What do investors look for in a startup?

September 10, 2021

The size of your market, your product offering and strong plans for growth are just some of the things that investors are looking for in a startup. Here are 8 points to help you impress the right investors.  

What will a potential investor be looking for when considering investing in your startup? 

1. A great product or service

Investors will likely be looking into other startups at the same time as considering yours, so you need to be confident that your product or service is a market leader (or have a convincing plan to make it one). You’ll have competition from other startups, so think about what sets you apart from your competitors. 

  • Why is your product more likely to succeed than theirs? 
  • What makes you a better investment than them?

Remember they are often investing in more than just the product - they may be investing in you and your co-founders.

Investors will be keen to see where the gap is in your market. 

If there is a big need out there for your product or service, investors may see more chance of a return on their investment. 

They may also want to know that there are people out there who need the product. If the market is relatively small or is already populated with competitors, investors may not see the potential for success.

Ask yourself; what issues do your customers face and how does your product solve them? 

If you have a clear answer to this, then you are starting in the right place. If not, make sure you get these points established before you look for investment, as this will be one of the first considerations for an investor.

2. Potential to grow

If they are going to invest in your company, they will want to know that there are opportunities for growth and expansion. With this in mind, investors will want to see proof that there is room for growth for your product and that plans are in place to accommodate this. In addition, the business should have a strategy for how it intends to grow. 

If you can be clear about potential growth targets and identify the things you need to get there, then it makes the decision to invest an easier one. 

This can include:

  • People - what expertise do you need in order to take the next steps?
  • Competition - who are they and how will you stay ahead?
  • Processes - what do you have in place to ensure a smooth running of the business?
  • Pricing - how can you stay competitive while making a profit in future?

Investors will want to see that your business is progressing well and gaining momentum within the target market and that you are thinking ahead. 

Your plan for growth can include sales and marketing strategies to help promote and sell your product or services. 

3. A passionate and dedicated founding team
 

Investors don’t just invest in a product, they will also be investing in your team. They will want to know that they are investing in a knowledgeable, driven, and expert team with a passion for making the business a success. 

Not only that, but they will want to see that you work well together, co-operate and have formed solid foundations for your startup.

It’s a good idea to have examples showing how you work well as a team. Think about challenges you may have faced and how you overcame these as a team, as well as times when you succeeded (or even failed) and how you operate day-to-day. 

This gives savvy investors an idea of the people behind the business and the role they can play in it’s future success. 

It is also essential to consider your team and whether the founding members are in it for the long haul. You may have expertise in different areas already, such as research, development, sales and marketing.  Existing systems may already make the business run smoothly.

Investors will want the reassurance that the startup will have a solid, stable, and consistent foundation. The people who are already there are a big part of this.   

4. A sustainable and ethical businesses
 

A business that is ethical, with strong links to the community and a positive impact on the environment is very investible. Younger consumers are supporting businesses that focus on being “ethical” with generation z forcing companies to think beyond their profits.

This means that for many consumers of your product or service, your impact on the environment, approach to charity and community or even how your workers are treated, are far more important than cost. 

Sustainability can enhance the reputation of a business, giving it greater longevity and building up loyalty among consumers. It can also give you an edge over competitors who may have less of a focus on sustainability

The global coronavirus pandemic has increased the focus on tackling social inequality and climate change.

It is estimated that demand for sustainability data could drive the size of the data and service market to over 5 billion USD in the next five years. This trend is also relevant to UK startups.

How ethical and sustainable is your startup? 

5. Strong financial  plans

Investors will want to know where their money is going. There should be clear plans for managing the financial aspects of the business to ensure you do not run into financial trouble and are ready to face any issues that may arise. Having a cast-iron financial plan is crucial. It can often include:-

  • Forecast turnover and profit - You should have figures showing the amount you estimate to earn from your product and how much of this will be profit. These will demonstrate to a potential investor the rate at which your startup will grow.
  • Forecast cash flow and balances - You should have a clear idea of how you will balance money coming in and out. 
  • Considering any risks - With every venture, there will be an element of financial risk, no matter how optimistic you may feel about the business. Therefore, it is vital to acknowledge that some of your assumptions may not materialise.

Be honest about your finances, as most investors would prefer you to be upfront about the figures and any potential risks, rather than sugar-coating it. 

Any savvy investor will appreciate transparency, so long as you have plans for how you intend to deal with any risks and have the figures to back up your projections. 

Having comprehensive financial figures also shows an investor that you understand the business’s financial aspect, which will make you more attractive as an investment opportunity. 

6. Clear plans for the use of investment money

Once you have decided what you would like from an investor, you should have clear plans on the amount of investment you need and how you intend to spend the money that is being invested in the business. 

If plans seem unclear, then an investor is unlikely to give away their money to your startup (or the full amount you are asking for). 

Clear plans on where the investment will go can help the investor to understand when they might see a return on their investment and the role they will play.

Why do you need investment in the first place? 

Working capital can be much more cost effective for businesses than applying for a loan and can help with startup costs such as the gap between orders, sales or signups and any outgoings such as paying suppliers, staff and running costs. 

This is a great way of providing a “cushion” for your business and prevents cashflow issues.

As the business grows you may also need to purchase additional assets such as machinery, vehicles and IT equipment.  

7. Risk assessment and damage limitation

No matter what, all startups will have an element of risk. 

You might think it best to hide your startup’s risks from a potential investor for fear of putting them off, but that is a bad idea. 

Investors may go looking for risks before investing, so if you hide them, rather than being upfront, this will seem more suspicious and could put them off.

Despite all your best efforts, you can never entirely eliminate the risks but what you can do is be aware of what they are and how best to deal with them.  Having this in place will show investors that you have thought hard about all aspects of the business and are ready to deal with problems that may occur.

Communicating clearly and openly with investors about any risks and how you intend to minimise them will help build trust.

Risks might include changing customer behaviour, increased competition or even a global pandemic!

8. What are you looking for from investors?

In an ideal world, you might have interest from more than one investor.

Can you make it clear to investors why you would choose them?

When focusing so much on making sure you are ticking all of the investor’s boxes, it can be easy to forget that you should also consider what you are looking for in an investor. 

You might be looking for an investor who does more than provide funding. An investor that does not suit your business needs could cause issues further down the line. 

How can you help each other?

Knowing what you want from an investor from the outset can save you time with every pitch, proposal or meeting as you’ll know exactly what you are looking for and can make faster, more informed decisions. 

It could be that the investment will focus on the connections that the investors have to help your business grow and therefore they’ll become an integral part of your growth.

They might also have a great track record of helping startups like yours to flourish.

For tips on securing investment funding and the legal considerations, get in touch here.

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