If you’ve ever pitched your startup to investors, you know how hard it is (and if not, you soon will). Angel investors are ultimately looking to invest in ideas they believe will become profitable in the long term. However, when a startup is still in its early stages, with a non-existent customer base, or little to no revenue, what are these potential investors looking for in an investment opportunity?
That is a question I get asked often. At DCN, I get to speak with entrepreneurs and investors all the time. It is common for entrepreneurs to ask for advice on how to raise capital, how to get in front of investors and to review their pitch deck. While my conversation with investors is geared more towards, them trying to understand what kind of cannabis companies are out there, what are the pain points these companies are facing, what sectors of the industry do I think are going to start gaining traction, etc.
Now being an entrepreneur myself, I utilize my time with these investors so I can better understand how they think and to know what they are looking for in a startup before investing. The reason I do this is 1) I also am on this fundraising journey like so many other entrepreneurs in this space and 2) so that I can go back to the entrepreneurs in the DCN community and provide them with the knowledge and insight in this process of raising capital.
Below I have highlighted a handful of the main things investors have shared with me when it comes to determining what kind of company they are going to invest in.
The Team & Experience
The team behind a startup is going to define its future; they are the ones making the decisions that will push a company in one direction or another, thus the importance for investors when they review the team and founders.
Investors are not merely investing in valuation models and products; they are investing in people. Many believe that the risks would be lower if a team has good managerial skills, a nice chemistry, and a worthy prior experience in the industry they are facing.
To judge a product at the early stage, when all you have is a working prototype, is not an easy task. If metrics do not support the startup’s product, investors will have to decide whether to invest based on their previous experience in the space or their gut feeling.
However, even if your startups have at least one customer or even a dozen customers, you are now proving to yourself and others that you have a product or service that potential customers will understand and spend money on. Ideas don’t sell. Tangible products and services do.
Size of the market:
Market matters as it signifies growth. Investors want to have a more in-depth look at your market. An interesting aspect about this is that the size of some markets is not precise at the early stage when a startup is just getting launched.
In turn, what drives most investors is finding startups that at some point can become significant, large companies to get a substantial return on their investment. Excellent returns for investors are those that can pay back ten times the amount invested, and only high growth and scalable startups can reach those levels.
Investors come in all shapes and sizes, they focus on investing in different stages of a startups life, in specific industries, and business models. Many investors are curious about why you have approached them. An investor is likely to invest in an area they are familiar with, have domain expertise in or have successfully operated in before.
For an investor, this allows them to engage with your startup more deeply. You need to make sure you do your research upfront this way you ensure that you don’t waste your time (or their time) with an investor who ultimately isn’t a natural fit.
I hate to break it to you, but it is very unlikely that your startup is altogether unique. And even if it is, it is not necessarily a good thing. When you have competition, it validates the possibility underlying your venture and requires you to prove to investors why your product is better than your competition.
Before they invest in you, they will want evidence that you have some significant advantage that the competition cannot easily overcome.
When you have a well-defined business model that includes monetization, scalability and a viable exit strategy it demonstrates that you know the market and are ready to move forward.
It is key to have idea validation, a prototype, validation of that prototype, market research, and testing the model in a sample market to validate the business model. The most attractive startups will speak directly to what an investor wants to hear: how will they get a return on their investment? You want to be transparent about the measured amount of risk and resist the urge to exaggerate your pitch.
Passion and Commitment
Many investors want to see your passion and commitment to the business. You need to have a clear vision of what you are trying to achieve and have an active attitude in how you will attain it. When an investor sees this passion from you and your team, they are more than likely to be convinced that their investment is in good hands and that you and your team are likely to succeed. Investors are looking to invest in people and their ideas, and investing is all about balancing risks and rewards, so don’t be shy, show them that passion and commitment.
Problem-Solving and Resourcefulness
For any startup it is inevitable that you will encounter many business challenges, whether you run out of money, you lose a big client, or a supplier falls through. Investors know this and what they want to see is how you and your team maneuver through these challenges and how resourceful you are. This makes your startup more valuable if you can prove you’ve solved problems in the past.
Remember, there are many investors out there, and each investor is looking for something different, and you just need to find the one who is right for your business.
Founders, I know it is easy to get pulled into feeling like you need to raise capital, but please keep this in mind not every single startup needs funding. You should bootstrap for as long as you, this way you have more data proving your business model, and so you can preserve ownership and optionality.
Startups such as Craigslist, Github or Braintree grew with no outside money, and by the time some of them received funding they were already big companies with significant traction and revenue.
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