Entrepreneurs are frustrated with the unpredictable capital raising process because investors, rightfully, often see outsized risk in the investment compared to the potential reward. Real or perceived high risk/low reward is at the core of what prevents an investor from giving a company funding. And that’s no surprise when 75% of venture-backed companies never return cash to investors. Founders must recognize this major statistic and address investors’ concerns in a message that mitigates risks through well-crafted, impactful storytelling.
Here are four risks your potential investors weigh when considering whether to open their wallets—and strategies to get them on board.
Is the innovation commercially valuable?
The company can have a great innovation, but it might not have commercial value due to manufacturing, distribution, or adoption constraints that create logistical problems that prevent viability. Entrepreneurs must provide a business plan that shows the product can be scaled with a well-grounded path toward profitability.
Pitch investors a persuasive story that speaks to the customer problem they want to solve. Then, provide data showing proof that the innovation solves a large unmet need. The market needs to be large and growing. Investors want to know if there are multiple markets and if the product can become a platform that generates multiple revenue streams.
In this scenario, CEOs often fear that telling investors about multiple use cases will appear as unfocused or a diversion of resources. But that’s not how investors look at it, so you must reframe your message in a way that will give confidence to investors in the total market opportunity of your product offering. You don’t have to implement multiple market strategies, but you can tier them in a scalable timeline making the case that your product can be ubiquitous across industries.
Are there competitors, and can your startup outperform them?
Demonstrate to investors that you have positioned yourself to outcompete competitors through strategic partnerships.
You can have a great innovative product, but there may be competitors with terrific products financed by strong investors who will outcompete your innovation and out-finance your go-to-market strategies. Know your competition from other companies, what differentiates your scientific innovations from theirs, and how your product is superior.
Founders should make the case that their innovation is disruptive and that their secret sauce provides a significantly better solution to the problem than their competitors. Investors often fear the “David and Goliath” scenario. Suppose you are an early-stage company with a disruptive product. In that case, you need first to make the case that the disruption will capture market share from the market leader and that other early-stage companies who are developing similar products do not have the same innovation, team depth, and skill set, and financial backing. One strong tactical move to accomplish this is to leverage strategic partners who can often provide manufacturing, distribution, or sales support, all vital for effective commercialization and scaling up.
It’s never too early to develop a strategic partnership to differentiate your product and out-compete your competitors. These partnerships offer external validation to investors and provide additional resources to grow, scale, and commercialize the business. This strategy and storytelling approach augments the impact of your pitch and provides social proof that minimizes investor perception of risk.
Are you able to effectively execute your business plan?
Amplify your competitive advantage by highlighting the strength of your team, board of directors, and commercialization strategies.
Most CEOs believe that a lack of financing will be the cause of their company’s failure. However, research shows that the main reasons that startups fail is the weakness of the team, commercialization, and go-to-market strategies.
Demonstrate to investors that your company has the best team to execute a well-articulated business model. Investors fear operational and execution risk that is directly linked to the organizational structure of the company. Tell a strong story of how your team’s track record, skill sets, and capabilities will successfully execute your well-thought-out business plan and put the startup on a path to revenue generation and profitability.
Investors also want to know what the board looks like. CEOs often overlook the power that a strong board of directors brings to a company. A diverse, experienced board overseeing the strategic vision and assessing the operational integrity and milestones of the company reduces a lot of the execution risk that investors fear. Highlighting your network in your storytelling will show how you have surrounded yourself with experts and high-profile individuals. It validates you and your business’s value proposition, thus raising the confidence levels of potential investors.
Do you recognize the specific risks in your sector?
Some sectors, like healthcare, have specific risks that must be addressed. In healthcare, investors are concerned about the risk of FDA regulatory approval and the strength of intellectual property filings. What is the likelihood of the success of the clinical trial? How long will it take to get FDA approval? How much will the approval cost?
An entrepreneur can use storytelling to lay out the regulatory pathway, preparing the investor, early in the investment process, with a regulatory milestone timeline for both FDA approval and patent filings. Quantitatively assessing the risk in the regulatory approval and IP process is vital in the Storytelling for Impact Model we use with our portfolio companies.
CEOs often overlook this issue, saying it’s too early to meet with the FDA regulatory agencies, that regulatory approval will be several years away so the company can talk about it down the road, or that filing multiple patents in different countries isn’t necessary until the company is more mature. This is a critical mistake and often leads to investors overweighting this as a higher risk than it actually is, reducing the chances of investment funding.
Elevatiing your strategic thinking in your storytelling is critical. Show that you are planning for the long game and believe in the company’s longevity and long-term success.
“Storytelling is by far the most underrated skill when it comes to business,” author and investor Gary Vaynerchuk has said. As an entrepreneur, you must learn how to identify investor risk pain points and work to de-risk them so that you can get funding. Storytelling with impact will enable you to control the narrative and speak to investors from a position of power, emphasizing your leadership and vision to mitigate investment risk.
Jenny Fernandez is a marketing and brand strategist, startup advisor, leadership coach, and adjunct lecturer at Columbia University and NYU.
D. Martin Gershon is the founder of Endeavor Life Sciences and the chief innovation and investment officer for healthcare and life sciences at McGill University.
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