Steering through the world of startups can be terrifying if the entrepreneurs don’t have the right financial aids. Even though most of the entrepreneurs arrange financials on their own in the early stages of the startup process, it’s the entry of investors which take the startups to the next level.
Investors are shrewd when it comes to investing in a startup as they always want their investments to mature and be successful. Hence it is important to know what the investors are looking for in startups before they invest their time and money.
6 Important Things Investors Look For Before Investing
Even though your business idea will always be at the top of the priority list of any investor, it’s uniqueness is seldom a priority. The only reason an investor invests in your startup is to get the most out of his investment. Every pitch deck should be developed keeping this in mind.
Here’s the list of other things an investor looks for in a startup.
A Well-Defined Business Model & Business Plan
Having a complete, credible and clear business model is important for any startup as every investor believes that any startup without a concrete business model is on the path to failure. A business model is a conceptual structure explaining how the business operates and makes money.
Having a well-defined business model demonstrates that the entrepreneur knows about the market and is ready to take the leap forward. Market research, idea validation, building a prototype, validating that prototype, and testing the model in a sample market is essential to validate the business model.
A business plan, on the other hand, is a strategic plan for business’s future. It states the future goals and the routes business will take to fulfill those goals. An investor always wants the most out his investment and invests only in a startup which has its priorities straight and a business plan in line.
Team’s Capabilities & Experience
Building a capable and experienced team is one of the most crucial tasks of starting up. Investors believe that the risks would be lower if your team has good managerial skills, a nice chemistry, and a worthy prior experience in your domain.
Having a strong startup team is very crucial to the fate of your startup as its success ultimately lies on the shoulders of your team. Every team member should have an expertise in the department s/he’s handling and an iron will to contribute to the fullest.
“My criteria to invest are the founders. So I won’t check any business plans, any economic projections, spreadsheets; but (instead) I focus on the founder’s mindset (and) passion.” – Taizo Son, an investor in startups
Market matters as it signifies growth. Investors want to have a deeper look at your market. They want to see the potential of growth in the existing market and if your startup has the resources to accommodate a new growing market.
The bigger the obtainable market size, the more is the chances to get benefit from economies of scale in the future.
The companies that can emerge quickly and gain profits exponentially over the initial investments in the market due to its size are the ones ideally preferred by the investors.
Dave McClure, founder of 500 Startups says:
“Market size matters because most investors want to know that you’ve got a big business. Bigger is generally better.”
Aiming at a huge market is the best way to show the investors that the startup is on the way to create an impression in the market.
The Level Of Commercial Traction
A quantitative evidence of market demand is always preferred over just a prediction. Showing the investors that you and your team have already taken action to build upon your business idea and the business has some clearly identifiable momentum and progress will not only motivate them to invest in your startup but also make negotiations easy for you.
If the Month over Month (MoM) or Year over Year (YoY) development is steady, it is seen as a sign that the startup is standing differently from the rest. Mark Cuban, an investor, Dallas Mavericks, says:
“When it comes to business, there is a simple scorecard. Are you making money or are you not making money? Are you succeeding or are you not? So when you go to raise money, always, always catch yourself and eliminate the backstory.”
Investors look into the fact how much you can convince them to take a leap of faith. Empathy based on similar educational or work background, trusted co-investors, instinct or even impressions can prompt investors to think about the investing decisions. The best way you can pass this is by being truthful and confident while having a basic knowledge of the background of the investors. A startup might not be on par with other businesses but sometimes the X-factor could make a difference.
People often misunderstand the term ‘Exit Strategy’. The ‘exit’ in exit strategy refers to the money and not at the exit of the entrepreneurs. This means that the startup brings in the money and the investors get the money out. This is why every investor looks into the exit strategy of the startup. The returns are provided by the exit.
The exiting of the investors usually happens in two ways. A bigger company acquires the startup for enough money to give the investors the invested amount or the startup develop and flourish enough to sell shares of stock to the buying public over a public stock market like it happened with Facebook in 2012 and Twitter in 2013. Scalability is important for most investors since it gives the investment the best chance of developing quickly.
Getting investors to invest will be difficult with numerous startups pitching against each other for funds. Having the above 6 factors into account will help the entrepreneurs achieve their objective quickly.
Go On, Tell Us What You Think!
Did we miss something? Come on! Tell us what you think about our article on What Do Investors Look For In A Startup? in the comments section.