Startup Funding // 5 Things Investors Look for Before Investing

Startup funding can be a tasking job, but after years of interacting with investors we share with you some tips around what most if not all investors look for in start-ups before committing their finances

The startup funding process is mostly not for the meek, as most experienced investors tend to be smart, skeptical and diligent in reviewing opportunities presented to them, but you can never blame them as they are looking to ultimately put their money into your business.

Despite the wide variety of startups they may see, the truth of the matter is that there are several boxes that just about every investor likes to check before they’ll invest, either money or additional time.

Return on Investment

More than anything, investors want to see a return on their investment. Investors are in the business of putting money into growing businesses so they can make money. If you can demonstrate that your business will make them money, then you’re 90% there.

While each investor will want to make money, the hard part becomes knowing how to woo each prospective investor in a way that piques their interest.

Always remember that each investor will have different pain points and different intangible sets of criteria for how they arrive at investment decisions. Some investors will be strictly number-based, whereas other investors will base their decisions on a “gut” feeling.

In this article we break down for you the top criteria many investors will use so that you can develop your best plan and your best possible pitch to earn capital for your small business funding needs. You can also check out the 10 slides you need to include in your next pitch deck.

Dynamic market opportunity.

This is where most investors will start. How big is the addressable market that your company is looking to serve? A dynamic market is defined in terms of not just today, but the future as well.

If it’s a market with existing solutions, be prepared to spend a lot of time explaining how your solution is different from your peers. If it’s a new, emerging market, the focus will be on how big the market is expected to get and what’s driving its growth. Investors understand that rising tides lift all boats – many of them will look to place bets in new, promising sectors.

The Team

A potential investor will keenly look into your team. Your team needs to be well positioned to build and execute a plan and become a market leader.

Some of the things the investor will look at is the kind of expertise of every team member. What makes them an authoritative figure in the market? Does the team have complementary skills as is related to sales and marketing, product development and operations? Is there a strong chemistry on the team and does everyone play nicely with each other?

These are several of the criteria investors will be looking for, so it’s important to highlight as many of these as strengths as possible.

The Numbers

Investors want to make money. It’s your job to show them that your company is viable and will make that goal happen for them. If your company has been up and running for a while, then you need to show that you’ve had an excellent financial performance so far.

If your company hasn’t yet started up, then you need to show what you can expect to bring in, when you’ll hit your goal numbers, and when your investor can expect to start earning their money back. In other words, you need a really strong (and well backed-up) business plan.

Investor relevance

Doing your research upfront will pay dividends and ensure that you don’t spend a whole lot of time with an investor who ultimately isn’t a natural fit for your product.

In a funding 101 event we held last year, part of the discussion included the due diligence that entrepreneurs need to make to understand the type of investor they want. Getting this right is equally important. Talking to wrong investor might be a little bit frustrating and the rejection that follows might make you think that your product has an issue.

Most entrepreneurs go for Venture Capitalists for example, while in the real sense they only need an angel investor or even a bank loan. Ensure you carry out your research, to just understand the level your business is in and the type of investor you will need.

Also remember, Investors are choosy where they put their money and an entrepreneur needs to be just as careful who they allow to invest in their company.

You will likely be working with your investors for many years, so study the potential investor as deeply as you do the terms of the investment. Asking potential investors the right questions, before they invest in your company, will pay off with higher returns in the future.

There are many aspects to this, including: the stage of your company,  the industry that you’re startup is active in and investor experience in your market space.

Think of it as a piece to a puzzle. If there are multiple connections between an investor’s strategy and your startup, the investor is likely to get more deeply engaged and the fit becomes more obvious.

Commercial traction

An important way to de-risk an investment opportunity is to show investors that you’re not just all talk but have already begun taking action to build the business.

Demonstrating that the market is already engaging with your product and providing useful feedback will set your startup apart from many others that are in the work progress.

As mentioned earlier it can be quite powerful to throw real data into a conversation that supports your claims, or perhaps even forces you to adjust assumptions that you’ve started with. Furthermore, it reflects the commitment and initiative that the team is making in order to make things happen.

In conclusion, investors look for quite a number of things but to make a successful pitch, the most important thing you can do is to be prepared. Ensure that your pitch deck includes at least this 10 slides.

That business plan should be as watertight as you can make it. Your story should be compelling and well-thought-out. You should know exactly what you’re going to do with the money and exactly how the investment is going to be structured. Show your potential investors that you’re thinking about the future – because that’s their number one concern.