5 things investors look for in a founder/startup before investing.
After all, said about doing proper valuation, and what else to put in place before fundraising, there are a few other things investors hope to see before putting their funds into a business. Startup investors are charity foundations looking to give out money without expecting it back. They are always looking out for one or two things to convince them that investing in your business will not be the same as pouring water into a basket.
Significant market size
Investors consider the market size available for the audience you want to target as well. If you watch the Dragons Den show, you may have heard the ‘Dragons’ tell a founder something like “I just don’t think there are enough people who want your product” or “this product is not something I see going all big. The market is too small”.
Nobody wants to back an excellent product that only 200 people need in the world. It is even worse if it is a one-off product, where consumers buy once and do not need to buy again for years. If you refer back to a previous post on reverse product development, you will see that this is one of the things you ought to have covered during your market research. Do you have a market large enough to sustain the business? The number of customers/potential customers and the frequency of purchase are going to be key factors that can work for or against you.
Remember what we said in the post about preparing your pitch. When you stand before investors to pitch your business idea, they look beyond what you are saying. Investors look at your passion and ambition and try to gauge how far it can go with the business. The potential investor wants to see signs that you as the founder are ready to make the commitments and sacrifices that the business will require through its growth stage.
You can have an excellent product, with a valid business model and impressive financial projections; but the investor perceives that you do not possess enough passion or will to push it through, they could refrain from investing. No business model, however perfect it seems, can run itself. It all comes down to the entrepreneur. In addition to your passion, your integrity, charisma, and character is consistent factor to be considered in deals like fundraising. You would hardly find an investor who is willing to put his money behind an entrepreneur who has demonstrated an erratic temperament.
Competitive advantage or product differentiator
It is highly unlikely that you are starting or running a business that no one has done in the past. And even if you are, the investor will want solid information on what your competitive advantage will be when you start having other businesses competing in the same market. There just has to be something that stands you out, and it should be valid enough to keep your customers loyal to you. Hard work is not going to be much of a USP when the competition storms the market. There should be some cultural, strategic, or product advantages you can play.
Team members with expertise
I explained this in an earlier post. An investor wants to be sure that you are not the only strong person on your team. Even if you have not established traction yet, the integrity and antecedents of the people that make up your team, say a lot about how far the business will go. It is not about having a team of 50 people. It is about their expertise and experience, and their relevance to the business. If you can, get a power team before looking for funds. But if you don’t have them yet, you can state in your pitch that these are the persons you are looking to bring on board once the funds are available.
As a bonus point, the investor will also be considering the exit strategy you have mapped out for them. Don’t try to impress them with unrealistic timelines and empty assertions. Investors want to know – How much do I need to invest? How much will I get back, and when will I get it? Your potential investors can tell when your financial projections sound pragmatic and realistic, and when they are nothing but empty promises.