6 things an investor look for before investing in a startup
Created on 28 Sep 2020
Wraps up in 5 Min
Read by 8.3k people
For those of us who watch Shark Tank, we know what it means when an investor says “And for that reason, I’m out”.
For those of you who don’t watch this show, it means that for some reason or the other the investor is no longer interested in the startup and wants to opt-out of the investment process.
It’s obvious that any startup owner would never want to hear those words. Hence, they ought to know about what an investor looks for before investing in any project and what they expect.
What investors look before investing?
Startup owners generally want to raise large funds and that too, fast. However, it may be really difficult to find someone who would be willing to invest in our business and even if we find an investor, it may be very difficult to persuade them to invest.
A person must have an excellent network to be able to find investors or must have a very charismatic personality to woo them over. But having a good network or a charming personality can help an individual or an enterprise only to a certain extent. After that, the business plan and the sales figures have to do the talking.
So it becomes imperative for business owners to understand the different factors that investors look for before they make the decision to invest.
Some of the reasons are:
1. Passion and Commitment
Before investing in any project, any investor first looks at the motivation behind the startup and tries to know the story of the enterprise and how it evolved. They want to see passion and commitment from the owner. Investors know how risky it is to invest in new business, and in case of a wrong decision, they might end up losing all their money. So, they would want to invest in something that is worth their time, effort and money.
When an investment is made, the investor is not just putting their money in the business; they are also putting their money on the business owner. It is not just monetary resources that the investor gives to the startup, but they also share their networks and their knowledge. They want to invest in someone who really believes in the idea that he/she is trying to sell and is committed to carrying it forward.
Investors also generally value the proposition more when the owner is ready to self-fund as well. This shows the passion and determination of the owner. Also, since the investor is investing not only their money but their time as well, they expect the owner to put in the same amount of time and effort, and even more.
2. Unique and Viable Business Plan
When approaching different sources for raising funds, the owner must keep in mind the viability of his/her business plan. When pitching to the investor, their plan should sound like a business plan and not just an idea. It should be something that is practical and can be implemented. A proper framework of the entire process should also be sketched out.
Other than that, the business proposition should be something that is new and innovative. It should be something that provides a solution to a problem. Companies like Uber and Flipkart became successful because they identified a problem, and they provided an easy and convenient solution to it. So, this is something that any potential investors definitely look at.
3. Market Opportunity
The investor would want to know everything before investing in the startup. So, they would also want to know the target audience of the product or service. They would also want to see the size of the entire market and the total number of customers that can be reached.
If the intended market size is not large enough, then the investor would not want to invest as they might not get enough returns from the investment. It has to be kept in mind that the business should run for the long term. The business may not sell in the entire country or the entire state, but the investor needs to know that there is potential for it to grow.
4. Investor Relevance and the X-Factor
When an investor invests, they would want to give funds to a company that they connect with or that they understand. They would want to provide funds to a startup which is related to their background or previous investments.
For example, someone who usually invests in tech startups would probably not want to invest in a product that is looking at retail distribution. So, the startup owner should do sufficient research before approaching an investor.
Selecting the right investor would help the owner is not just getting the necessary funds, but it would also help them in gaining knowledge and experience from the investor.
There’s something also known as the ‘x-factor’ in funding. This is when there is some click between the investor and the startup owner, and due to this reason, the investor gets interested in the project and decides to invest in it.
5. Gaining Traction
The investor should see that the owner has already started working on the business model and that there is some sort of engagement with the target audience and the customer base of the business.
The investor should know what kind of sales the business has already had (if any) and what numbers are they hoping for in the future. The investor needs to know the future prospects of the business and whether it is actually something that can be sold for the long term.
Startup owners should back their business ideas by giving appropriate data, and relevant numbers as investors would want to know how much money they would get back and how fast they can expect it.
6. Team Structure
Investors also look at the team that handles everything in the startup. They want to know how many members are there and what departments they belong to.
This, however, does not mean that the investors would only invest in startups which have a large number of employees under them. They just want to evaluate how well the operational efficiency of the team is and how well they can execute their respective roles.
What should the Startups Do?
In conclusion, any startup owners should keep in mind all the above factors and select and approach the investors accordingly.
These factors are important because investors can not only help enterprises with resources and funds, but they can also share their knowledge and business insights with the owners, sufficient knowledge. One can also benefit from the investors’ network and experience.
All in all, investors are a boon for any startup owner or any business, for that matter. It is important to keep them satisfied and ensure that their trust in the invested business stays intact. A business owner should prioritize its investor’s trust and make sure that their expectations are taken care of.
How was this article?
Like, comment or share.