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A Pitch Gone Wrong

Even the best-laid plans can fail.

The same is true with private investment opportunities. It doesn’t matter when you invest through a late state round or the very first round. There are no mulligans given on a Reg CF (Crowdfund) or Reg A+. When things go wrong, they go wrong.

I spent plenty of time talking with other investors, so I’m privy to hearing about both successes and failures in the private investing world. Here’s the rub: the failures that teach can come from both investors and from the company. Today, I’m going to share a few short synopsis.

Today, we’ll start with where a company can go wrong pitching their company by taking a look at an actual pitch made in 2020.

During COVID, one of my colleagues took a call from a social media company CEO. He got his hands on the deck and absolutely loved the concept. It was a perfect fit for the trapped at-home music and entertainment lovers.

The idea piggybacked popular live and television events that had been put on hold. So, this company checked the box for concept and public appeal as well as solving a problem/need. Additionally, the founder had experienced prior success in other ventures.

Then, the conversation shifted to valuation and the capital raise.

The sought $50 million at a pre-money valuation of $100 million.

If you aren’t familiar with private markets. That’s a big ask. Like huge. It’s the maximum. Think of it like walking into Starbucks and asking for a latte with one of everything.

Insane Starbucks Orders - Craziest Starbucks Orders Ever

Yeah. Kind of like that.

Now, a big ask isn’t an automatic deal killer but it will require a killer story, strong moats around the business, and, generally, profitability or huge growth.


Must-Ask Questions

What’s your current revenue?

We’re pre-revenue.

How much cash do you have on your balance sheet?

None. That’s why we’re raising money.

*(At this point, I would have runaway, but my buddy already invested time in the call and the pitch deck, so he continued).

What kind of IP (intellectual property) do you have?

None at this time.

No patents?

Well, you can’t really patent this, but we do have some partnerships.

Are those exclusive?

Well, no. But they really like us.

Do you have any users on your app yet?

No. It’s not complete yet.

Do you have a beta?

We actually haven’t begun to build it yet.

You haven’t built anything?

No. That’s why we need the money.

After all these questions, why do you think the company is worth $100 million right now and will be worth $150 million if you raise the money?

Because we can build some really cool stuff with $50M

Give me $50 million and I can build cool sh*t isn’t a business model.

I think we can all agree there are plenty of folks out there who can build some really cool stuff if they had an extra $50 million in the bank. That doesn’t make you worth $100 million before you have the money.

After hearing all of this, I asked how much my buddy thought the company was worth.

His response, “If they raise $50 million, they’re probably worth $40 million, but right now, they’re worth nothing.”

How could they be worth $10 million less than cash? An obvious, but necessary question. And my buddy’s thinking, “Based on the answers to the questions I asked, the current status of the project, the vast needs of the business, and the potential heavy competition, they are going to blow through $10 million fast with nothing to show for it.”

So, what mistakes were made by the company?

Overvaluation – Entrepreneurs tend to treat their ideas and companies like owning a home or looking at your child. Most homeowners think their homes are worth more than what the market will bear. And most parents will think their kids are smarter, more talented, better looking, etc than they truly are. It’s the quickest way to kill a deal.

Raising too much cash – Yes, cash is king, but the early rounds of capital raises should be prudent. A company should raise what they need to achieve certain milestones and build in a small buffer; however, raising too much early on will dilute founders and the earliest investors/employees. Those folks need to stay incentivized as they are often the heartbeat of the business. If you kill those rewards and incentives, chances are you will kill the business.

Nothing Special – If your business doesn’t have intellectual property or anything proprietary about it, then arguing valuation becomes tough, especially if you have no revenue.

Bottom Line

These really are the three biggest mistakes I see a company make when trying to raise capital. Plenty of companies will overcomplicate their stories or try to tell investors too much. Others don’t have a clear vision.

But, far and away, the biggest mistake out there is the: If you give me money, I can build a cool company business model. Overvaluing a company is a very close second. Fortunately, trying to raise too much capital is an easy fix.

Keep an eye out for these mistakes every time you consider a company.

Next, we’ll take a look at a few deals that looked good enough to participate in but left investors holding the bag.