How to Pitch Your Idea for Investment
What do these three people have in common?
- An entrepreneur asking a venture capitalist to fund her idea
- A product manager requesting her management team to invest in her product
- A CEO selling a candidate on joining her company
All three are pitching. They are trying to convince someone with resources (money, headcount, or time) to invest in their idea. In my former life as a McKinsey consultant, we often pitched our recommendation to senior management around growth (startup) opportunities. These were clients who asked us questions like, “Should we start this new business line?” or “Should we enter this new market?”
During my time at McKinsey, I worked on several projects advising high-tech companies about growth opportunities. In all cases, we pitched ideas to senior management that resulted in significant strategic shifts for the company — including in one case, a major acquisition.
After working on a number of these McKinsey growth projects, my team and I began to develop a framework for pitching our ideas. Since then, I’ve used this framework throughout my career, first as an entrepreneur raising money from investors, and more recently as a product leader within a consumer Internet company (Twitter).
To pitch investors, senior management, and even prospective employees on your idea, you can use a simple framework to motivate the investment:
- Worth winning
- Winnable by us
This is all about the size of the prize. How big is this market, and how fast is it growing? Anyone who is going to fund your idea wants to know that this is a large and fast-growing market.
When pulling together our market sizing for our McKinsey studies, we took two approaches: top-down sizing, and bottom-up sizing. Top-down sizing involves looking at 3rd-party market research: from eMarketer, Forrester, Gartner, etc. Bottom-up sizing involves creating a model that calculates the total number of potential customers, the adoption rate (and thus the number of buyers), and then the average sales price. You can then calculate your bottom-up market size by multiplying quantity x price, where quantity = potential customers x adoption rate.
Ideally, you want your top-down and your bottom-up market sizing to be directionally right, and the right order of magnitude. Don’t split hairs trying to precisely estimate the market size — your investors just want to know order of magnitude ($100M or $1B opportunity, not $550M v. $575M). If the top-down and bottom-up estimates were close to the same value, we could show that we had “triangulated” our estimates using top-down and bottom-up approaches to give more confidence to senior management.
When creating the bottom-up market sizing at McKinsey, we would always make some key assumptions about adoption rate and average sales price. It was impossible for us to forecast with certainty what the adoption rate or average sales price would be, particularly for a startup idea. For comps, we would look at the adoption curve of similar categories of products, and the cost that customers are currently paying for substitute products.
Even with these comps, we would still lack certainty about what the adoption rate and the average sales price would be. So we would do a sensitivity analysis to understand what the market size would look like if we varied some of our key assumptions around adoption rate and average sales price. Suppose the adoption rate was only half what we thought it would be next year — turns out it’s only 5% instead of 10%. Or suppose the average sales price was only $60 instead of $80. How would this impact our bottom-up market sizing? We would then be able to show different scenarios to senior management: a low-case, base-case, and a high-case. We could then walk the management team through a “what do you have to believe?” analysis — what do you have to believe about the adoption rate and average sales price for this to be a $200M market next year?
Once your investors are convinced that this is an attractive market (“worth winning”), you next want to show that it’s winnable — by anyone. To do that, you need to look at the competitive dynamics in the market today.
We would first consider how concentrated the industry is. There are two worst cases here: a highly concentrated industry (like an oligopoly), or a highly fragmented one. As a startup, you don’t want to enter a market where there are just a handful of companies (1–3) who control most of the market share — these companies have market and pricing power, well-recognized brands, and installed bases of customers who may be difficult to switch over to your product. On the other extreme, if the market is highly fragmented and there are hundreds of providers, the product category may be a commodity, which means it would be hard for any single company to gain significant share. Ideally, you want to enter a market which is relatively balanced, with a manageable number of competitors (not too many!). A relatively balanced market was likely to be “winnable” by someone.
The next thing we would consider is: what are the factors of competition, and who has access to proprietary resources or assets? In most markets, the factors of competition are often value/performance, cost, service, etc. In high-tech, we would analyze competitors to understand their assets: who had an installed base of customers (where there could be a network effect), proprietary data, technology patents, etc. If there were scarce resources or assets still available that created a competitive advantage for a new entrant, then we would also say that the market could be “winnable” by someone who held these scarce resources.
The final thing we would look at were the strategies and the business models of the competitors. Who was pursuing a low-cost, high volume strategy? Who was pursuing a premium, differentiated strategy? What market segments were currently being served by existing competitors, and which ones weren’t? What were the business models that each competitor was pursuing? For example, in high tech, was the business model a software license fee, a service subscription fee, a freemium approach? If there was an opportunity for someone to take a new strategic approach (go after an under-served market, offer a disruptive business model) — then we could say that the market was “winnable” by this new entrant.
Winnable by us
If the opportunity was worth winning and winnable by someone, the last question we had to answer for our client was — why was this winnable by us?
Once we had done the competitive analysis in the “Winnable” section, we knew where the competitive openings were. We then had to look at the client company itself to answer these questions for the client: What scarce assets do we have around the factors of competition? What unique strategy could we take to exploit the competitive openings?
There were two primary ways that a company can compete and effectively “win” a market:
- Proprietary differentiators
Proprietary differentiators produce lasting competitive advantage for companies. By definition, these are assets or resources that would be hard for competitors to replicate. As mentioned above, these assets could include valuable proprietary data; algorithms (trade secrets); or patented technology. The more proprietary differentiators that a company has, the harder it is for competitors to replicate, and the longer the company can operate in a market without facing direct competition.
Being first-to-market is another way for a company to compete. This is the classic “first-mover” advantage, which can enable a company to build up an installed base of customers, build its brand and strategic position, and set the standards and expectations in a new market. This first-mover advantage can become especially powerful when there are high switching costs for customers, or when there are network effects to a business.
Ideally, a market is “winnable by us” if the company has both proprietary differentiators and first-to-market advantages. The problem with only relying solely on being first-to-market is that if your competitors can mobilize quickly, you’ll face direct competitors sooner and then you may not be able to sustain your differentiation. That’s why many startups who want to maximize their “first-to-market” advantage will remain in stealth mode and, even after launch, remain under the radar. They don’t want their competitors to know what they’re doing or how well they are doing, in order to avoid attracting their competitors into the market.
The key with the proprietary differentiators or the first-to-market features are that they need to be valuable to customers. It’s no use for a company to have a bunch of proprietary differentiators, or to introduce first-to-market features, if the customers don’t care about them.
By going through this 3-part framework for pitching our ideas, we were able to convince senior management at a number of companies to invest. This simple framework of “Worth winning,” “Winnable,” and “Winnable by us” helped us convince ourselves and the client management team of the opportunity. By understanding the factors of competition and also what our own differentiation would be, we also determined our client’s product and go-to-market strategy.
The next time you’re preparing to ask investors, management, or even prospective employees to invest in your idea — apply this 3-part framework for pitching your idea. You’ll be a lot more successful if you do.