have built years of expertise in the car wash and on-demand space and have built a vast network of connections we can tap into.
• We’ve built a prototype app and website and so far we’ve tested it with 50 customers in the SE14 area, that we recruited through flyers and some door-door selling. All of them paid £10, with 75% ordering in the evenings during the weekday. Forty of them said they’d definitely use us again (of which 24 have already) and have recommended it to their friends. Of the ones who didn’t, we’ve identified the key issues and have some ideas around fixing it (cue more discussion if required). We have some plans around testing 5 more marketing channels over the next few weeks so we can compare the results with our initial findings and look more closely at Cost of Acqusition and LifeTimeValue
• In terms of our assumptions and financials, we know our key levers around the cost of acquiring a customer and how many times they keep using us, as well as the cost of providing the service, along with the complexity around that. If we get our acquisition costs to less than £20 initially, then this makes the model viable, alongside only paying £5 in costs to perform the washing service. If these assumptions hold true (show top line numbers), then we really believe we can get to 10,000 paying customers a month over the next 9 months — generating £100,000 in monthly revenue, of which 50% are recurring customers.
• We’re raising £300,000 to give us a runway of 18 months, of which 75% will be spent on the team (technical, growth, and operations). With this, we aim to be operating across London, with 15,000 monthly active customers earning us £175,000 a month. We’ll know our true Cost of Acquisition (estimated: £35) and have a solid idea of LifeTimeValue (est: £170).

That’s it — simples! Just remember to keep asking yourself “what’s the risk in the business here and how can I break it down and remove it — a bit at a time..”.

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