Business Models & Pitching Investors

1. Business Models&Pitching Investors Mark Neely mpn@infolution.com.au

2. Agenda • Part I- Business Models • Business Models 101 • Explaining your Business Model • Groundtruthing your Business Model • Part II – Pitching To Investors • It’s a Numbers Game • Pitching 101 • Proposed Presentation Format • Risk v. Reward

3. Business Models 101 Part I:Business Models

4. Business Models 101 • A business model explains how you convert your idea/technology into economic value. • Value Proposition • Market Segment • Value Chain • Revenue Generation & Margins • Business Environment • Competitive Advantage

5. Business Models 101 • Value Proposition • Identify the customer ‘pain’ or problem. • Indicate how the product addresses that problem. • Quantify the ‘value’ of the product from the customer’s perspective. • Understanding ‘value’ is KEY! • Generally wholly unrelated to your cost base. • What is the value of a bottle of Coke? • What is the value of a painkiller?

6. Business Models 101 • Market Segment • Identify the specific group of customers (aka ‘market segment’) you will target. • Demonstrate an understanding that different market segments have different needs, preferences and purchasing criteria. • Explain why you have chosen the specific market segment. • Quantify, Quantify, Quantify. • Important to be able to point to a present demand from an identifiable and targetable market segment.

7. Business Models 101 • Value Chain • Where does your business sit in the value chain? • Do you need telco support/partnership? • Can you go direct-to-customer? • Do you require the availability of other technologies (e.g. Bluetooth)? • If you are reliant on others, how will you capture your part of the value created? • If you require other technologies, how do you overcome consumer inertia?

8. Business Models 101 • Revenue Generation & Margins • How is revenue generated? • One-off purchase? • Subscriptions? • ‘Freemium’ model? • Advertising? • How does that tie back to the value chain? • What is your cost structure? • What are your target profit margins?

9. Business Models 101 • Business Environment • Who are your competitors? • There is ALWAYS a competitor (even if it is just consumer inertia). • Who are you complementors? • Is there a substitute product/service? • Does the product become more valuable to customer as a result of network effect? • Are there any ‘force multipliers’ that can be utilised? • Position on telco portal • Viral distribution / Word of Mouth

10. Business Models 101 • Competitive Advantage • What is your source of sustainable competitive advantage? • Examples: Costs, product differentiation, market insight, superior execution or niche strategy. • SCA is a must have for investment. • First to market not always sustainable. • Market insight is not always sustainable. • IP protection not always sustainable, and is dependent on your ability to finance enforcement.

11. Explaining Your Business Model • Business Model = Your Business In a Nutshell • If you cannot explain it in 50 words or less, you don’t yet fully understand your business. • Summarise, summarise, and summarise again. • Throw away verbiage, get to the essence (e.g. “We cure cancer”). • Concise, powerful summary needed: • Elevator pitch • Investor pitch • Customer pitch • Friends & Family (“What is it that you do?”)

12. Groundtruthing Your Business Model • Business models often work great in theory, but fail in the ‘real world’. • Why? • Assumptions (e.g. People think like me) • Research is often ‘backwards looking’ • Rapidly changing business environment • Talk to customers – LOTS OF CUSTOMERS: • Confirm their ‘pain’ + interest in your product • Confirm their pricing sensitivity • Get confirmation in writing, if possible. • Be oblique (“What if there was a product that did X?”)

13. Business Models 101 Part II:Pitching to Investors

14. It’s a Numbers Game • Law of Supply v. Demand works against entrepreneurs/innovators: • 1000s of ideas (Supply) v. Dozens of investors (Demand) • Investors are very choosy: • Specific niches / areas of interest (e.g. Health) • Specific investment criteria + thresholds • Specific stages of investment • Specific regions for investment • Do your research + target compatible sources of investment.

15. It’s a Numbers Game • For every 100 business plans received, investors select only 1 for further investigation/discussion: • 70% don’t clearly articulate business proposition. • Heavy emphasis on the ‘tech’, low emphasis on the opportunity and the right team. • 20% don’t clearly demonstrate investment return. • 9% remainder aren’t original ideas: • May have a similar opportunity on the boil • Know a colleague who is investing in something similar

16. It’s a Numbers Game • Important to be a ‘pragmatic optimist’. • Optimists think “This is an incredible product and opportunity. It will sell itself”. Get slammed. Try again. Get slammed. Try again. Get slammed. Give up. • Pragmatic Optimists think “I have faith in my product. I have faith in my business model. I believe I will get funded, but it is a long hard slog”. • Far more resilient. • Far less defensive. • Far more successful.

17. Pitching 101 • Rule 1 – Decide whether to pitch. • Not every investor/opportunity is worth chasing. • You have limited time, resources & optimism – CONSERVE them, and spend them well. • Hard to make a good second impression. If an investor your pitch (or hears of your pitch) a few times, then the idea can become ‘stale’ • e.g. If you’re still pitching, then no-one else is interested in you, so why should I be?

