When you’re creating a startup pitch there are two sides of the story you need to consider. From an investor’s point of view, you must remember that they are… well you guessed it: they are investors. So, like any investor, they are evaluating your pitch in two areas:
- Return: The potential return (aka upside) on an investment in your business
- Risk: The risks that might prevent them from getting that return on their investment
From a strictly human point of view, you need to remember how we (humans) process information. The message has to be honed to perfection. It has to be a simple narrative delivered in an engaging way. When it comes to ‘simple’ , both the text and visuals have to support the cognitive ease. When an investor (or anyone else for that matter) is listening to or reading your pitch-deck, multiple computations are going on in their brain. Those serve as a radar and maintain and update current answers to some key questions: Is anything new going on? Is there a threat? Are things going well? Should my attention be redirected? Is more effort needed for this task?
Think of it as a cockpit, with a set of dials that indicate the current values of each of these essential variables. The assessments are carried out automatically by System 1, and one of their functions is to determine whether extra effort is required from System 2. Those two Systems are clearly explained in a must-read by Daniel Kahneman „Think Fast, Think Slow”.
One of the dials measures cognitive ease. Its range is between “Easy” and “Strained”. You should always strive for easy. How? First of all, make them feel good. Mood is a prime factor when it comes to cognitive ease. When you feel relaxed and show sense of humour you may affect others mood. You should also by all means avoid narratives worded in complicated language. It’s best you present ideas that are primed and somehow seem familiar in structure. Metaphors and clear explanations of complicated processes are more than welcome. And of course everything has to be presented in a perfectly designed graphic form.
Sentences that are printed in a clear font, diagrams and visuals that are designed with information structure in mind, or has been repeated, or has been primed, will be fluently processed with cognitive E ease. Hearing a speaker when you are in a good mood, or even when you have a pencil stuck crosswise in your mouth to make you smile also induces cognitive ease. Conversely, you experience cognitive strain when you ‘ read instructions in a poor font, or in faint colours, or worded in complicated language, or when you are in a bad mood, and even when you frown. So next time you script your pitch, keynote or design, keep that in mind.
But make sure to keep in mind that you are attacking the INVESTOR’s mind. And an investor’s job is to find businesses that offer the highest return on investment with the least risk. Your job is to convince them that your business offers a greater return, with less risk, than all the other businesses they are looking at. With a simple narrative delivered in an engaging way. Keep in mind they look for return. And when it comes to it, remember that most investors are looking for at least a 10–20x return on their investment in a business. So you need to convince them that you can grow your valuation at least 10–20x from its current baseline. Therefore you need to show credible and easy to digest data and research. Remember though to stay away from ‘dreamlike’ valuations lubricating the investor’s decision with TAM (total available market) predictions. There are 7 billion people on Earth. Even Facebook cannot reach them all.
Business valuations are typically driven by revenue and profit multiples, so you need to show how your product will dominate a huge market and generate the revenue and profit growth required to drive a 10–20x increase in the value of your business.
But when investors listen they tend to be sceptical. Why? Because they are trained to look for potential risks. And when it comes to it, remember that when then they read or listen to your pitch deck or ask questions they are trying to assess your investment risk in three key areas. These are as follows:
Market Risk: Are you addressing a large, growing market with your solution and is the problem grave enough for people to pay for your solution (with time, attention and/or money)?
Product Risk: Can you build a compelling product with sustainable competitive advantages? Note that if you do not have competitive advantage do not compete. Sometimes startups leave me puzzled when they state that ‘user friendly interface’ is their competitive advantage.
Execution Risk (Team Risk): Can your team acquire and retain new customers profitably, at scale, and transform your opportunity into a substantial long-term business? The lack of one of the elements leads to Anna Karenina principle, where the lack of one of the crucial factors leads to failure. In my experience startups too often focus on development and do not have a good sales strategy.
I usually work with startups using a very simple template that covers all the above elements. We write a script. Edit it till we cannot make it any more simple and engaging. We look for remarkable facts, that can be summed up by ‘tell them something they do not know’. And then we rehearse. The simple template I use consists of couple of elements:
- Big Idea (the intro) which serves as the intriguing opening that introduces the main elements (‘heroes’) of the pitch. It can take a form of a short story, engaging questions, a quote, stats or even a strong visual with a comment.
- The problem you solve, who you solve it for, and the reasons why your target customer/users are frustrated with current solutions.
- Solution – where there’s problem there should be an addressed solution. You need to explain how you solve the problem and the benefits of your solution.
- Your product and how it works in three simple steps. Mind the cognitive ease!
- Business Model where you show how you make money.
- Market Opportunity to explain how much money you could make if you dominate your target market. The roadmap of how you get there is also a thing to consider.
- Your competitors and why your product is better than theirs.
- Growth to show how you will acquire and retain customers, profitably, at scale, and keep your product competitive.
- Traction that should serve as tangible proof that your customers love your product and are happy to pay for it. The best is of course expressed in profit or revenue, but any validation is better than none whatsoever.
- Financials to show your current best guess of how much money you will make in the next 3–5 years.
- The team that has the experience and expertise to transform your opportunity into a large, profitable business.
- Funding and the ask, to state clearly how much money you need and what you will do with it.
- Summary to well… summarize the highlights of your business/investment opportunity as a closer. Make sure to finish sharp with w witty call to action.
This template works but only if you fill it with clear messages, the language that is simple and stories that are sticky and contagious. It also only works if you rehearse the pitch till you can’t take it anymore. And when you deliver it smoothly. After all there are so many factors that influence the perceptions. Make sure you make most of them.