Investors have many reasons to put their money into a startup. They may like the thrill. They may want to mentor younger founders. But whatever their motivation, above all, they are looking to get a return on their money.
Investors who are willing to assume a more significant amount of risk by investing in a startup, therefore, are looking for the possibility of a bigger payoff.
So for investors to make the decision that your startup will grow (getting them the return on their investment), they need to see sure signs or indicators that their investment will pay off. Said differently, if you present to your potential investors these confidence-inducing signs that they’ll get a positive return from the risk they assume with your startup, you’ll increase the odds of them investing in you.
This article will give you an overview of what you have to demonstrate to your investors, so they feel confident to support your startup.
Growth Potential
The first criteria that an investor will have is determining how big your startup can become. Every investor would love to have their investment grow up into a unicorn. Even though it is unlikely, since only 0.00006% of startups become unicorns, they still need indications to what they can expect. Here are some of the questions you’ll need to answer.
How big are the top players in your space?
This is a good indicator of your company’s potential. If, for example, there are several billion-dollar companies in your space, it means there’s plenty of room to grow. On the other hand, if the leading companies aren’t performing much better, it’s an indicator that growth potential is minor.
Also, keep in mind that it may also mean that it’s a new market that hasn’t developed.
How much time will it take you to grow?
Will you need a year, five years, or ten to maximize the potential of your startup is a question investors will look to have answered. Having growth projections based on different funding scenarios can be a helpful tool.
How many rounds of funding will you need?
Some startups plan to need several rounds of funding before they become self-sustainable and profitable. This is part of their business model. In contrast, others will need fewer rounds because their business model is designed to reach sustainability quicker. Showing your potential investors what your funding panorama will be is an excellent way to understand when they might see a return from their investment.
Competitive Advantage and Innovation
When you go out looking for funding, it’s important to keep in mind that about 90% of all startups fail. Your potential investors also know this. That’s why they must understand what it is about your startup that will help it stand out from the rest and make it out of the startup phase. What is unique about you, your product, or your team that will give you the edge and dramatically increase your chances of becoming a great investment.
Define your competitive landscape
The first challenge you need to overcome to grow your startup is your competition. Showing your investors how you compare to your immediate competition and how you’ll gain ground is a big part of helping investors feel confident. If you enter a space with little or no competition, depending on the context, can be both a red or green flag. This can either mean a meager opportunity for profit or that the market is entirely underserved.
What’s your special sauce?
This is mostly about your product or service. It’s essential to be very specific about what aspects of your product are different/better than your competition’s. Doing this is critical since it will make sure that you can differentiate yourself from the competition.
Do you have the right people to make it happen?
People make startups. So making sure you have the right talent or a plan to attract the right talent is a significant indicator of your success. To give you context of how big this is, many big companies, when they want to enter a new space or grow their operations, prefer to acquire a competitor to access their talent. If you can show your investors how you plan to access the human talent, you’ll increase confidence in your operation’s future.
Financial Accountability
Since you’ll be asking people for money, it is imperative that you can prove to them that you’ll be able to manage said money effectively and responsibly. Long gone are the days when investors would just pour open their wallets. Today’s investors expect you to optimize how you’ll use your funds, so you don’t burn through your funding before you can make enough progress.
Have a bulletproof business plan
A business plan is a document that your investors will use to judge whether or not you have a high chance of success. It must be specific and contain action plans to manage a variety of scenarios, from bad to good.
Cash flow is king
Cash flow is one of the best indicators of a business’s health. Showing that you have a healthy cash flow to investors signals to them that you have diligent financial practices.
Have an exit strategy
Having a clear exit strategy is an excellent indicator to an investor of how much potential your startup has. That’s because this is typically the moment where your investors will see the payoff from the risk they took with your startup when you started. So if you plan to IPO, then having a roadmap of how that will look sends a great signal to your potential investors.
Ready to Partner with Finance Professionals?
29% of all startups fail due to not having enough funding. So making sure that you dot all your i’s and cross all your t’s before talking to investors will have a direct impact on your odds of success.
Click here to set up a call with our startup experts so we can help you make sure that your accounting inspires confidence in any investor considering your startup.