Technology ventures can often be the most capital-heavy types of businesses. Exorbitant amounts may need to be invested in research, development, and testing before one can even begin to contemplate going to market. Usually, it will take months – if not years – before a tech firm will earn its first dollar of revenue. As a rule of thumb, investors regard technology companies as big bets. They’re high risk, high reward deals. Perhaps one out of every 20 investments in the sector will pan out. But it if it does, then the yields can be enormous.
For these reasons, the pool of investors in technology ventures is relatively limited. Few people have the stomach or wealth to absorb substantial losses. Retail investors, in particular, will typically prefer something more predictable, like blue-chip stocks or real estate deals. Moreover, the concept may be too complex for them to grasp or become confident in.
Below is a checklist of four items to remember before pitching an investor on a technology venture. Be sure have them completed before approaching a capital partner.
New technologies are can be deeply sophisticated and are often developed by people with advanced academic backgrounds. As such, they can be challenging for a potential investor to understand. Keep that in mind while explaining your product to prospects. Although they might be intelligent financiers, they will not move forward if they cannot wrap their minds around what you’re selling. Don’t pitch them as though they are rocket scientists.
Further, it’s helpful to provide evidence that your technology will be a game-changer. “I have passed on financing opportunities because I didn’t know whether the technology already existed,” says Alexis Assadi, the CEO of Pacific Income Capital Corporation, which is the general partner of Pacific Income LP.
“I am not an expert in the space. I wanted to believe in the product, but I wasn’t convinced that it wasn’t already out there. I couldn’t move forward without being 100% sure that I was about to fund something special.” Securing a patent can help allay such concerns.
Any investor worth her salt will want to have a breakdown of how her funds will be deployed. She will likely need a description beyond simply to “develop our product.” For example, you should consider providing a table that gives an anticipated capital allocation by percentage. It might say, “70% will go towards technological development, 20% will go towards advertising and 10% will be used to fund salaries for full-time employees.” Not only is this a good practice for disclosure purposes, but it will also help her understand your pitch.
Technology investors will probably not be shocked by claims of a potential 500% return on capital. In fact, they might expect it. But you should be able to explain how you plan to get there. Importantly, your estimates should be backed by solid math. What are the margins like on your product? What will the market pay for it? What portions of the returns are payable to different shareholders? Are there any debts that must first be repaid?
How will your prospective get her money back? Do you plan to take the company public? Will it be bought by a larger player? There are any number of ways to exit from a technology venture. Your investors will want to know what scenarios are available to them, and what is most likely to occur.
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