One of the things that differentiated the NZGDA conference from others around forms of entertainment here was the regular focus of sessions on the business of making profit, not just the business of content creation. Smallworlds’ Mitch Olson presented a guide on pitching to investors.
Olson is an experienced entrepreneur with a background in the design, development and commercialisation of digital products to large consumer markets, and co-founder of SmallWorlds, New Zealand’s largest social gaming company.
Before offering up a presentation on what should be in a pitch to an investor, Olson examined the reasons one should or shouldn’t seek investment, all with the proviso that commercial investors invested in businesses more often than single projects.
He outlined the four main reasons for seeking investment as being to increase speed to market, overcome cost hurdles, fund expansion, or gain access to expertise, experience and contacts.
At least two of those reasons were in play when SmallWorlds sought investment, some of which came from The Disney Corporation and Sam Morgan. Olson has achieved investment of $8-9 million for various projects he’s worked with.
So why not get an investor on board?
Getting investment, Olson reckoned, is time expensive, requires you to create collateral and – if you’re seeking investment from commercial sources – will probably require you to give up some control of your baby. Raising funds from family, friends or angels will probably let you keep control but when a board is set up (often a requirement stipulated by commercial investors) it gets more difficult.
You may end up owning a majority share of your company but if you’re in a minority on the board, the share only matter when the income needs divvying up.
Also, some investors can be very high maintenance. In that way, Olson suggested, “They’re like a boyfriend or girlfriend … low maintenance is better.”
the good news is that gaming is currently perceived as a good investment opportunity – internationally if not locally. Compared with other industries it requires low capital investment (essentially a few people and laptops), the industry is enjoying strong growth internationally and – increasingly – product distribution costs are very low.
Olson noted it was important to understand an investors needs and expectations as well as one’s own. Investors want strong growth potential, profit, monetization opportunity, long term sustainability, and a big return on investment (ROI). They invest in businesses not ideas, and look for an engine that converts users into dollars and keeps on doing it.
Late stage investors, Olson suggested, are looking for 2-4x ROI, early stage investors 8x plus. They arrived already looking for the exit, and you should be able to answer the question: who’s going to buy you and why?
Olson presented a 10-slide blueprint for a pitch (hopefully a successful one).
1. Capture attention with your big idea and establish context
2. Explain the market and the total addressable market. How much do people spend on similar products in a year? What are the target market’s demographics? What trends are in play? Who are your key competitors?
(Olson suggested citing three: one to differentiate yourself from, one to show you know what you’re talking about, and one to show there’s money being made in the arena. “Basically, convince an investor that you know your shit.”)
3. Your Product. What’s your unfair advantage that will make people buy your product? What’s your current position and stage of develpoment? How is it going to go forward? Explain product growth within the particular space you plan to operate in.
4. Monetization. How do you make money? Is it a freemium model, box sale, what. Prove it works (for others). Many NZ investors don’t understand the freemium model, so educate them.
5. The path to market. How will you get your first 1,000 or 10,000 users? What’s the cost of acquisition (COA) of those users?
Olson suggested being specific. Don’t just say “Facebook and Twitter”. What is the COA from various channels, advertising, viral, SEO, PR activity? Olson noted Smallworld’s COA per user, which gave the company a benchmark against which to measure its income needs.
6. Financials. What are your operational costs (now and future). What’s your cash flow?
7. Your Team. Basically the chance to shout We kick arse! Who are your founders, key employees, advisors … and who else is needed to make this business fly?
8. Money and milestones. What are you offering – how much cash do you need and what are you prepared to give up to get it?
9. Summary. Remind the investor what your competitive advantage, reinforce the credibility of the opportunity you’re presenting. Make your call to action. Uncover the investor’s objections (they’ll always have some) and establish the step forward.
Olson closed by reminding people of three key lessons:
Investors are not your friends.
Investors don’t know what you know, and vice versa. Make sure you bridge the gap.
Raising money takes longer than you think. Always.