What investors look for before investing in a Startup

[Note: This article has been written keeping in mind early-stage startups and not the established ones. By now the latter already know what the fuss is all about.]

The term ‘elevator pitch’ was coined for a reason. A top-shelf investor quite literally has no more time to give you than what it takes for an elevator to go up. Be it angel or VC-backed, they receive hundreds of startup pitches every day. Some at odd times, others odd places, as private as the urinals even.

In such frenzy, how do ensure your million-dollar idea (or fast-growing startup) catches the fancy of these investors, and makes a strong impression to drive them towards investing in your venture.

For starters, you can help your cause by knowing what investors are looking for in startups before investing their time and, more importantly, their money.

Even though there’s no set criteria as every person may have certain unique pointers; nonetheless, here’s a list of 8 most important things an investor invariably looks for before signing the dotted line.
 

8 Things investors look for before investing in a Startup

 

1. Market Size

How big is the size of the pie? If your product caters to a new emerging market, the investor would prefer it to be big to justify their risk.

Investors ideally look for companies that can grow quickly and achieve economies of scale. Because such companies offer the maximum potential for huge gains over the initial investment. For that the market size has to be large.

Looking at it differently, a startup addressing a genuine problem would invariably have a large market size. For example, e-commerce in a country like India offers immense scope and a vast market. Hence, you see these startups getting funded more.
 

2. Product-Market Fit

A good product by itself holds little value unless it fits the market it is operating in. In simple words, product-market fit refers to offering something that a group (market) needs.

Identifying your customer, figuring out the correct approach, and then creating the right product to fit your market is must for a startup’s success. Every investor wants to know how far you’ve cracked the code in this regard. The closer you are, better are your chances to get funded.
 

3. Team Capability

An investor would also want to know why your team in particular is qualified to do well in the industry your startup is dealing in. What domain expertise do you bring to the table, your past record in a similar position and its outcome? The compound skill set of the founding team – such as in tech, marketing, operations etc?

Another thing, however politically incorrect it may sound, but where the founders come from (education and work experience-wise) also plays a significant role is swaying the investor’s dollar pendulum. It isn’t a coincidence that Bhavish Agarwal of Ola Cabs, The Bansals of Flipkart are IIT alumni. Kunal Bahl of Snapdeal studied at Wharton. However, there’s always a Jack Ma story – Vijay Shekhar Sharma of Paytm. Hope you get the point.
 

4. Traction

Actions speak louder than words. In the vapour-like world of startups, demonstrating that the market is already responding to your product is sure to soothe the concerns of any potential investor. Additionally, if the MoM (or YoY) growth, customer retention has been steady, you can comfortably separate yourself from the proverbial chaff – the “idea” folks.

Remember, the mantra for any investor is:

In God we trust, everybody else must bring data.

 

5. Investor Fit

Just like there are a million and one startups in your ecosystem, investors too come in all shapes and sizes, specializing in investing at different stages of a startup’s lifecycle. A Tiger Global might not be the best place to raise seed money of $50,000. Therefore, what you, as a founder, also need to look for is – investor fit.

It is natural for the investor to ask, why me? Apart from the fund size, it also boils down to the matter of synergy. An investor is more likely to invest in areas they are comfortable with, have domain expertise or have successfully operated in before. This will allow the investor to engage with your startup more deeply.

Consequently, doing your research on the investor’s funding history might save you a lot of precious time.
 

6. Competitive Advantage

It is unlikely that your idea or startup is altogether unique. Even if it is, it may not necessarily be a good thing. Having competitors validates the possibilities underlying your venture.

However, competition forces you to prove to your investors why your product is better than what all others are offering. What’s the secret sauce, the differentiator that’ll outdo your competition in the long run? A patent maybe? A built-from scratch framework? Early-adoption of a disruptive technology? If yes, do you have the numbers to back up your claim?

An investor puts his/her money thinking 5-10 years down the line. For them to make profit on their investment, your product has to last that long. As your market segment matures, consolidation is inevitable and only the very best will survive in the end. Convince your investor of the same and he would happily part with his money for your venture.
 

7. Thorough Business Plan

A wise old man once said:

Idea is the sober word for bullshit.

I am kidding, I just made that up, but I totally swear by it.

An idea is just loose talk without a clear-cut business model, minimum viable product, execution plan, growth strategy, competition-factoring, targeted market and a rough timeline of turning profitable. Any investor worth his salt hears dream-sellers day in, day out. Without a well thought out business plan, you won’t stand a chance unless you can nail down point number 8.

Moreover going prepared shows your dedication and that you are in it for the long haul. For an investor nothing is worse than a potential startup looking to make a quick buck to fund their personal fantasies in the name of ‘burn rate’.
 

8. The Unknown (X Factor)

It’s like meeting the love of your life. You just know it. Similarly, if there’s some chemistry between the founder and the investor, it may just transverse some of the above points. This chemistry can be based on anything ranging from a solid first impression, mutual likeability, common education, work experience, shared passion or life experiences etc.

Here the interpersonal skills of the founder matter a lot. How he’s able to convince the investor to take a leap of faith with him. Mind you, much easier said than done. Still, quite possible. A real life example of the power of unknown would be Jack Ma of Alibaba investing in Paytm – back then, an unknown, small-time venture by a modest (read: no fancy degrees) founder who genuinely considered Jack Ma as his role-model.
 

Conclusion

As someone who knows the best about your own business, do thorough research and seek the investors that make sense vis-à-vis your startup. Pounding and hounding all kinds of investors shows lack of preparation, insecurity and most important it will be a waste of yours and their precious time– all of which will earn you a bad reputation that may be hard to shed.

Raising funds can be overwhelming, but you can get ahead of the pack if you address these points in your next pitch. Even if it doesn’t land you a deal, and just paves the way for a second interview, consider it job half done.
 
Image credit: Shark tank – DMagazine