18. Pitching 101 • Rule 2 – Know your audience. • If you have decided to pitch, it is important to know who you are pitching to. • What are their interests? • What are their backgrounds? • What organisation do/have they worked for? • What do they most want to learn about you? • Can usually get these details from the pitch organiser, or the person who referred you. • In short, research the bejesus out of your audience.

19. Pitching 101 • Rule 3 – Understand the time constraints. • If you only have 5 minutes, don’t bring a 20 page presentation. • 1 slide = 2 minutes of conversational paced talk. • Ideal presentation format: 10/20/30 • 10 slides • 20 minutes • 30 point font • Adjust slide numbers to suit time, not font size!

20. Pitching 101 • Rule 4 – Get to the point, FAST. • Within the first 60 seconds, explain what your business does, why, and why they should care. • Before you open your mouth, assumptions have been made about you (often subconsciously): • Age, sex, appearance, demeanour, clothing etc. • You have 1 minute to recapture and refocus attention. • Skip the autobiography or background story (if it is important, bring it up during ‘Team’ discussion).

21. Pitching 101 • Rule 5 – Explain ‘the obvious’ • Your audience doesn’t know what you know . • They haven’t ‘lived’ it for 6 months, have your skills/experience etc. They are coming in ‘cold’. • Assume every time you make a claim, they’re thinking “So what?”. Answer the “So what?”, then follow through with a concrete example. • e.g. “We make triple-density mobile batteries. [So What?] It increases the powered-on lifespan of mobile devices by 300%. [Example] If you are a ‘road warrior’, this means you can go 1 week without having to plug your phone in.”

22. Pitching 101 • Rule 6 – Don’t try ‘Law of Big Numbers’ razzle-dazzle • Every entrepreneur claims a multi-billion dollar market. • 1% share = Hundreds of millions in revenue. • Investors don’t believe it, and you damage your case if you use this logic. • Hone in on the true ‘total addressable market’. • What is the actual market you can realistically target with your product, in your launch market, with your start-up budget, during early market penetration?

23. Pitching 101 • Rule 7 – Remember the ‘end game’ and only tell enough of the full story. • You cannot assume they have read your business plan (99% won’t have). • But you don’t have time to tell them everything. • No one is going to write you a cheque after a single pitch. • So you need to tell them enough to get them interested and secure a follow-up meeting. • Objective of a pitch is to stimulate interest, not close the deal. • It is the start of a l-o-n-g process.

24. Pitching 101 • Rule 8 – Don’t pitch too high or too low. • MISTAKE: Sticking to your comfort zone. • Tech/logical types pitch too low (coalface) – they get into the nuts-n-bolts of the solution, how it was put together, why it is so innovative etc. • Business/creative types pitch too high (blue sky) – they talk about massive markets, first-mover advantages, changing business paradigms etc. • Both frustrate investors – it tells them too little, or too much. You must present a balanced story. • Provide enough coalfacedetail to prove you know the market + can deliver, and enough blue sky to demonstrate you know the market well.

25. Pitching 101 • Rule 9 – Listen, Take Notes + Revise • Always take notes during the session. • It shows you’re conscientious and willing to learn. • It compliments the person speaking (“I think you’ve said something important/smart”). • Demonstrate you have been listening by summarising their point/question before answering. • Use your notes + learnings from each pitch to refine + evolve your pitch. • It should improve with each presentation. • HINT: Don’t pitch the No.1 choice first.

26. Pitching 101 • Rule 10 – Avoid common traps • Turn up early. • Don’t assume you will get full time allotted (e.g. previous meeting runs over etc.). • Always bring equipment, spares and backups (inc. projector + printed copies of presentation). • Only 1 person should speak. • Do not read verbatim from powerpoint (it should provide a framework for the audience only). • Animations are verboten! • Use dark backgrounds with white/light text.

27. Proposed Presentation Format

28. Risk v. Reward • The key to successful pitching is to reduce the perception of risk while increasing the perception of reward. • Start of Presentation: 100% Risk, 0% Reward • During Presentation: • Demonstrate market demand: 80% Risk • Demonstrate well-targeted solution: 60% Risk • Demonstrate coherent business model: 40% Risk • Demonstrate sizable, addressable market: 30% Reward • Demonstrate sustainable competitive advantage: 60% Reward

29. Risk v. Reward • Remember your audience – THE INVESTOR. • Investors always want to see: • What they get for their $. • A billion dollar market. • 10X return within 3-5 years. • Investors have a portfolio approach: • Of 10 investments, 7 will fail (money lost), 2 will break even (nil return), 1 will be breakaway hit (10X return). • They pick every investment for its potential to be breakaway hit.

30. Recommended Reading

31. Business Models & Pitching Q&A