Angel Investing – The ‘Elevator Speech’ Antidote
Posted by Dr. Earl R. Smith II in Venture Capital, tags: adviser, advisor, advisory board, board of directors, CEO, chairman, coaching, consulting, director, Executive Coaching, Governance, Leadership, leadership assessment, leadership coaching, leadership development, leadership styles, Life Coaching, management assessment, non-profit, nonprofit, Personal Growth, spirituality, turnaround, Turnaround ManagementDr. Earl R. Smith II
DrSmith@Dr-Smith.com
www.Dr-Smith.com
Listening to the delivery of an elevator speech is the single most distracting event in an investor’s journey. It is to that point in time – the equivalent of ‘love at first sight’ – that most of the subsequent failures can be traced. An elevator speech is an advertising undertaking. It is an attempt to draw in a potential investor and get them interested in providing funding for a venture. It the starkest terms, it is a money trap.
Because of their brevity, elevator speeches are selective in their focus. They dance away from – or avoid all together – issues that undermine the apparent viability of the value proposition on offer. The necessarily simplified approach begins with an assumption that the presenter and team is able to execute and that their ideas are their own. In stark terms, an elevator speech is a swindle – a created illusion that – necessarily – avoids or minimizes potential lethal challenges and highlights a series of yet to be tested and usually overly optimistic assumptions.
If you are getting the impression that I have a strong aversion to the entire idea of elevator speeches, you are correct. Investors have lost more money because they failed to critically evaluate and aggressively test key underlying assumptions than for any other reason. This single misstep is by far the biggest ‘deal killer’ in the process. In a recent article – Assumption is the Mother of All … – Lessons for Young Wannabees – I argued that untested assumptions are the primary reason that start-ups fail. Here I would add that untested assumptions are the primary reason that investments in start-ups go south.
Here is a series of questions that I recommend any angel investor push hard on before then even considering providing money for a start-up:
1. Why should I think that you are capable of building and running a business? Prove to me that you understand the business of business – not just the business of your intended business. Repeatedly I have encountered companies whose CEO was very good at promoting themselves and the idea behind the company – they were masters at the kind of shallow-water thinking that goes into creating a good elevator speech – but a complete failure at assembling, managing and leading a professional and effective team. Investors have to ask the hard questions early on and challenge the assumption that the elevator speaker can build and run a successful company. The hard truth is that most of them cannot.
2. Who is on your team that would impress me and what kind of a deal did you have to make to get them onboard? I will want to talk to them – to see if they are floaters or workers. What have they accomplished since joining the team? I am surprised at the percentage of sociopaths that find their way into becoming CEOs. Primarily they are of two kinds. The first is not comfortable with the idea that there are other people on the planet. They are more comfortable with ‘ideas’ and ‘concepts’. As a result, they constantly are moving the flatware around on the table – but cannot seem to assemble a team dedicated to their ideas. The second are the ‘uncritical assemblers’. These people are good at piling up names but, when you start poking around the team, you find that the dedication to – and often understanding of – the value proposition behind the company is somewhat gossamer. These entrepreneurs are not able to build effective and dedicated teams. They are talk show hosts and always very bad investments.
3. Do not tell me about your passion tell me about your accomplishments. I am not looking for the glib or theatrical. What have you already done to turn your ideas into a going business? If the answer is nothing of substance, come back then you have. Passion is one of those buzz words that simply will not go away. In my experience, it is a poor substitute for other, more important, ingredients. I prefer an entrepreneur who is focused, persistent, knowledgeable, determined and who makes the best use the resources at their disposal. The illusion of passion can be manufactured – most educated people are adept at it – but these other things cannot.
4. Do not tell me about markets. Who are your customers? Amateurs have markets – pros have customers. Who believes in your ideas enough to pay for them? This one really drives me nuts. Somebody sends me a business plan and I get to the section that is supposed to be focused on the possibility of revenues and encounter something like the following. “The total market is XXXXX billions of dollars annually and if we get even one tenth of one percent of that … (blah, blah, blah)”. This is a simple bait and switch – an investor is baited with a huge number – then shifted to accepting the ability – and, most often as it turns out, the inability – of the team to implement in a way that captures any of that huge number at all.
5. Do not tell me about your revenue model – tell me about your revenue. I do not trust Excel spreadsheets – projections are usually self-serving crap. Tell me about your revenues to date. CEOs that are not dedicated to generating revenues from the very beginning need to be avoided. I recently reviewed a ‘business plan’ that admitted that the company would be cash flow negative through at least two follow-on capital raises. In other words, if the company were not able to raise the additional capital, the investors would loose their investment. The message behind the business plan was, “we are too busy doing product development to dirty our hands chasing revenues.” These are not companies – they are science projects. If you want to supply grant money, go ahead. If you expect a return on your investment, dream on.
6. Do not go on about differentiators or competitive advantage; tell me about a customer that you took from another company. It is not ideas that I am interested in – its implementation. Show me that you have implemented your ideas – stolen customers – generated revenues. This point relates to the one above. No validation of the value proposition is relevant unless it comes from a customer who has paid real money for what the company has on offer. The real test of the validity of the value proposition is the market – not the investors or the founders.
