What do Investors Look for before investing in a start-up?

Definitely, there are entrepreneurs who succeed to get successive rounds of investment. There are even unicorns which are listed after successive IPO rounds. However, not everyone is as lucky as these entrepreneurs and there is no shortcut to a proper funding process.  As per research, about 20% of start-ups in the first year of funding fail to perform well and close down. 30% of start-ups fail during their second year and third year of funding. Due to this, prospective investors are becoming more cautious about investing their money. Investors would also consider the Startup Investment Criteria before investing in a start-up.

Hence we have brought out conclusive criteria which is more of a guide for entrepreneurs. This would provide important information for a budding entrepreneur to show cause in his start-up. 

Startup Investment Criteria- What is it?

All budding entrepreneurs require funding for their idea. Giving thought of these criteria would tick mark all the requirements to convince an investor. These points indicate “What do Investors Look for before investing?” A startup or pitch deck presented by a promoter requires to be attractive to the investor to secure some form of funding. The below criteria state what key items an investor looks for before investing.

Diligence and Passion

As a budding entrepreneur, your passion for doing business and making revenue is the trick of the trade. A start-up has to show cause that they are passionate about what they do. This can easily be shown or proved by the founders. If an entrepreneur has designed a new product, then they must focus on proving that the product has some form of added value in the market. Startup founders must have passion and believe that the product that they provide would change the needs of society.

If an invention is already present in the market, then founders have to show some form of improvement in the product. In other words, the product has to be better than what is already present in the market.  As an effective Startup Investment criteria, diligence and passion have to be shown not only by the promoters but also by the team. Initially, you may consider bootstrapping as an opportunity for your product. However, when investing in your own start-up, you must ask yourself an important question “Whether you believe in investing in such a product”? At the end of the day, you would have to launch the business out of the ground using your own initiative.

Traction for Success

Having traction for success is a crucial criterion which would help the start-up to survive in the competition. An entrepreneur must prove that the product or service is marketable to the public. Apart from this, an investor would also want to know, the strategy adopted by the product when introduced into the market. Factors under this would include the consumer interest in the products.

Some form of solid proof must be provided to the investor, that consumers would be willing to use the product. The proof which is derived from the concept or idea would only convince the investor that the product has a place in the market. This is the second startup investment criteria which have to be considered by a founder.

Geographical Market Size

Geographical Market size is one of the crucial criteria for “What do investors look for before investing in a start-up”? 

When launching a product into the market, the geographical size is an important criteria for the product to succeed. If a start-up wants to consider a particular city, then outskirts of the city should also be targeted by the start-up. After state wise, the product has to be launched in other cities in the country.  

If successful, then the product can be launched in other countries. However, not all products would have a global market like Microsoft. The markets which have to be targeted would include those that have economies of scale, where focus would be more on production and increase of investment for your operations. Apart from this, your product must have some form of competitive advantage over similar products.  This would be considered as the third Startup investment criteria for successive funding.

Differentiation of Products

If you want to succeed with your products, then you must prove some form of competitive advantage is present in your products. Here the Unique Selling Proposition (USP) of the product must be emphasized and summarised to the investor.

Competitive advantage of your product can be explained to the investor using the geographical segmentation of the product or target customers which your product is launched for. As a founder you would have to explain why your product is launched in the particular locality, its significance and how it operates in the presence of competition. Using the business plan to provide examples would be suitable

The Team

When founders promote the business during successive funding rounds, the investor would want to know the strengths and capabilities of the team as a whole. Typical start-ups would only comprise of founders with few individuals. The operational plan of the company has to be presented to the investor. The investor would not only be interested in the business, but would also want to know whether experts are on-board. You have to demonstrate that your team has sufficient expertise to handle the operations. Having an expert team is one of the Startup investment criteria which investors would be interested in.

Strategy of Exit

All investors would have questions to ask themselves. Some of the common questions under Startup investment criteria would be the following:

• Will my investment be worth? 
• What will be the return on my investment?
• How much will I get back as an investment?

To answer all the above, you would have to provide statistical analysis using financial projections for the business. The following must be present when presenting such projections:

• Information and Description of the Model;
• Projections related to income statement, balance sheet and profit and loss;
• ROI Analysis;
• Analysis related to Sensitivity; and
• Use of Cash- Resources.

Such reports have to be prepared as per the month wise calculation. You can only account for shortfalls in cash considering the monthly statements. An interested investor would want to see their return on investment and this can be achieved through methods such as Capital Budgeting analysis and ROI. You can utilise a financial expert to help you scale and prepare such report.

X- Factor

Another important aspect is to see how much you connect with the investor. Though you must professionally act during an investment round. Having a personal touch would define the commercial value which you derive through this funding. This is prominently known as the ‘X- Factor’ which is important to aid you in your funding rounds. This is the final requirement for an effective Startup Investment Criteria.

What do investors look for before investing- Funding Options?

In the funding field, there are different sources to secure your funding. However, if you have your initial seed funding, then raising subsequent investment is your best bet. 

Angel Investors

Angel investors would invest their own money if the start-up and idea has piqued their interest. However, they may want some form of equity ownership and participation in the management of the start-up.

The way to convince Angel investors is by using your Pitch Deck. Funding rounds provided by an Angel investor would cover funds up to US$ 100,000. If you want to aim high, then you would require to seek funding from venture capitalists.

Venture Capitalists

In the funding field, Venture Capitalists or VCs have majority control. The amount of funding provided by VC’s are more and they may take part in managing and consulting the company. You can consider VCs for an investment, if they want to make lot of money through an IPO exit. 

Conclusion

“What do inve1stors look for before investing”? Is the main question posed by different entrepreneurs? This question strikes many individuals when coming up with a business idea. You as an entrepreneur would also have this question in mind. 

We have provided the Startup investment criteria conclusive guide to cover all your questions. It is essential for you to consider all the criteria to have a successive funding. While there may be other sets of questions which investors have, the above criteria would address all your needs before a funding process.