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Succeeding in locking down an investment is really about understanding what an investor is looking for in a company and its founder to ensure value creation and a return on investment.
We look at what a hypothetical investor would look for in a business – regardless of what stage it is in – as well as what questions they might have and what startups need to have ready for them.
The starting point for any business is a good idea. An idea is worth starting a business over (and worth investing in) if it solves a particular problem for a consumer or fulfill a need or desire for them or improve on an already successful idea. The market for that product or service must also be large enough to sustain a growing business.
To answer this, careful research and testing on the product or service must be done – which will include analyzing its feasibility and the costs required in time, labor and money – and conducting extensive market research to gauge market size and potential, barriers to entry, as well as spotting any existing or potential competition.
You can’t have a business without a product and service that is tested and ready to go to market. Startups in the founding stage and looking to prototype a minimum viable product (MVP) could seek out angel investors. But at the seed stage, investors will expect an already existing MVP and a strategy for taking that product to market.
Read more about: Angel Investment Basic Guide
Nothing screams potential success to an investor better than a solid track record. Any investor will expect to take a close look at previous financials – including income statement, balance sheet and cashflow statement. They will be looking at things such as net income, revenue and sales growth, gross margin, customer acquisition costs, cashflow, assets, and costs of goods and expenses.
It is crucial that these figures are independently audited and can be verified. Solid figures will go a long way towards convincing an investor to buy in, and if solid figures don’t exist yet, there needs to be an explanation as to why, and how the investment will help propel them forward.
Investors will be looking at these to gauge the potential of the business they are investing in and to judge whether it is sustainable, scalable and potentially profitable.
They will want from the founder a clear vision on where they see the business going, along with goals, targets, and KPIs, and a clear strategy for how to achieve them.
They must also see projections for their sales and financials going forward. They will also want to know that the founder has made contingencies if the assumptions that these projections are built-on don’t come to pass.
Many investors will choose to forgo much of what we’ve previously mentioned if they have faith in the entrepreneurs and their management team.
It is incumbent on the founder to demonstrate why they are the right people to grow the business, including the team having the required background and experience as well as demonstrable proof of their ability to execute on the strategy.
It is important for an investor that the startup they are investing in is on secure legal and regulatory ground. Investors will want to make sure that the venture has no encumbrances or other issues.
These issues include things like lawsuits, disputes with previous founders or investors, not owning the IP for their product, not having the right licenses, permits and other regulatory requirements.
It is crucial for entrepreneurs to understand who the investors they are pitching to are and what they could add to their portfolio to see if they are the right fit. Doing background research on the investor and understanding what businesses they tend to gravitate towards in which sector is crucial for this.
It is also important for them to know what they can get from an investor beyond their financing. This could be experience, mentorship, connections, synergies with other portfolio companies and providing functions and services they may lack.
Investors are ultimately looking for a good deal – one that grants them a decent return for a reasonable cost and one where their rights and obligations are clear and secure.
This includes giving them a reasonable valuation that can be backed by all what we discussed previously.
They will want clarity on what their rights are as investors and how you plan to fulfill those rights and obligations. And they will want to know the paths they have to exit the company and sell off their stake.
All what we previously discussed can be measured and quantified to some degree. But there are somethings that just can’t be measured but can go a long way to convincing an investor to part with their cash. These include things such as the business having a great story and a passionate team as well as a charismatic and marketable founder.
Disclamer:
This post is for educational purposes only, and the Firm does not directly or indirectly provide these services.
