what do investors look in a startup
There’s little debate among investors about the importance of the team to a start-up’s success — it’s Team first, Idea second, every time. Many investors will even fund top-notch teams regardless of the product or service they’re working on, especially at an earlier stage.
So, what makes your team great in the eyes of investors? Although it depends on the type of company you’re building and varies between investors, there are key parameters that investors will look at.
Here are 8 things investors look for in a start-up?
It is often said that between 50–70% of an investors decision to put capital into a business is based on the team operating that company. The thought process is that the idea can be a grand slam solution, but if the team can’t execute the plan you will never gain enough traction.
Having a solid team doesn’t mean you must have a fully developed organizational structure already in place. It is important for most start-ups to have both technical and business-minded co-founders (rarely are they the same person). There are some functions that you can outsource, especially early on.
Some entrepreneurs cover their bases on skills their team is missing by having an advisory Board. Here they invite other entrepreneurs and professionals willing to provide their time (sometimes for free or in exchange for small amounts of equity) to guide the company through issues within their area of expertise. Whatever way you choose to structure your company, just be sure that you have a strong team in place.
2. A great idea that solves a true pain point
Some of the largest companies in the world did not come out of unique ideas. Apple started by developing computers. IBM and others were already doing that. It isn’t the idea that made them what they are today. It was the execution of a slightly different take on the idea.
Investors are looking for great ideas that solve pain points for which people are willing to pay for. If people aren’t willing to pay for the solution, then either it isn’t that big of a pain or your solution doesn’t solve it well enough.
3. Market size/market share
What happens when you have a great idea that solves a pain point that people are willing to pay for but there just aren’t enough people experiencing that pain? Nothing happens.
Market size matters to investors because they understand that it is going to take a significant amount of growth in your company, and that means taking over enough market share from competitors, for the investor to re-coup their capital and get a good return as well.
4. Intellectual property
Patents, copyrights and trademarks. Moving from left to right in that list respectively investors love, like, and are happy when you have intellectual property (IP) rights protection in place. Particularly issued patents, provisional patents, meaning you have applied but the patent office has not officially approved your application, are good but not as strong.
You are most assuredly going to have copy-cat businesses that try to take your idea and either make it their own or make small changes to claim they are different. Having your IP properly in place signals to investors that your idea and their capital is well protected.
5. A good deal
If you have ever bought something that you really didn’t need because it was on sale, then you understand the psychology behind purchase behaviour. While smart investors won’t throw “good money after bad”, investors do like good deals. After all, they are looking to maximize their return.
Your idea and team may be enticing, but sophisticated investors are seeing hundreds, if not thousands, of good ideas and teams on an annual basis. If they compare two companies where one company is offering more equity in return for less cash, they are likely to go that direction.
Make sure to do your research and structure a deal that is fair to all parties involved
6. Other investors
Investors are often attracted to companies when others have already in-vested. The old saying of “where there is smoke there is fire” holds true. If well-respected investors are supporting a company then this signals to other investors there is something worth looking at.
Herein lies one of the benefits to landing experienced investors. They tend to attract other investors. This is one reason to be targeted with the investors you plan on approaching.
7. Early traction
The value that investors place on your company will partially be driven by the number of milestones you have accomplished. We call this traction and the earlier you gain traction the better.
Milestones can be things like MAU’s, issued patents and paying customers. Milestones not only increase your value, but they also attract the attention of investors.
8. Investment philosophy
Every investor has a philosophy that underlies their approach to investing. Some investors are strictly in it for the return. Others take a strategic approach, looking to support start-ups that will benefit their parent companies. For example, one investor might decide to focus only on start-ups that sell into Fortune 500 companies, because that is where there’s big money to be made. Another investor may focus on green technology or social enterprises.
An investor who specializes in a certain area — say green technologies — will come to know that area very well, and be able to understand the playing field, competitors, trends and buying behaviours. They may also want to invest in companies that have synergies with each other.
To conclude whether they’re in it strictly for the return, or whether they are doing it strategically, most good investors will have a thesis or area of interest, and if you are looking for their money, you need to know what their thesis is.