This question originally appeared on Quora: What are a few pet peeves for angel investors when you’re pitched by a startup?
These are my pet peeves that I don’t see listed in other answers [in the Quora thread]:
- Arguing with feedback. What? You wanted to pitch to us and now you’re arguing with our feedback? Now that your pitch is done, our feedback is the most valuable thing you can get. Okay, so we’re wrong and you know better. Don’t tell us so–prove it, and then come back and you’ll be golden. Be a line, not a dot.
- Preposterous projected profits. What? You’re going to make 50% profits to sales in an industry in which the winners get single digits? That doesn’t mean your startup is that good; it means you don’t know the business very well. I’ve seen projected financials showing 30%, 40% even 50% or more projected pre-tax and even net profits without having any idea of real industry averages. Furthermore, the high projected profits indicate you don’t understand how startups grow and how angel investment works. Angels want to fund growth, and growth is rarely profitable. Growth generates increased valuations at exit. Profits come later.
- IRR is a total crock. If you don’t know IRR, don’t bother. And if you do, still, don’t bother. Your prof at biz school wanted you to understand the concept, but in the real world its multiplication of several completely hypothetical future assumptions against each other. You estimate future cash flows, which are of course subject to all kinds of uncertainty, and then future exit value–even more uncertainty–and come out with a number. What’s particularly annoying is when founders act like we are supposed to care about all those hypotheticals, as if IRR were going to make a difference. There are a lot of real numbers that do matter: sales, bank balance, burn rate, web traffic, conversion rate, social media relationships, paying users, registered users, customers, distributors, stores carrying your product…IRR isn’t one of them. Let it go. And NPV, by the way, same thing: a nice conceptual analysis for your biz school class, not for angel investors.
- A small piece of a big market. I hate the top-down sales forecasts that project some infinitesimal piece of an enormous market. “One tenth of one percent of a $50 billion market” never happens. Do your sales forecast from assumptions about drivers, conversions, channels, or something else specific. Do it from the ground up.
- Projected cash balances. Amazing. You want investors to contribute their money, so you can keep it in your bank account--why would they do that? Don’t you see the high-level contradiction between projecting you’re generating cash and planning to raise more money at the same time? Besides which, the only way your cash balance gets that high in your projections is because you vastly underestimated expenses, as in #2.
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