What Investors Look for in a Startup

I have been on more than two sides of startup investments. Two of my companies have raised money and I have invested small amounts. Plus, I have been an advisor to investors. So, I feel adequately qualified to give some advice…

Less than 1% of startups get funding at the seed or startup phase. Of those that do, less than 1% get future rounds of funding. In other words, companies that raise multiple rounds of funding are literally one in a million. So, ideally you shouldn’t look for funding – read more here (http://blog.gupte.net/dont-look-for-funding-generate-revenue-instead/). However, should you decide you are going to pursue investors, read on.

A Passionate and driven management team – Notice that this one is first. A great management team will not only come up with winning strategies but also execute them efficiently and effectively to get the desired result. An important point to note here is that investors rarely invest in one-person companies. Not only is the risk too high (of the person quitting or worse) but it raises a red flag that the person is unlikely to be good at convincing people to support the idea (customers, partners, employees etc…)

At a talk that I attended, an investor gave the following reasoning. He said “that they rarely look at financials or look at them in great detail before a deal”. In fact they even give the business plan only a cursory look. He made a very important point, and here it is. He said essentially, that “An A team will fix a B plan or a B business. But a B team might screw up even an A plan”. Makes sense. In fact, I’ll take it further. An A team that is passionate about the business they are pitching will likely have thought about it carefully and chosen that business because it is an extraordinary proposition. A teams are made of A players and A players don’t choose ordinary opportunities. The rest of this article is about how you as an entrepreneur should identify a “great proposition”.

Return on investment – Your opportunity has to be a better option for investors than say, the stock market, gold, real estate or a dozen other opportunities that return anything from five to thirty percent annualized returns. They have to feel that they are placing their bets on a venture that has the potential to create disproportionate value within a relatively small timeframe as compared to other businesses. An obvious fact that many “green” entrepreneurs miss is that investors don’t invest because they like you, your idea or your company. Investors invest so that they can profit. Simple. This also has means it is very important that you present a believable and attractive exit strategy for investors.

A strong customer value proposition – this is really the basis of any company. In fact, it is quite simple – if customers are not clamoring for the value proposition your company represents, you don’t have a business. Even if you drive a taxi instead, you have better chance of being profitable.

A disruptive innovation – In a market that sees new ventures coming up every day, investors are always looking for that one idea that has the potential to change the landscape of that domain. It might be a radically innovative business model, or it could be founded on the basis of an incremental innovation – but one that will relentlessly change the competitive landscape.

Scalability – A great investment opportunity is not about earning peanuts. Plausible investment opportunities present a business that is anticipated to be a “rocket” performer. For the same amount of time and effort, they could invest in slow or small growth elsewhere that carries almost no risk in comparison. It is important for investors that the innovation or idea they are investing in has the potential to scale to a large size.

Leverage – Startups that leverage technology, knowledge of the marketplace, contacts, location or something else are attractive. For example, technology offers a competitive edge to any business that uses it effectively. From an investor’s perspective, if you are not leveraging, you don’t have competitive advantage. In fact, effective leverage is a common factor in all successful global companies anywhere.

Believe it or not, professional investors want to see all of the above, not just most. This is why only 1% make it.

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