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One of the most insidious contributions to the process of investing is the ‘elevator speech’. Nothing had done more damage than the idea that you can boil down a value proposition, management team, business plan and resourcing requirements to a forty second pitch. Complex discussions are not improved by simplifying them – and people who think so simplistically are to be avoided.
Listening to the delivery of an elevator speech is the single most distracting event in an investor’s journey. It is to that point in time – the equivalent of ‘love at first sight’ – that most of the subsequent failures can be traced. An elevator speech is an advertising undertaking. It is an attempt to draw in a potential investor and get them interested in providing funding for a venture. It the starkest terms, it is a money trap.
Because of their brevity, elevator speeches are selective in their focus. They dance away from – or avoid all together – issues that undermine the apparent viability of the value proposition on offer. The necessarily simplified approach begins with an assumption that the presenter and team is able to execute and that their ideas are their own. In stark terms, an elevator speech is a swindle – a created illusion that – necessarily – avoids or minimizes potential lethal challenges and highlights a series of yet to be tested and usually overly optimistic assumptions.
If you are getting the impression that I have a strong aversion to the entire idea of elevator speeches, you are correct. Investors have lost more money because they failed to critically evaluate and aggressively test key underlying assumptions than for any other reason. This single misstep is by far the biggest ‘deal killer’ in the process. In a recent article – Assumption is the Mother of All … – Lessons for Young Wannabees – I argued that untested assumptions are the primary reason that start-ups fail. Here I would add that untested assumptions are the primary reason that investments in start-ups go south.
Here is a series of questions that I recommend any angel investor push hard on before then even considering providing money for a start-up:
1. Why should I think that you are capable of building and running a business? Prove to me that you understand the business of business – not just the business of your intended business. Repeatedly I have encountered companies whose CEO was very good at promoting themselves and the idea behind the company – they were masters at the kind of shallow-water thinking that goes into creating a good elevator speech – but a complete failure at assembling, managing and leading a professional and effective team. Investors have to ask the hard questions early on and challenge the assumption that the elevator speaker can build and run a successful company. The hard truth is that most of them cannot.
2. Who is on your team that would impress me and what kind of a deal did you have to make to get them onboard? I will want to talk to them – to see if they are floaters or workers. What have they accomplished since joining the team? I am surprised at the percentage of sociopaths that find their way into becoming CEOs. Primarily they are of two kinds. The first is not comfortable with the idea that there are other people on the planet. They are more comfortable with ‘ideas’ and ‘concepts’. As a result, they constantly are moving the flatware around on the table – but cannot seem to assemble a team dedicated to their ideas. The second are the ‘uncritical assemblers’. These people are good at piling up names but, when you start poking around the team, you find that the dedication to – and often understanding of – the value proposition behind the company is somewhat gossamer. These entrepreneurs are not able to build effective and dedicated teams. They are talk show hosts and always very bad investments.
3. Do not tell me about your passion tell me about your accomplishments. I am not looking for the glib or theatrical. What have you already done to turn your ideas into a going business? If the answer is nothing of substance, come back then you have. Passion is one of those buzz words that simply will not go away. In my experience, it is a poor substitute for other, more important, ingredients. I prefer an entrepreneur who is focused, persistent, knowledgeable, determined and who makes the best use the resources at their disposal. The illusion of passion can be manufactured – most educated people are adept at it – but these other things cannot.
4. Do not tell me about markets. Who are your customers? Amateurs have markets – pros have customers. Who believes in your ideas enough to pay for them? This one really drives me nuts. Somebody sends me a business plan and I get to the section that is supposed to be focused on the possibility of revenues and encounter something like the following. “The total market is XXXXX billions of dollars annually and if we get even one tenth of one percent of that … (blah, blah, blah)”. This is a simple bait and switch – an investor is baited with a huge number – then shifted to accepting the ability – and, most often as it turns out, the inability – of the team to implement in a way that captures any of that huge number at all.
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