The best way to overcome investors’ concerns with the challenges in your business is by demonstrating traction. Entrepreneurs think angels and VCs are happy to support great ideas. In truth, they invest only in a small number of companies that have already proven that customers are excited enough about the product to pay real money for it. If you have significant revenue, and if it is growing quickly, ensure to highlight it in your pitch. If not, try to find out how to get into revenue before raising.

Showing Traction

<ul><li>Recurring sales: A few customers that have purchased multiple times proves the sale was more than just a trial.</li><li>Purchase orders: Large purchase orders can be better than sales if they show that a customer is committed to buy a significant volume.</li><li>Letter of intent for large items that will take a long time to deliver and evaluate shows that customers are excited about the product.</li><li>Grants: It gives investors confidence that your technology is feasible.</li><li>Awards.</li><li>Being selected to known accelerators and incubators.</li><li>Get one prominent investor to sign up, and others will follow.</li></ul>

 Alternative ways to show traction

The best way to overcome investors’ concerns with the team, market and every other challenge in your business is by demonstrating traction. I’ve been through countless pitches where I’ve noticed…

Stashed ideas

Pitching Angels 11: Showing Traction

For a pre-revenue company, a one-year revenue projection is a fiction. Demanding to see a 5-year revenue seems impossible. Yet it is vital. When it's time for the Q&amp;A session and the end of a pitch to an angel group, the slide that is on the screen is the revenue projections. This tells them everything there is to know.&nbsp;

The Fictional 5-Year Revenue Projection

Revenues after 5 years tell investors if you're in the right room. If you expect to get to $5 million in revenues after 5 years, even if it may be profitable, it won't work for venture funding. Unless you expect to be over $25 million ( ideally $50 million), there's no point to talk to angels.For VCs, you need to target at least $100 million to $250 million.

What a 5-year revenue projection reveals

Investors next focus on how much money you plan to lose at the beginning. It reveals your burn rate, your runway, and the amount of capital you'll need to raise. A short runway means you're likely to crash and burn or get stuck.Then, investors see how realistic your assumptions appear.<ul><li>Do you plan to take a large fraction of the market? How?</li><li>Are you showing $2 million in revenue for the year, but halfway through you have only reached a tenth?</li><li>Are you generating tens of millions in revenues but not increasing headcount and marketing costs?</li></ul>

Observing your assumptions

In a simple table, your slide should contain the following information:<ul><li>Gross revenue for the next five years</li><li>COGS (if significant)</li><li>Gross profits</li><li>Marketing expenses</li><li>Employee expenses</li><li>Other expenses</li><li>Net income</li></ul>That is all you need on this slide to reveal what investors need to know.

What is needed in a slide

For a pre-revenue or early revenue company, even 1-year revenue projections are pure fantasy. Demanding to see 5-year revenue projections seems perverse. No company in the entire history of the…

Pitching Angels 12: The Fictional 5-Year Revenue Projection (And Why It’s the Most Important Slide…

A good business is not always a good investment if nobody wants to buy it. Conversely, a stupid business can be a great investment if someone wants to buy it.&nbsp;&nbsp;&nbsp;Founders often focus on how great the business and the product are. Yet the pitch needs to answer the question: Is this a good investment? It involves several factors:<ul><li>Probability of reaching a liquidity event.</li><li>How long until liquidity</li><li>Expected valuation at liquidity.&nbsp;&nbsp;</li></ul>

How the Investor Can Make a Return

For investors, the right time for acquisition is as soon as the startup has achieved enough success to attract a big company to acquire it. It means an APR of $25-$50 million, but is dependent on the market. A typical target for acquisition is three to five years from seed round, but it could be longer.

The right time for acquisition

On your pitch to investors, the exit strategy slide is:<ul><li>A list of companies that should be interested in acquiring your startup</li><li>Other startups acquired in the same space</li><li>Metrics for those acquisitions as multiple of sales</li><li>Average acquisition price in your industry as a multiple of sales</li></ul>Combining this multiple with your revenue projections from the previous slide will provide an estimate of the expected company valuation over time.

The exit strategy

Let’s say I’m a real estate developer and I’m offering you a deal: if you pay me $2 million, I’ll buy a plot of land, build a big house, sell it for $3 million, and split the $1 million profit with…

Pitching Angels 13: Exit Strategy — The Climax of the Pitch

Many founders want to know how to calculate the valuation of their startup. The valuation is one reason why you will (or won't) get funded. The right valuation is the one that attracts investors. From an investor's point of view, the underlying principle of valuation is the Risk x Reward. As you gain traction, build out the team, grant patents, and make progress, the risk of failure will decrease and your valuation will increase.

Valuation is Risk x Reward

Investors will see hundreds of pitches before picking one or two to invest in. It is about how attractive investing in your startup is compared to the other startups. For example, when you look for an apartment of a specific amount, you don't analyse the cost to build the unit, plus interest, taxes, etc. You will go online and scroll through many units in the same neighbourhood and filter for your budget and size range, then choose one from your top five choices. Investors do the same with your pitch.

What investors do with your pitch

Find someone who knows the local market and can advise you on a suitable price. This is the role of your advisors.Accelerators and incubators will know where you stand. Ask them for guidance. Also, talk to your ealier stage investors.In the end, your valuation is the amount investors are willing to pay.

Find an equivalent of a real estate agent

Set your ask a bit high when you open your round, but be clear that it's a target valuation and that you are open to negotiation. When you have a lead investor with a signed term sheet, your valuation is set. Other investors in the round can accept the same terms or will pass. If you overprice in an earlier round, you may not be able to show enough progress and may have trouble justifying an increased valuation. Investors will see a slight increase in valuation as a red flag. That is why it is better to underprice your valuation somewhat.

Valuation is a negotiation

The most common question I hear from founders is: “How do I calculate the valuation of my startup?” Ah, if it was only as easy as putting numbers in a spreadsheet like they teach in business school…

Pitching Angels 15: What’s My Valuation?

The first rule of sales is to conclude your presentation with a call to action - buy my product, hire my company, give us a chance. But most pitches miss this and end with a "thank you for your time." This is your sales pitch. You're selling equity in a company. Wrap the pitch with your ask: "Buy our stock now, it'll be the best investment you'll ever consider."

Pitching Angels 14: Wrap Up Your Pitch With the Deal Terms

In your ask, give the key deal terms. Most importantly, the valuation (the price you're selling the stock at). Also include:For equity:· Amount of raise · Pre-money valuation · Liquidation preference · Board representation · Any non-standard termsFor a convertible note or SAFE:· Amount of raise · Valuation cap · Discount · Interest rate · Maturity date (convertible note) · SAFE typeOther details:· Prior funding rounds, amount and valuation · Target closing date · Amount already committed · Lead investor · Any notable investors

Give the key deal terms

The first rule of sales is to conclude your presentation with the ask — buy my product, hire my company, give us a chance — it’ll be the best decision you ever make. Every web page has a call to…