WHAT INVESTORS NOTICE & VALUE IN A PITCH

Lakshmi Balachandra, PhDAssistant Professor, Entrepreneurshiplbalachandra@babson.edu

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The PitchEntrepreneurs must be able to articulate their ideas in a “pitch” to all kinds of “catchers”

Entrepreneurs use the pitch to obtain all kinds of important start-up resources:• investors and start-up $$• early employees to join them• first customers

My research: The pitch, what works, what gets investors interested…

Content that has to be included?Clearly Presented Idea – what is it, how

developed is it, how protected is it…

To be able to evaluate the “2 Ms”:• Market – Big & growing, competitive advantage, go-to-

market strategy, exit plan• Management – Backgrounds, Boards, and Networks

http://www.style.com/culture/style-map/2014/most-expensive-hermes-birkin

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Judging a Pitch, judging the personInvestors make judgments of the entrepreneur (the people) during the PITCH

• The pitch = critical VC decision-making criterion

• Must meet with, watch entrepreneurs delivering

pitch before moving forward in investment

decision-making process

Role of Pitch: Common decision-making process

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REALITY: Most VCs will NEVER invest without meeting the entrepreneur and hearing the pitch…

THE PITCH MATTERS!

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My Research & The What Else

GETTING NOTICED DURING THE PITCH

“I would never invest in a company with an entrepreneur I wouldn’t want to go to dinner with”

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What do investors look for in a pitch?

RANK QUALITY Entrepreneur is passionate Company has good revenue potential Entrepreneur is coachable Company has good business model Company has reasonable barriers to entry Entrepreneur is trustworthy Entrepreneur is enthusiastic Company has reasonable exit plan Entrepreneur is experienced Company has large growth potential

Rank the order of importance (1=most important, 10=least important)

of these 10 qualities:

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What do investors look for in a pitch?

RANK QUALITY 9 Entrepreneur is passionate 2 Company has good revenue potential 3 Entrepreneur is coachable 1 Company has good business model 7 Company has reasonable barriers to entry 3 Entrepreneur is trustworthy 8 Entrepreneur is enthusiastic 5 Company has reasonable exit plan

10 Entrepreneur is experienced 6 Company has large growth potential

Rank the order of importance (1=most important, 10=least important)

of these 10 qualities:

Source: Lakshmi Balachandra, Babson College

Implication: Trust Requirement

• Investors need to TRUST the entrepreneur!• Making decision to trust someone with their money, their

time…• Entrepreneurs who can “show” they are trustworthy

receive more investor interest.

HOW MUCH do trust evaluations affect investor decisions?

AND - WHAT are “trustworthiness behaviors”?

(Balachandra, 2012)

In general, there are “tells” for trust

Poker players – studied domain: face hiding movements, looking away(Mike Caro, “the mad genius of poker”)

Micro-expressions: 7 universal facial behaviors that all humans exhibit when feeling certain emotions (Ekman & Frank, 1990: happy, sad, angry, surprise, fear, disgust, and contempt)

Physiological too: Trust can be induced with oxytocin (neuropeptide hormone plays a key role in social attachment and affiliation) (Kosfeld, et al, 2005 Nature)

Different levels of trust across different countries - - trust is strongest known predictor of a country’s wealth (nations with low levels tend to be poor) (Zak & Knack, 2001)

Propensity to trust

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Investors make trust

judgments of the entrepreneur

during the PITCH

Study 1a: Matter of trust

HOW MUCH DOES JUDGING TRUST AFFECT

INVESTORS’ DECISIONS?

The Tech Coast Angels (“TCA”)

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A LOT! Role of Trust Judgments:

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Investors make trust

judgments of the entrepreneur

during the PITCH

Study 1b: Matter of trust

WHAT DO ENTREPRENEURS DO DURING THE PITCH

TO BE JUDGED TRUSTWORTHY?

“Trusting” Behaviors from a Pitch

Source: Lakshmi Balachandra, Babson College 2012

Openness (accepting suggestions, not defensive)

Laughing!

Name Dropping (has a strong network)

Being Younger…and

Coachability (can I work with this person)

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“I don't want to be just a voice on the phone. I have to get to know these guys face-to-face and develop a sincere relationship. That way, if we run into problems in a deal, it doesn't get adversarial. We trust each other and have the confidence we can work things out.”

- Wayne Huizenga,Waste Management, Blockbuster, AutoNation, & Angel Investor

What matters.

Passion or Role of Being “Up”?

• Some studies say YES! (Cardon, et al, 2009; 2010; Mitteness, et al, 2012)

• Some studies say NO! (Baron et al, 2011; Chen, et al, 2009)

Decided had to investigate this with VC judges on real pitches – as passion was NOT important in earlier study…

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The Entrepreneur’s “elevator pitch”Short summary describing and defining a product, service or organization and its value proposition. “Elevator” refers to short time to deliver the pitch in the time span of an elevator ride ~30 seconds – 2/3 minutes

Used frequently in investing – VCs, angel investors, and others

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Now, lots of elevator pitch competitions

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Analyzing Pitching Success: never mind the “idea”

2 years of videos from the MIT 100K Elevator Pitch Competition (2007-2008) (185 pitches…or 220 for more women!) $5K prize! $2K runner-up prizes and $2K audience favoriteCoded ALL videos for entrepreneur emotions, behaviors, attractiveness, other non-verbal stuff.

Full model of emotions (Barrett & Russell, 1998)

elated

Sadness

Disgust

Anger

Fear

Surprise

UNPLEASANT PLEASANT

DEACTIVATION

tense

fatigued

lethargic

depressed

sad

upset

stressed

nervous

alert

relaxed

serene

contented

happy

excited

Happiness

ACTIVATION

CALM

UP!(Passion)

PositiveNegative

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B

2 Pitches, 2 Entrepreneurs

A

What did you notice about Ent A?

Which would you invest in?

What did you notice about Ent B?

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Which one would you invest in?

Qualities of ENT A:• More Competent• More Experienced• More Prepared• Stronger Leader

Qualities of ENT B:• More Intelligent• More Creative• More Honest• More Trustworthy

CALM

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Winners of pitch competitions can

be predicted (almost) purely on

presentation quality

Study 2: Style Matters

WHAT DOES AN ENTREPRENEUR DO TO HAVE A

“GOOD” PRESENTATION

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Positive was effective…but NOT

Being “UP”

BUT…

Non-Verbal Behaviors

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How should you be Positive?

YES!

BE CALMLY POSITIVENOT PASSIONATE

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What else? What about women?Then (1999) Now (2014)

15%; 3%5%

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Study 3: What About Women

ARE ACTUAL VCS BIASED AGAINST WOMEN OR

FEMININITY?

Investors are biased

against pitches by women(Brooks, et al, 2014)

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FEMININITY is LESS likely to get investor interest

Don’t be:

happy excited expressive enthusiastic

(Women entrepreneurs more likely to be“feminine”…)

Women × Femininity

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Women entrepreneurs MORE likely to display masculinity too

confident determined

strong bold

Women Masculinity

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What else? What about women VCs?

Then (1999) Now (2014)

6%10%

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Study 4: Women’s Markets Women × Femininity

“I was trying to convince all these men to try to make a product that they didn’t even wear!”

--Sara Blakely, Entrepreneur (Founder of multi-billion dollar company,

Spanx)

Initial results? Women entrepreneurs MORE likely to start in women’s markets, LESS likely to get MEN’s (investor) interest…

The Net Net?