Early funding option for startups can usually be limited. Though there are ways like bootstrapping, crowdfunding or receiving help from family members and friends, startups need angel investors or VCs to scale up fast. Investors want to become the primary backers of the next game-changing venture. There are many things that investors look for in a prospective investee. The merits of an idea, market need and size, vision for execution of these ideas, are just some of these. These aspects should definitely be in your pitch deck!
The team behind any idea needs to work together and work well. Investors would ideally ensure this as the first check. They would look at whether the team is capable of delivering on their ideas and has an assembly of strong and like-minded people with knowledge of what they are doing.
Investors need worthwhile returns on their investment. They ideally look for products or services in larger markets that offer the most potential for profits. They need assurance that at some point, the startup can become a large company and there would be significant returns on their investment. Only scalable startups can reach this target. One interesting contrast to this point is that sometimes when a startup is in the nascent stages, the market size may not be very clear. Two examples of this are Airbnb and Uber. Airbnb managed to steal clients from hotels. Uber is becoming a logistics company doing more than just cab services.
While ideas are great, there needs to be some evidence of progress. They would like to see startups signing in customers at the early stages itself or even begin building their product.
What also affects investor in a startup is its value proposition as chosen by the entrepreneur. While entrepreneurs generally aim at high valuations , investors are usually on the opposite end. If according to an investor, the risk associated with a startup is very high, they will try and own up as much of the startup as possible. This usually pushes down the value proposition of the said startup. Startups that show a high value proposition initially also face the risk of finding it difficult to justify future financing at higher valuation.
Risk taking and clear vision
The entrepreneur needs to have a clear vision and motivation. However, it is also equally important to take risks in order to progress and this is another thing that would attract prospective investors.
Technology and intellectual property
These two go a long way in determining the value of a business. For any startup, there should be a clear ownership of the technology and intellectual property. If your business is in developing products and there is a key IP associated, an investor will definitely be interested to invest. If your products and services depend on certain key IP assets, an investor will undertake due diligence to understand the entrepreneur’s right to use such assets.
Barriers to entry can be both natural and artificial. A startup’s barriers to entry are some of the unique points that can hinder potential competitors from entering the target market and capturing a major market share. Some such barriers include internal capabilities, government regulations, intellectual barriers, market share, partnerships, first mover advantage, brand name, economic and market conditions, competitors’ reactions, customer relations, etc.
Startups need a strong exit strategy meaning the founders either go public, get acquired or get another big round of funding from PE investor. Investors and the initial employee-investors expect returns on capital and this is one important point to consider before approaching possible investors. Venture capitalists usually expect quick returns and therefore they invest in two to three startups at the same time in order to avoid the risk of failure. It is really essential for an entrepreneur to be passionate, optimistic, and hopeful. A final thing to remember is that investors are also people, and you shouldn’t be afraid to approach them as such. Ultimately, investors are going with their gut in investing in businesses just as much as you are in creating yours. So why not give them something to believe in?