I asked 20 investors in searchers/ETA "what are your pet peeves when searchers pitch their small business acquisition?"
Here are the top 5 responses. If you're pitching an investor, don't make these mistakes, especially #5... that one really grinds investors' gears.
1. CIM has basic mistakes
One investor told me, "Their math is wrong, spelling errors, basic misunderstanding of loan terms, etc. If you can’t get the basics right, how am I supposed to trust you with running a business?"
Most investors told me over 90% of deals they see are an easy no. Over 90%!! Don't make the reason that you're an easy no be spelling errors.
2. Underwriting lacks credibility
More quotes from investors:
- "When I see a company has grown 5% for the last decade, and then the searcher projects to grow it 15% after closing, without changing anything, why would any of us believe that?"
- "When I look into a financial model, the first thing I look for are the assumptions, and I try to see if I can get comfortable with the assumptions."
- "I once got a pitch from a searcher who didn't even do a financial model."
3. Investor terms are too lopsided
- "Sometimes I see terms where both investor and entrepreneur win when things go well, but the investor loses and the entrepreneur still wins when things go poorly."
- "I want to work with searchers who have a commitment to shared outcomes between them and their investors."
4. The business is not enduringly profitable
We all should know that the ideal acquisition is enduringly profitable, with basic criteria like recurring revenue, diverse customer base, and the ability to increase prices without churn. But many investors are seeing pitches for acquisitions for businesses that are temporarily profitable, or even enduringly unprofitable.
One investor said, "There's a surprising number of people who are peddling absolute shit. Really just crappy deals."
A couple investors alluded to their 3 buckets for evaluating a pitch being 1) the business itself, 2) the entrepreneur, and 3) the investor terms. #2 and #3 don't matter if #1 doesn't check out.
5. Lack of downside risk analysis
Oh boy do investors get fired up about searchers who don't do credible risk analysis:
- "People have told me that they're acquiring a company with no competitors. Bullshit."
- "It's easy to drink your own koolaid, but if you send me a 60-page CIM with 59 pages of good news, I start questioning the searcher's ability to find and mitigate risk."
- "The right people have realistic appraisals of not just their strengths, but also their weaknesses."
- "I can get behind risk if we talk about it like adults, but don't hide the risk from me or pretend it doesn't exist."
This info is from my ~50 manuscript pages for my upcoming book, Investing in Micro-Cap Private Equity: book.midnightcp.com. Email me --@----.com if you'd like more fundraising/investing advice gleaned from these investor interviews!