Small Business Guides
How to pitch a business idea
6 min read
How can you tell if your new business idea is a good one that will convince investors? We spoke to our CEO Rod Drury, to find out how to turn a business idea into an effective investment pitch.
An idea is just a starting point
Lots of people have ideas for new businesses. Many of them will seem like good ones, but the harsh reality is that most are unlikely to succeed.
Experienced entrepreneurs and investors will say ‘ideas are easy – execution is hard’. There are many reasons for this, including a lack of knowledge of market economics and a failure to understand the competition. So how do you avoid pouring lots of your time – and money – into a business idea that's doomed to fail?
In this guide we'll look at how to evaluate your idea to see if it has a reasonable chance of success. We'll also look at how you can present or pitch your idea to investors in such a way that they're interested in getting involved.
Areas you should avoid
You can save a lot of time by quickly eliminating any business ideas that are highly unlikely to succeed. There's no point in repeating the mistakes made by previous startups.
While there are always exceptions to the rules, Rod's experience in the technology sector has shown that there are some obvious ideas to avoid. These include:
- Taking on dominant market makers
Think you've got what it takes to compete with eBay or Amazon? The probability is that you haven't. The first company in a new market often becomes dominant. They already have all the customers. How will you get to critical mass in your market?
- An export business with stay-at-home directors
If you're not willing to travel and embed yourself in the culture of your customers, you'll never understand the market properly. You’re competing against people who will always understand their market better than you.
- A customer-focused business based on outsourcing
For example, if you run a software business with outsourced development, you're one more step removed from your customers – which makes you less nimble.
- A business with no added value
Whether you're buying web traffic from Google AdWords or importing toys from China, you need to add value to what you offer. Otherwise there's nothing to stop dozens of competitors doing the same thing and pricing you out of the market.
Most of the new businesses that fail each year fall into one or more of these categories. Make sure yours doesn't.
Get honest feedback
Now that you've cleared the first hurdle, the next step is to write down a high-level summary of what your business idea is – and why it will be successful. Keep this short and relevant, no longer than three pages. Then show it to your friends, trusted colleagues and work partners.
If everyone you ask agrees that your idea is a good one, keep asking. They may not have thought it through properly, or they may not want to hurt your feelings. Find someone who disagrees, ask them in detail why they disagree and then see if you can respond to all their criticisms.
Make sure you run your idea past people with relevant industry expertise. Find experienced business people in your market sector and ask them for their thoughts and comments.
Getting feedback on your business idea isn't about finding people to pat you on the back and tell you to go for it. It's about a 'fast fail' approach, where you quickly discover any flaws in your plan and save yourself time and money.
Seven ways to prepare your investment pitch
If you've done your market research, got this far and you still believe your idea has a good chance of success, the next step is to prove it to investors. They're the ones who can help make your business idea a reality. Create an investment pitch document, taking the potential investors' perspective into account:
- What's in it for them?
Every investment is a gamble. Why is your business a better bet than most? How and when can they expect to see a return on their investment?
- Who is the competition?
You may not think you have competition, but you do – and a canny investor will know it. Positioning yourself against competitors, perhaps with an ecosystem diagram, shows that you understand your market.
- Don't be boring!
Investors have a short attention span. Your job is to keep them interested by providing relevant information that gets to the point quickly. Three or four pages is enough. Make it easy for them to understand your concept.
- Have the answers ready
Investors will ask you all sorts of questions about your business idea and they won't pull any punches. Be prepared for questions about your background, your knowledge of the marketplace, future plans, staffing levels, revenue streams and many other subjects. The more prepared you are, the more seriously your idea will be treated.
- Presentation matters
Investors receive a lot of pitch documents – most of them highly polished and well designed. So if yours is less than perfect in appearance, you're already losing points. It's worth getting a professional designer to help with the layout, to create a good first impression. Never send Word documents – use Adobe PDF format so that you have full control over formatting.
- Polish your pitch
Know your idea inside out. Understand its strengths and weaknesses. Work on your pitch document until it's perfect. Test, cut back, clarify, reread and test again. If that takes a month, so be it. This is one of the most important things you'll ever do to get your business idea off the ground.
- Strike while the iron is hot
The investment community is well connected. Your pitch document is likely to be passed around for comment and advice. After a while, deals will get tarnished as it's clear that early investors have passed. So you should put as much effort as possible into closing investment deals quickly.
Having your investment pitch document ready before you start approaching investors will make you seem far more professional. Be prepared, focused, knowledgeable and engaging, and make sure your pitch document lives up to its promise.
Know your idea inside out. Understand its strengths and weaknesses. Work on your pitch document until it's perfect.
Three-step reality check
Optimism is a wonderful thing, and it will carry you through some rough patches in your business career. But you need to remain realistic at the same time. Bear these three points in mind:
- You need a business plan
Without a carefully thought out business plan, your business idea will fail. Read our guide about writing a consulting business plan for some useful tips.
- Don't be greedy
You might think you can exchange just 10 percent of your business for $1 million in your first investment round. But with that attitude, you almost certainly won't get any funding. Be flexible when dealing with investors, and understand the realities of investment economics.
- Be prepared to let go
Your idea might turn out to be brilliant, but if you have no experience as a CEO then investors will want to replace you. If that's what's best for the business, don't fight it.
A look at the number of businesses getting angel investment will show you that getting funded is the exception – not the rule. So it's wise to keep your expectations realistic.
Success is built on good ideas and hard work
Thomas Edison said that genius is one percent inspiration, 99 percent perspiration. On that basis, if you've had a good business idea, you've successfully achieved one percent of your goal.
The rest is up to you. How hard are you willing to work? How much do you believe in your idea? Are you willing to put in the necessary effort to achieve success?
Getting your investment pitch document right is vital, and not just to inform investors about your business idea. It will also help you focus on what's important and on the commercial pressures that will influence your success or failure.
If it turns out that your business idea wasn't such a good one, don't worry. Failure is part of the route to success. Learn from it, understand what went wrong and then try again. With the right idea and the right attitude, you stand a good chance of success.