Inside the Investor’s Studio
An exclusive view into an angel investor pitch
Editor’s note: This article appeared in our June 2009 issue.
By Jim DeBetta
Sometimes there is truly no better way to learn about the invention process then by doing things on your own.
When I first started, I made so many mistakes that I cannot remember them all. I do, however, remember the money I lost along the way when making uninformed decisions. The adage “you learn by doing” certainly rings true in my experience.
I recently brought a client into a meeting with a potential investor in the hopes he would get the funding he so desperately needs to keep his invention idea on track. He has a great product and I see the potential in it, but being able to articulate that with facts and figures is another story.
Because I know this investor personally, I was able to give my client a heads up about my friend’s personality and what questions he would be ask. Having this advantage is a luxury, but unfortunately most people must be ready for anything when meeting with a potential investor.
As we settled in and finished the small talk, my friend asked my client if he had any idea how much money he needed to get his product fully developed.
My client said, “I think I need about 600K.” My friend immediately asked how he planned to find this amount and my client’s answer was exactly the opposite response he needed to give.
“Well, I need a few hundred grand for development, another 100k or so for marketing and some money for me, like a salary, because I will be running the company.”
When you approach a potential investor, you must clearly demonstrate exactly how their money will be spent and back it up with real numbers based on quotes and research that proves the actual costs of work you require.
Paying a salary is not something my friend is interested in doing. In fact, it is just the opposite. He wants to see you sweat and he also wants to see your personal and financial commitment to your product. He wants to know you are willing to put your money where your mouth is.
My investor friend then asked my client if he was able to show any proof that his product was viable and desirable by consumers and retailers. My client said he asked his family, friends and some co-workers and they all thought it was a sure thing. My friend simply said the opinions of those who know you and care about you are worthless to him.
My client reacted with a puzzled look. The fact is validating your product with strangers who have no vested interest in your success is critical to proving potential viability. Performing consumer surveys, focus groups and even talking with a few retail buyers can show that a demand for your product exists and that may make an investor more comfortable.
My friend asked my client many more questions and one that stood out was whether he had a solid business plan. Unfortunately, he did not have what is often referred to as an investment-grade plan, which includes detailed financial models, in-depth market research, an explanation of yourself and your advisory team’s qualifications.
Perhaps most important, the plan indicates when investors will see a return on their investment. If investors do not clearly understand the benefits of your product and a concise plan to earn a profit, then regardless of your product’s ingenuity they will not invest.
I warn all clients about what to expect in these types of meetings. Investors are looking to turn a profit. The inventor must instill this confidence in investors and be prepared for their numerous questions. Angel investors will not invest in someone who is unprofessional or lacks the ability to carefully budget, use and safeguard money. When you are seeking money, you need to instill not only the confidence that you can succeed, but provide all the facts and information that allows an investor to seriously consider making a formal offer to invest.
At this point in our meeting, things were not going well. I intervened by telling my investor friend I had done preliminary research and the initial results were promising. I also told him that my group would act as advisors to ensure that all aspects of development and commercialization would be handled professionally and by a team who has decades of relevant experience. This made everyone feel better.
Inventors need to pay attention to detail and professionally prepare for their new venture. They cannot solely rely on their vision for their idea, but meet the investor’s bottom-line agenda. This means taking cues and advice from industry professionals like me who have been down this road before. It seems that sometimes no matter what advice I offer, some inventors choose to do things their own way.