What investors look for in startups: An inside perspective

Startup founders ask us all the time about things we, as investors look for in a startup before investing. Unfortunately, there is no hard and fast rule for funding startups, but mostly all investors across investment stages broadly consider 3 main criteria, which include team, idea and market.

The importance of each of these deciding factors change between stages of funding, as the team might be more important than the idea for an early stage investor like an incubator.

The following factors are those that may be considered (amongst many others) within each of the 3 main criteria:

1. Team

Founder Characteristic

  • Committed and focused full time
  • Determination and perseverance with ability to be flexible
  • Willingness to take on-board advice
  • Married to their passion, not the idea

Team Characteristic

  • Founding team of 2–4 co-founders
  • Organic chemistry
  • Complimentary skill sets (Covering 3 key areas of sales/marketing, operations and tech, if it’s a tech product)
  • At least, one founder to have domain expertise, leadership/decisiveness qualities

2. Idea

  • Problem — Is it solving a real genuine problem?
  • Competition — If other solutions exist, then why is this solution better?
  • Timing — Is now the right time for the idea?
  • Business Model — Possible identifiable, viable and sustainable revenue stream?
  • Target customer acceptability — Would you, your friends and family use the product?
  • Scalability and traction (if any)

3. Market

  • Is the target market large enough to generate investor returns?

I see a fundamental difference in the way AdvantEdge looks at opportunities for its incubator and how it considers startups for a seed round.

For a seed round of funding, the team would look very hard for reasons not to invest in the startup and if they cannot find any, then they would be happy to invest in that startup.

So all you founders looking to raise funds, please try not to give investors a reason to say no. I will highlight a few red flags that you should not raise later in another post.

At the incubation stage, as most applications are from extremely early stage startups with just ideas or low level prototypes, if we start looking for reasons not to invest in a startup, we are surely going to find one or many such reasons in each application. Hence, the approach of selecting startups at this stage is very different to the seed stage. Here, we actually look for very strong reasons to invest across the 3 main factors we discussed earlier. So for example, we could overlook a small gap in the team, if the market pull and/or value proposition of the idea is exceptional. Or alternatively, we might back a phenomenal team, working in a space where the immediate market opportunity is not massive.

We love to hear from passionate founders, so feel free to reach out to us, if you are looking for support via the relevant forms on our website http://advantedge.vc/. AdvantEdge is an early stage venture capital fund, which also runs a pre-seed program and a startup incubator. We back entrepreneurs who are determined to solve big problems and support early stage companies that have a strong growth potential with funding upto $500K.