When we built out Axial’s Teaser Builder software, we looked at thousands of teasers and reviewed the most effective teasers in determining their core elements. Effectiveness was measured and validated by measuring Buyer response and engagement. While we’ve written on writing great investment teasers before, this brief article adds to the archive of resources serving entrepreneurs and the strategic advisory community.
While there are multiple important elements of an effective investment teaser, every investment teaser MUST in some clear way answer the following question:
What is the source of your company’s competitive advantage?
Why is a clear statement of your competitive advantage so important? Because the essence of your company’s value is tied to how sustainable its competitive advantage is. Competitive advantage dictates your company’s ability to generate and sustain profitable operations over the long term. When investors look at your company, they seek to understand this as well as possible, and it forms the basis for their estimation of your business’ valuation.
Competitive advantage can have many sources: customer entrenchment and high switching costs (example: database software), long-term contracts (equipment service companies, defense and government contractors), brand recognition (certain consumer products), intellectual property, devoted and stable management teams, culture (Southwest Airlines is a great case study in culture as a sustainable competitive advantage), and on and on. Whatever yours is, clarify in the investment teaser what it is that sets you apart and makes it difficult to copy your organization.
Getting this element of your teaser written in the right way takes some time, but it’s essential. All sophisticated buyers of companies will want to understand your firm’s competitive advantage.
- If you have financial buyers evaluating your company, they are going to rely on the sustainability of the competitive advantage to generate a return on their investment. The price they are comfortable paying for the business is directly impacted by how protected the business’ stream of revenues and profits appear to be. The more protected they are, the more the financial buyer is willing to pay to acquire your company. If you want to achieve a high price multiple for your company, you must demonstrate to buyers that your company has sustainable growth potential based on competitive advantage.
- If you have strategic buyers evaluating your company, they potentially have many (or sometimes all) of the necessary in-house resources to try to reproduce your company’s products and services. Strategic buyers therefore confront the well-publicized “build vs. buy” strategy when evaluating your company. The more powerful your competitive advantage, the more complex it is to attempt to reproduce the key elements of your business, the more buyers will tilt towards buying your company versus attempting to compete with you. Of course, this raises significant additional complexity for you in terms of sharing information with a would-be competitor, a subject that warrants its own article.
- A good example of the “build vs. buy” decision framework used by strategic buyers is Google’s recent attempted acquisition of Groupon, the hyper-growth local e-commerce company. Google has a cash war chest of over $30B on its balance sheet, a horde of exceptional engineers, global sales and marketing reach, etc. Yet they attempted to acquire Groupon, apparently raising their bid multiple times to up to $6B, rather than try to build Groupon internally. Only Google knows why they tried to “buy versus build,” but it reveals that what Groupon has built is not easily or rapidly reproducible. With the acquisition talks failed and concluded, Google appears to be “building”, with the release of Google Offers. This is a classic example of the “build vs. buy” life-cycle and very important for business owners to understand when engaging with strategic buyers.
Remember that nearly all of the buyers you will approach look at hundreds (sometimes thousands) of opportunities each year. They have limited time to review each opportunity and are only able to make a certain number of investments or acquisitions each year. No investment teaser will attract every buyer (nor should it), but yours must effectively attract the right set of buyers. A critical way to develop interest in your firm is to state (note: “state,” NOT explain) your competitive advantage.
Of course, the structure of an investment teaser *should* vary based on the business’ stage, current size, and the industry in which it operates. While teasers should be constructed “bottoms-up” (Axial’s teaser generation tool is used by companies at all stages, from startup to growth equity, M&A, LBO, and turnaround), all effective investment teasers will clearly articulate the core competitive advantage of the company.
IMPORTANT: Just because you state the competitive advantage of the business does not mean you should explain or reveal the details or intricacies of your company’s competitive advantage in the teaser. In fact, we recommend against it. The teaser is designed to generate curiosity among relevant qualified buyers such that more thorough materials and in-person meetings can be shared and secured. Other materials, including the Confidential Information Memorandum, as well as venues (management meeting) will serve as a better forum in which to further explain your company’s operations and competitive advantage, so we suggest holding off on sharing the details of how you developed your competitive advantage in the teaser.