Investors who decide to invest in startups have a unique perspective in how they evaluate risk. That’s because they understand that investing in any startup, regardless of how promising it seems, is risky.
Since startups have a 90% fail rate, the risk is high, and investors must find ways to improve their odds of success. To do so, they’ll look for other indicators of success. An earlier article explored what investors look for in your financials. But how do investors take in that information and use it to choose where their money goes?
This article will cover the top 5 aspects of a startup that investors consider when deciding if they should invest.
1. The Team
At its core, startups are about the people who are part of it. A good idea and a sound business plan are necessary, but nothing happens unless the work gets done. It’s for this reason that investors pay close attention to the founders and early team of the startup. Here are three aspects that they look into.
- Track record: If you and members of your team have success in the field of your startup, this will dramatically increase the confidence investors have in you. If you did it once, odds are you can do it again.
- Leadership skills: There are countless tales of founders who lose it. They kick off the early stages well, but they have a hard time bringing it all together when the team grows. This is why leadership skills are critical to every startup’s success and why investors look at who you’ve surrounded yourself with pre-funding.
- Decision-making skills: Founders will ultimately make all the decisions in the startup’s direction. These decisions are what will determine the success or failure of the startup. If you can convey to investors that you can manage stress and make data-driven decisions, you will present yourself as a capable founder.
2. The Idea
All startups begin with a good idea. But it’s when you take this idea out into the world where everything starts becoming real. So when you present your idea to investors, they will look at it from different perspectives. Your ability to share this idea and help others see it the same way you see it, will determine your ability to get your business off the ground.
How unique is your idea?
Not every startup is groundbreaking or disruptive in their industry. Some are, but it’s not a requirement to get funded. In some cases, you having an idea that’s too unique can even work against you. The critical aspect is understanding:
- The landscape of the concept
- Which problem(s) you solve
- How your product fits into the market (product market fit)
Can you communicate it easily?
Your ability to clearly and concisely communicate what your startup is about is one of the critical aspects of getting funded. Investors evaluate many startups, so capturing their attention by having a straightforward way to communicate what your startup is like, is necessary to get investors interested in funding you.
How much potential does it have?
Not every idea has the potential to become a unicorn. In fact, only a very small number of startups will ever become profitable, let alone attain unicorn status. That’s why it’s essential to gauge the business’s potential size and communicate this with potential investors.
3. The Market
Having in-depth knowledge of the market you’ll compete in is fundamental to understanding the upside of investing in your startup. Not all markets have the same size, so knowing what is possible within the space you’ll work in is an important consideration for investors. Here are a couple of things to think about when it comes to the market your startup will compete in.
- The market size: It’s critical to know how ample space is because if you don’t have enough potential customers, then the outlook for investors will probably not be attractive enough.
- How much market share do you aspire to take: If your answer to how much market share you desire to take is all of it, you may come across as having unrealistic expectations. In most cases, there’s already competition you have to deal with, so having a clear target for your market share will give your investors a clear idea of what’s possible.
4. The Involvement
Investors will have different requirements for the amount of involvement they may want to have with your startup. It’s important to remember that you will have a long-term relationship with your investors. Ensuring that all parties understand how you’ll work together is critical to having a successful work arrangement.
Here are a few scenarios to consider:
- Some investors prefer to sign a check and just check in with you every once in a while. If you have all the expertise you need and the right connections, then this can be an arrangement that works well for you.
- If the investors have experience in the space you’ll be operating in, some investors may have a more hands-on relationship with you. They may get involved in hiring the right people and help with connecting you to the right partners.
5.The Exit
All investors want to get their money back, so having a plan on how this will happen is a great way to encourage investors. There are many ways in which your investors can get their investment back. Here are three of the most common ways in which startups exit.
- IPO: Initial public offerings are a great way to exit and of the best case scenarios for investors. That’s because when businesses go public, they have a huge potential upside.
- Being acquired by a bigger company: The goal for some startups is to become acquired by bigger businesses in their space. Investors love this model because it usually reduces the risk of their investment.
- Becoming profitable: If your strategy is for slower long-term growth, you have to make it attractive for investors to stay involved for a long time. Being able to map out how your startup will become profitable helps them understand how much their share will be worth.
Ready to Court VCs?
Venture capital is an incredible tool. It can give you all the resources that will help you make your idea a reality.
Every investor you come across will want to know your financial planning. So If you’re ready to go after funding, having your finances in order is a must. Click here to schedule a free consultation with one of our startup experts to explore the different ways in which we can help you get the funding your startup needs.