7. Slow down – I am not interested in being the focus of a heated rush. If you think your business can be described in a few sentences, you are far more simple-minded than the world as I know it. I often suspect that ‘entrepreneur wannabees’ who are good at elevator speeches suffer from ADD. Their attention span is so short that the brevity of an elevator speech is all they can manage. Their vision of business, their business and the investor’s world is so abbreviated that anything beyond instant gratification and casual agreements is beyond them. Getting a CEO beyond the elevator speech and into deeper waters is one of the best ways to test their ability to build and manage a company.
8. Recent trends and the economic downturn have made this an unfavorable time to seek financing. You do realize that, if we do reach an agreement, the valuation of your so-called company will be very low and I will end up owning most of it until you can produce results that allow you to buy it back. I occasionally receive packages on pre-revenue companies with proposed valuations in the millions. My response is always the same – set the valuation at the investment amount and allow the management team to buy in through sweat equity and results. Initially the investors will own most of the company but, with success, the management team can increase their share of ownership. Most investors are very happy to allow the team to achieve a majority position – if they earn it.
These are just a sample of the questions that I recommend investors ask when reviewing a potential investment. Pressing them will improve your returns. If you cannot bring yourself to press them, bring in somebody who can. Whatever they cost, you will be a small matter compared to loosing your entire investment.
© Dr. Earl R. Smith II
Related Articles:
- Angel’s Sins
- Angel Investing – Governance
- Angel Investing – Hard Choices or Hard Times
- Customers as Financiers
- Exit Strategies Under Current Conditions – Part 4
- Attitudes, Agendas, Interventions and Compromises
Dr. Smith is a proven senior executive, successful entrepreneur, published author and public speaker. He serves on boards of directors and advisory boards or as a strategic adviser to CEOs. Dr. Smith specializes in turnaround management, strategic planning, leadership development and executive coaching. He also works as an executive and/or life coach in the areas of personal growth and spirituality. He is the author of Amazing Pace: Turbo-charged Business Development – a book that shows how Advisory Boards can dramatically increase revenue. Dr. Smith is also the author of Dream Walk: Parables for the Living – a book of Raven Tales and exploration.
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Thanks Dr Smith II – this is really great advice.
I’ve experienced the wrong end of believing the spreadsheet – and not going into the detail of the assumptions that built the spreadsheet. The interesting discussions are always about the assumptions – and rarely about how much this enterprise will be worth in 3 or 5 years time. If you miss this point, you lose your money.
I also support entirely the ‘prove it’ first approach to business and investment. Even in the bible when Christ turned water into wine at the wedding, the water didn’t become wine UNTIL it was laddled out. In other words, to have miracles happen, you first take action.
Thanks for a great comment Neil. During my time on Wall Street I learned that you begin reading any financial statement from the back forward – start with the footnotes. One of my reservations about an elevator speech is that it contains no footnotes and some investors don’t follow up by verifying the details in the assumptions. You are totally correct – the only sure way to decide is by reading the ‘tracks in the snow’. It’s not the idea that matters – it’s the demonstrated ability of the team to implement and turn the idea into revenue and profit margins.
Having given many investor pitches I found this article refreshingly honest and a great guide to making a good presentation. I have to admit to a number of the sins mentioned. I do however think it portrays us entrepreneurs as conmen and snake oil salesmen. It takes a lot for someone to take the risk of starting a company, speaking from my own experience, I endured 2 years of poverty and maxed out 5 credit cards before we finally got it off the ground – we took it all the way to an AIM floatation but then we fell prey to one of those CEOs you mentioned.
Back at square one, I am facing the situation Sean mentioned – I’m in CleanTech and the government is quite willing to throw grant money at me, however, State Aid rules restrict this to 60% so 40% still needs to be found from the private sector – if Angels aren’t prepared to take the risks and the 3Fs aren’t rich enough how are we going to develop these technologies that will get us all these CO2 emission reductions?
Sean, Good question – most of the time successful entrepreneurs tap into the three Fs – friends family and fools. It is far better to bootstrap until you can validate the value proposition through the generation of customers. Such an approach also demonstrates the ability of the team to monetize that proposition. There is an article on my website titled Customers as Financiers. That is one example. If you go to angel investors too early in the process, you end up with a very low valuation – and that costs you significant equity in the company. Chief
I found this insightful and thought provoking. It makes sense to me that as an investor you should be looking for substance not flash and that the company should be built around have people who have a record that shows they can get it done.
However, as someone who has just started a company to take IP out of a University so we can develop and ultimately commercialize it I am curious what you would advise a comapny several years away from having a product or revenues that needs to raise money.
In points 4, 5 & 6 you would appear to be advising investors to avoid situtations where the company doesn’t have a product, doesn’t have revenues and that maybe even in a situtation where they have to get through several rounds of funding based on achieveing key milestones.
Where should they go to raise money, are these not often the people who are advised to seek angel investors ?
Appreicate your thoughts
Sean
Very well written. The point is clear. Keep it simple and give me facts not hypotheses. I’ve been to many companies where the local management team is suffering paralysis by analysis. Plan after plan is drawn up but no action follows. A plan that’s not implemented is a waste of time and money and does not serve the shareholders well. Don’t get me wrong, I’m not advocating no plan, but once the plan is drawn up – Do it.