Tips for Talking to Investors

A young company looking for outside funding won’t get very far without a well-crafted pitch. And pitching to investors doesn’t just mean showing them a raft of numbers; it also requires skillful storytelling.

“The biggest challenge is distilling [the pitch] down to something that’s irresistibly compelling,” said Greg Erman, a serial entrepreneur who has founded six medical-technology companies, at a recent conference held by Boston-based The Capital Network.

A compelling pitch is especially important for seed-stage companies these days, given current trends in the venture capital market.

Although first-time financing by venture firms in 2010 were up about 30% from 2009 — with more than $4 billion going to about 1,000 companies — the flow of funds going to seed-stage firms declined by 2%, according to the Moneytree Report by PricewaterhouseCoopers and the National Venture Capital Association.

Similarly, angel investors poured $20.1 billion into growing companies in 2010, an increase of 14% over 2009, but reduced seed-stage investments by 4%, according to the Center on Venture Research at the University of New Hampshire’s Whittemore School of Business.

Erman was one of several experts who talked about creating and delivering a successful pitch at The Capital Network conference. Here, distilled from their discussion, are five tips for talking to investors:

1. Don’t cold-call potential investors.

Use your network instead to connect with angels or venture capitalists. “The first priority in approaching any investor is to have a credible referral,” Erman said.

This person should know “enough about the entrepreneur and the business to be able to offer recommendations that are authentic.”

If an investor allows electronic submissions, entrepreneurs should submit a plan and try to reach out through a referral.

2. Talk about market need, not market size.

A large market by itself will not sell your product, so a pitch should never hinge on the idea that grabbing even a sliver of a huge pie will turn a profit, said Dan Meyer, a partner at Boston-area Rose Ventures.

“It is typically not helpful when companies say they are going to get 2% of an enormous market — especially if not all of that market is applicable to their product or service,” he said. Instead, start from the bottom up and talk about how your product or service addresses a particular need in a unique way, he advised.

Noted Erman, “There has to be a deep understanding of the market dynamics, the buying behavior, and what’s going to motivate a purchaser to adopt your product over the others.”

3. Acknowledge the competition.

Competition may be unnerving to young businesses, but investors see it as a sign there is a market for your product, said Barbara Fox, an entrepreneur who has founded several companies.

Accordingly, investors are looking for the most competent and innovative companies to meet the market need. So how should you discuss your competition? “Never say, ‘No one else is doing this,’” said Fox. “Instead, define them, [and delineate] who is a threat and where there are opportunities.”

But refrain from making sweeping statements about your position relative to the competition, she warned. Investors may have already met with your competitors and know more about their strengths than you do.

4. Show investors where they fit.

“It’s important to lay out where you are in development and what you need investors for right now,” said Fox. Tell investors exactly why their money is important.

If you need funds for a clinical trial, for instance, say so, and specify how much you will need.

5. Practice your pitch.

Investors, said Erman, “are really smart people with no time,” so entrepreneurs must make their proposals quick, concise, and engaging. That requires practice.

Ask someone who is not related to you or your business to critique your presentation, said Erman: “Get people who couldn’t care less about you or what you’re doing.”

In the end, even a sound business plan and a quality pitch may not be enough to persuade an angel or VC firm to invest.

But once you have made a connection with a potential investor, don’t sever it. The investor field is small, and a venture capitalist who rejects you today could help fund your company tomorrow.