What Do Investors Look For In A Startup?
Investors look at a wide range of characteristics to determine whether they’d like to invest in a startup. Whilst different investors take different approaches (especially depending on whether they are Angel Investors, Crowd Funder or traditional venture capital), they tend to look at the same features of a small business. The point of differentiation is how they weight those features.
The most important features lie under Market Opportunity, Scalability and Executability. If you’re good on all these fronts then you’ll be maximising your chance of fundraising success.
Investors want to know that your business’ total addressable market (TAM) will be large enough to accommodate a scaling business and that there is an opportunity for a new company to win market share.
People respond to narratives much better than they respond to lists of facts. Presenting your problem and solution statement is a crucial part of your business’ story and a key concern for investors. A clear problem and solution statement will show investors why customers benefit from your product or service.
You probably know your market better than the investor you’re speaking to. Your competitors analysis is a great way to help them understand the landscape whilst also offering an opportunity to explain your competitive advantage.
Sometimes, when we come up with a new idea, it can be tempting to say that this is a brand new market but this is actually unnerving for investors. A brand new market is no market and investors know that people and companies have limited money so the question to ask yourself is: “What will our customers stop spending money on when they engage with us?”
When the Wright brothers invented the first plane, there were still alternatives for customers such as cars, trains and boats. What’s your equivalent?
Potential investors also want to know whether there is anything that might prevent your company from scaling and how you plan to mitigate this risk. It’s much better for you, as a founder, to spot the problem before the investor does because it:
Shows that you understand your business
Allows you to control the narrative.
The best evidence that your startup is ready to scale and has compelling growth potential is your company’s traction. If you can demonstrate tangible evidence of market demand (through revenues or users) then this provides evidence for the quality of your offering, your go-to-market strategy and business model. In addition, this also shows that your company is ready to start collecting feedback from real users which is a huge advantage when developing your product.
Investor looking for financial returns will also be interested in not just whether the company can scale but how it benefits from scaling. The most exciting companies will have a high degree of operating leverage – all that means is that as they scale, revenues will increase faster than costs increase. This might come in the form of reduced costs of production or a fall in the cost of customer acquisition.
If your startup can achieve this in the long term, as it begins to address a worldwide market, then make sure this is highlighted in your financial projections.
The most important part of executability (and maybe the thing an average investor cares most about when deciding whether to make an investment in your company) is the team. There is a lot of uncertainty around how an early stage business will grow. Investors want to see a team that they’re confident will make the right business decisions to grow the company and, also, have the ability to execute on those decisions. This is the area which is most variable from investor to investor but assessing your own team from the perspective of technical, business and domain expertise and filling any gaps will help!
Aside from the team, investors will use your clarity of messaging as a proxy for the business’ executability. The team should show (from their website to their pitch deck to their social media accounts) that they understand the business and how they want it to be perceived. Making sure that you’ve spoken to every area an investor looks at in your pitch deck is a great start. Beyond that, it’s showing your own team’s and business’ personality so the investor can decide if it’s a good fit.
Improving your proposition on any of these dimensions will improve your investor proposition. Even those who’re only interested in a financial return on their investment are still likely to prefer one with a good social cause (all else being equal) because it increases the likelihood of it gathering support.
The skill lies in making sure you place most emphasis on the areas that the investors cares about most. It’s wise to tailor your approach whilst keeping on track with your businesses core values. Now you understand what investors are looking for. Our article, How to Raise Money for My Startup, will help you to plan how you will approach investors.
Where Can I Learn More?
Capital Pilot is here to help founders value their startup. For more information, check out all our Startup FAQs here. Or, if you are ready to get your investability assessment and rating, click here.