We recently met with a CEO who has built a number of businesses and is currently leading a private equity-backed business in the security space. Within the first minute of our conversation, it became clear why investors were backing him. In this short time span, he clearly defined his marketplace and his company's role in creating value in simple terms.
It struck us how obvious this was, but it reminded us of how rarely we see CEOs take this approach. Many entrepreneurs are wired to try to impress others, including potential investors, with the depth of their technical knowledge or complex approach to solving a customer problem. Many of us foolishly believe that, in order to be innovative, a business idea needs to be genius in its complexity.
The reality is that investors, like any business decision-makers, are drawn toward simplicity. This means the investment case you propose must be simple in both concept and communication. If you can't communicate a simple investment case, you probably don't have a winning business idea.
Try these three steps to build a simple investment case:
1. Frame the market and current customer demand.
Every investment concept begins with the logic of a customer. Someone has to have a need for your product or service, and the easiest way to prove that is to point to the existing market for that service. Outline the current market size, what customers are currently spending annually on that customer need, and the driver of that customer demand to demonstrate why the demand will continue.
2. Describe the segment of the market you're aiming to capture.
What customer segment or segments of the market does your product or service appeal to? If you have a product or service that is differentiated from the current offerings, it should appeal to a specific segment more than others. Describe why you are targeting that segment and explain why the segment is profitable and sustainable.
3. State your sustainable competitive advantage.
What are you bringing to the market that will set you apart and maintain your competitive advantage going forward? If the investor is deploying capital into your business, she will expect a return on investment. The only way to receive a return on investment is to provide proof that you will be able to sustain profitability, even after competitors realize that you are gaining traction and attempt to replicate your solution.
The CEO of the security company was able to describe all of this to us in less than a minute. When using this framework on a credible business case, describing your case clearly and logically should be easy. If you have trouble, that's a sign that your business case is not as attractive as you thought.
Send us your thoughts and questions on pitching your investment case. We can be reached at email@example.com.