Startup owners generally want to raise significant funds, and that too, fast.
However, it may be tough to find someone willing to invest in your business and even if you find an investor, it may be challenging to persuade them.
This article will explain the factors investors look at before backing a startup.
What do investors look for before investing?
Starting a business is challenging.
Few entrepreneurs have enough capital on hand to start a business without any outside assistance.
If you're starting a small business or wanting to expand an existing one, you can get funding through a regular loan, a microloan, or cash from family and friends.
You can also seek funding from investors, so it's essential to understand what investors look for before investing.
Below are the different factors investors consider before investing in a startup.
Here are the most important factors an investor should consider before backing a startup.
1. The Character Of The Startup Founder
Before investing, investors will undoubtedly look at the startup founder's character.
Here are some attributes investors look for in an entrepreneur:
Being teachable means being able to listen, admit your mistakes, and learn.
Investors like to share their knowledge with the companies they invest in and appreciate those who are constantly listening and learning. They dislike those who have all the answers (or act as they do).
Plays well with others
Investors like startup founders who build teams.
Founders need to understand what they don't know to build to bolster up their weaknesses.
Investors find it great to see entrepreneurs who know their weaknesses and seek out people with the talents and expertise they don't already have.
Believing that it matters
Startups with a cause do better.
When potential investors inquire about the origins of a startup's concept, they are looking for the authenticity, the light and hope in the founders' eyes that they hope to see in those stories. There's no history (or passion) behind it when it is just a fast business opportunity for someone who sees a way to make money.
Investors want something that makes a difference.
2. The Startup Founder's Ability To Perform
Many investors seek out founders who are passionate and determined. Are they people who are committed to expanding the company and meeting the problems that will inevitably arise?
Startups are challenging, and investors want founders that have the inner drive to perform and see the company through its ups and downs.
Investors want to see a true dedication to the company.
3. The Management Team's Skills And Passion
Running a successful business requires hiring the right people and communicating effectively.
A startup company may not survive for long if there are problems within the management team.
If the people in your team don't know how to do the job well, the startup will suffer due to this.
A potential investor will be interested in learning if your team is well-positioned and passionate to develop and implement a strategy and become a market leader.
Both the founders and the team should have the skills and knowledge related to the business. The skills they possess should be complemented with that of the team.
Startup investors will also want to know if you’re working on your business full-time, which can show that you’re strongly motivated to solve a particular problem. A founder with a prepared fallback won't chase profitability with the same hunger as an entrepreneur who cannot afford to fail.
4. Unique and Viable Business Plan
A unique, well-thought, and viable business plan is what investors are looking for.
They want to know that you're not overly optimistic and at least realistic about your company's future. They want to see that you both have a vision for your company and have a strategy for achieving your objectives.
They'll want to know that you have well-thought-out plans in place to guide you through the process of launching your products and comprehensive marketing strategies.
- Your chosen market, along with data to back up why you chose that market.
- Data-based, hard number financial projections.
- Sales channels, with data to back up why they'll be effective.
- Marketing strategies and objectives, as well as data to support them.
- Competition analysis for your product or service.
- Projected timeline for when you might expect to start making money.
- Potential roadblocks and your strategies for overcoming them.
5. Market Opportunity
In investing, angel investors are often interested in solutions that address critical issues for large target markets. Meanwhile, venture capitalists look for market qualities such as high growth and low competition.
When pitching to investors, the more extensive and more reliable your customer base, the stronger your competitive advantage will have.
Investors look for companies that can scale up quickly and manage their high growth scale. With sound financial predictions and a plan to integrate several revenue streams, investors must understand that the company can create considerable profits beyond the initial product idea.
6. The X-Factor
The X-factor is having a connection with someone and is something you can't explain.
You can't plan for the X-factor, and you can't go out of your way to find it. However, if you find it exists, it will be beneficial to you.
Being genuine in your presentation is the best approach to see if the X-factor exists.
Don't over-professionalise and just be yourself.
Be an entrepreneur with a great idea, one that is both socially and financially beneficial.
Also, always pay attention to your investors.
What they think is significant will be shown by the questions they ask and the comments they make.
Listening will lead to discovering those things that indicate the presence or absence of the X-factor.
