Mistakes which often result in an “I’m out” from potential Investors
So you’ve got a great idea, a great product, a great proposition. You now want to create a great business. You have ambition and you want to grow. To do this effectively, you recognise you need investment. The problem is, being “business ready” is not the same as “investment ready”. You don’t want to let all that potential go to waste by making a few avoidable mistakes when approaching Investors or making your pitch. Here are the top 6 cardinal sins I’ve experienced over the years of early stage food and drink pitches. Avoid these and you’ll be well on the way to an “I’m in”.
1. The brand over-delivers and the product doesn’t
Those familiar with consumer-facing branding will know that a brand needs to capture the attention and imagination of the consumer and convince them to buy the product. Ultimately, the brand promises to the consumer that the product will fulfil their expectations – even better, exceed their expectations. The ideal situation is a brand which resonates with the consumer; it promises a solution to their problem and the product knocks their socks off. That will result in a repeat purchase (the whole point of building brand awareness in the first place). All too often it doesn’t. It falls flat.
In food and drink it’s amazing how many Entrepreneurs believe that a green message, an alluring brand purpose or a catchy founder back-story will sell the product. If the product doesn’t also taste good, the one initial sale which has been so expensive to capture will also be the last. Increasing rate of sale will be elusive no matter how much resource is pumped into brand awareness.
2. The Entrepreneur won’t listen
Some founders simply cannot handle advice. They claim to want the value-added ‘smart money’ that angels bring, but in truth they believe they have it all figured out and are not interested in what their investors have to say. There’s a way to weed out such people early on: ask them to justify some of their fundamental business assumptions during their pitch. Founders who don’t listen tend to get defensive and their answers either demonstrate this, or they suggest they think you’re not ‘getting it’.
BTW, I don’t think I have all the answers – in fact, there’s no way I should. The founder should know much more about their business than I will. In fact, I like push-back. But it’s got to be push back which is justified in either reality or insight, ideally in both. A well thought-through counter will get my support, rather than simply not listening.
3. The proposition is not scalable
Many times, an Entrepreneur doesn’t understand the commercial reality of setting up and growing a business. It turns out what they really want is to build a lifestyle business in which they plan to draw a decent salary and maybe pass it on to their kids. There’s nothing wrong with that, but it doesn’t constitute a proactive growth plan and it certainly doesn’t warrant much external investment.
And even when they do want to adopt a growth strategy, the initial motivation to develop the product and bring it to market is born out of frustration that the product did not exist before they created it, but the founder fails to seek out real consumer insight. They end up designing a product which is relevant only to themselves and by definition, only appeals to a narrow target group. And so you can’t scale – certainly not quickly and often not at all. For angels, the return on investment will be far too low – certainly in relation to the risk inherent with investing early on.
Finally, when everyone really is aligned on aggressive growth, founders sometimes fail to recognise that they can’t produce their product at margins that are attractive enough to ultimately allow the business to fund brand building from working capital, after the invested funds run out. This is another frustrating example of a business that won’t scale, no matter how hard you try. It’s frustrating because it can take you quite some time to figure this out!
4. The target market is not defined
Many founders believe they know exactly what their target customer wants, but haven’t ever actually asked them! This is similar to the Entrepreneur who designs the product around their own personal needs. Fine to start with, but you need to ask the target audience what they think of the product – do they like it, why do they like it, what would they change about it and ultimately, would they actually pay for it? This means, of course, you need to have defined your target audience in the first place. Don’t think you can sell to everybody. If you attempt to sell to everybody, you’ll end up selling to nobody.
5. The valuation is crazy
If I hear another pitch that claims to be the “next Fever Tree”, I’ll scream. There aren’t many things which are guaranteed in business but one is, you will very likely NOT be the next Fever Tree. They are so much the outlier that any comparisons are meaningless. Entrepreneurs who use this point of reference to justify crazy valuations aren’t doing themselves any favours. It’s unreasonable to expect Investors to invest at extremely high multiples or worse still, at high valuations when the business is still pre-revenue.
There exists, bizarrely, a slight contradiction here as we’re seeing a number of what I would regard as “crazy valuations” taking place recently in early stage food and drink rounds. There are a number of reasons for this, but speaking of guarantees, probably the only thing you can guarantee will follow an over-inflated valuation is a down-round at the next hurdle – and that serves no-one’s needs. If a business is at very early stage and therefore the risk is still quite high, the potential Investor should be viewed as more of a partner – and the equity the founder is prepared to surrender should reflect that.
6. Not knowing what you plan to spend the money on
Knowing what your “marketing playbook” looks like is an extremely valuable asset. This is usually developed by trying a few things and figuring out what works best and what doesn’t work at all. So much money can be wasted by not first figuring out the list of “dos and don’ts” for your brand and your category.
Therefore, you need to know how you would spend the money you are seeking. And there’s no shame in not knowing – but there's huge shame in not finding out. Typically, an Entrepreneur needs to invest in team and stock. But the really exciting investment will be in brand building. The more money being allocated to this, the more opportunity there will be to deliver a strong return on the overall investment. But this is only the case when it has been figured out what actually works. Otherwise, you’re asking the Investor to place a bet on your roulette wheel. Founders need to figure out a way to de-risk that gamble and that is called developing your “marketing playbook”.
Ultimately, how can you avoid these schoolboy/schoolgirl errors? Well, find someone who has industry experience who can help you through the various stages of “getting Investor ready” is a good start. This can be a mentor or even a (more experienced) co-founder who comes on board very early on. Then try to find “smart money”- someone like an Angel Investor with relevant industry experience who can also bring value-added input to complement their investment. Finally, try to get professional help and support to ensure you spend the investment wisely.
One excellent way to achieve this can be to join an accelerator. Not all accelerators are the same, however. Best to find one who speaks your language and understands the pressures of growing your own business. Find one run by Entrepreneurs, who have been through the same journey as you, and will have you and your business best interests at heart. At Mission Ventures, our programmes are run by Entrepreneurs for Entrepreneurs. With over 80 years of industry experience and more than £50m of exit values from brands we’ve launched ourselves, we believe we can help. Check out our programme opportunities and get in touch to learn more, and to hear about upcoming accelerator programmes.
Lastly, Good luck!
John Stapleton, Director and Co-Founder of Mission Ventures.