7. Gaining Traction
One of the most acceptable ways to stand out from the crowd is to show that you'll hit the ground running or that you have already done so.
There are many excellent talkers in the world, but it's all about the follow-through at the end of the day.
Hundreds of entrepreneurs present their ideas to investors, yet only a small percentage of those ideas produce outcomes.
Showing investors that you're not just talking but taking action to expand your startup business is a crucial method to de-risk an investment opportunity.
Demonstrating that the market is already interested in your idea and providing relevant input can set your company apart from the many others still in development.
You can throw actual data (such as key performance indicators) that supports your arguments to demonstrate your team's dedication and initiative in bringing things to fruition.
KPIs are more than just numbers reported out weekly; they enable you to understand the health and performance of your business so that they can make critical adjustments in their execution to achieve their strategic goals.
Suppose your startup is gaining more customers (either new, repeat or referrals) every month. In that case, it's safe to say that the strategy you're using is very much effective, something investors would like to see.
8. The Startup's 10-Year Goal
Some founders thrive in groups of up to ten people but struggle in groups of 100. Some want to build a company that will last ten years, while others will become bored and start something new.
With this, investors should ensure that all agreements and clauses are in place to support a smooth founder exit with minimal disruption to the business.
9. Analyse the Plans for Future Funding
Investors seek out founders that have a thorough understanding of their company's finances and key metrics. You must demonstrate that you understand all of them and that you can communicate them rationally.
Here are some key metrics that investors will be interested in:
- Your company's monthly burn rate
- Projected growth in revenues
- Gross margin
- A customer's lifetime worth
- Gross revenue and gross expense components of importance
- Key elements of gross revenues and gross expenses
- The lifetime value of a customer
- Customer acquisition cost
- Earnings Before Interest, Taxes, Depreciation, and Amortisation
- How much additional capital will need to be raised in the future, and when
10. Look Over the Legal Documents
Before presenting your business, you need to make sure the company is clean from a legal perspective.
An experienced startup lawyer can help significantly, and here are some legal documents and contracts startups need to have:
A Founders' Agreement is a contract between you and other company founders that outlines ownership, investment, and equity.
The document should control ownership rights, identify operational responsibilities, and, in general, outline the foundation of the shared venture among owners.
The Nondisclosure Agreement (NDA) protects classified, private information and material such as business strategy, trade secrets, schematics for a new product, algorithms, customer information, and other sensitive information.
The NDA's purpose is to keep employees, contractors, or investors from disclosing, publicizing, or stealing confidential information without the proprietor's consent.
Articles of Incorporation
The Articles of Incorporation are a legal document that lists the names of your company's founding members and expresses each subscriber's intention to incorporate the company. This paper lays out the rules that the company must follow and operate by.
The Shareholder Agreement is a contract that outlines shareholders' ownership, investment, and equity. This document governs the founder-shareholder relationship, including vesting limitations, share transfers, shareholder disputes, and exit strategies.
Employee Contracts are legal documents between you, an employer and your employee. Employee rights, responsibilities, tasks, and legally binding terms are all defined here.
Bylaws are administrative and managerial guidelines that govern how the company, its owners, shareholders, and workers operate. Bylaws preserve the startup's long-term organisational integrity in the face of an uncertain and chaotic future.
What should Startups Do?
In the end, getting your startup funded is less about connections as much as it is about having a fundable project.
However, if your startup can provide the characteristics described above, it can help you obtain investors.
Although finding the proper type of investor who will invest the right amount of money with acceptable terms will require some research.
It might take some time, but if you believe in what you're doing, you should keep looking until you discover your "Yes."
You can also read this article to help you identify the common mistakes to avoid when raising funds for your startup.
Researching before investing is something investors should do.
Even though your company may have strong cash flow projections, what looks good on paper may not apply to the real world.
Investors have several factors to consider when investing, and the most important thing you can do is be prepared.
It would help if you had a clear idea of what you're going to do with the money and how the investment will go. Show them that you're thinking about the future, as this is their primary concern.
I hope this guide helped you, and if you have any questions regarding your startup, you can ask us by scheduling an appointment with us today.
Rest assured that someone will get in touch with you to answer all your questions.