10 Factors Investors Use in Deciding Which Startups to Invest In
2/18/19
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President, MP LLC
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What every early-stage startup founder wants to know...what makes investors take the leap and say yes to a startups pre-seed to seed fund request?
For investors, there is no shortage of investment options being pitched today. Even those who want to get ahead and find off-market businesses ripe for funding have overwhelming choices. With no shortage of investors or money on the side, what makes the difference between a yes and no for your start up?
While there are some differences or shifts in the weight put on different factors as startups progress through various funding rounds, there are definitely some constants to understand and master if you want to start spending less time pushing out your pitch, and gain more capital flowing in.
Even though expectations may change depending on the financing cycle of your company, factors that generate interest from investors are for the most part the same.
Who You are as a Person and an Entrepreneur
This is far more important in the early fundraising rounds than later, but it is always a factor. As a founder you ought to be particular about who you are accepting as investors and co-owners of your company. Expect those with the capital to be even more selective.
Being likable is a nice-to-have. Being trustworthy is a must-have. You must also be someone they can believe in. And perhaps most important of all, you must be someone who is going to stick it out, never quit and who will make good decisions with their interests in mind.
In your pre-seed and seed rounds especially, this is about all an investor really has on which to judge you.
The Mission
If you’ve got money to invest in a company, there are enough choices in the world to find a perfect fit with patience. There is no shortage of strong companies with good balance sheets and strong history for an investor. Your startup carries more risk and unknowns. Plenty of companies will have more seasoned or well-known executives and advisors on the board.
How do you overcome this disparity? Your potential investor has to buy into the mission of your company, too. They need to believe in the problem you are solving, and the possibility of you succeeding at solving it. And they need to believe their investment will bring you closer to completing that mission.
What size is your market?
How big of an impact can your startup have in the market? How big is the total market size? What is your total addressable market of that number? Information on your market should typically take one or two slides on your pitch deck. If your slides don‘t show your market being over $1 billion, it is highly unlikely to receive excitement from larger, sophisticated investors.
Also include their estimated share and multiple on investment for a successful exit. Few can pull off the golden 100x, but what about 10x?
The Presentation
Even if you’ve got a brilliant idea, a track record of resilience, lots of talent, sparkling data that's exciting, you know your industry and you’ve got the research to prove it - you’ve still got to shine in the presentation.
That applies to your intro emails and initial contact attempts. It applies to your live presentations. It really matters when it comes to your pitch deck. Presenting is an art form.
After your show is over, you’ve got to have solid answers to basic questions from investors. Expect to be pushed to see how you’ll react, and what you reveal about your personality underneath.
If They Can Add Value
While not all investors will care about this, many investors are in a place to "give back" and seek to add value on some level. If they have other resources and connections that can scale and catapult the success of what you are doing, or even just lend some key expertise, it could differentiate you enough to receive the funding. You’ll both feel a lot better about the deal. They get significance and a return on their investment while you get funding and added resources to realize your vision.
Timing of the Market
The condition of the economy at large and overall market can be factors that affect the amount or timing of an investment. The broader economy, media spin, forecasts, personal finances, performance of their other investments, and their own timeline can factor in.
That can seem unfair and out of your control. But it is your job as founder or CEO to anticipate this and find the investors who are the best matches. Consider stretching out your funding rounds or bringing them forward for timing at the optimal moments.
Your Research
This is especially vital for new startups. It’s tragic to see how many wannabe entrepreneurs are out there every day, trying to sell something ‘new’, which is just a carbon copy of a bigger company already in the market. It’s very important to conduct basic Google searches during the business plan building process.
You can still disrupt a crowded field, or displace a bigger company (or get bought buy them) if you bring something really unique and valuable to the marketplace.
Unless you are really the only one going to Saturn, and have more advantages, talent and trademarked IP that will put you there, you’ve got to show you are bringing something unique to the table. You’ve researched. You are aware of all the competition. You can show why you’ll still win. You’ve even tested and have some social proof.
Who Else is Investing?
Especially once you hit a series A round and beyond, you’ll often find this is one of the first deciding questions you get from investors. They want to know who else is in. More importantly, they want to know who is leading the round. That alone can be the make-or-break factor.
Later in the game, investments from and contracts with VC's, corporations and government agencies can be a big benefit.
It’s not just who is investing in this round, but who has invested in earlier rounds. Even if all you’ve got are some friends and family or unknown individuals from a crowdfunding campaign, it's still important to disclose the early investors to the later ones.
For investors, there is no shortage of investment options being pitched today. Even those who want to get ahead and find off-market businesses ripe for funding have overwhelming choices. With no shortage of investors or money on the side, what makes the difference between a yes and no for your start up?
While there are some differences or shifts in the weight put on different factors as startups progress through various funding rounds, there are definitely some constants to understand and master if you want to start spending less time pushing out your pitch, and gain more capital flowing in.
Even though expectations may change depending on the financing cycle of your company, factors that generate interest from investors are for the most part the same.
Who You are as a Person and an Entrepreneur
This is far more important in the early fundraising rounds than later, but it is always a factor. As a founder you ought to be particular about who you are accepting as investors and co-owners of your company. Expect those with the capital to be even more selective.
Being likable is a nice-to-have. Being trustworthy is a must-have. You must also be someone they can believe in. And perhaps most important of all, you must be someone who is going to stick it out, never quit and who will make good decisions with their interests in mind.
In your pre-seed and seed rounds especially, this is about all an investor really has on which to judge you.
The Mission
If you’ve got money to invest in a company, there are enough choices in the world to find a perfect fit with patience. There is no shortage of strong companies with good balance sheets and strong history for an investor. Your startup carries more risk and unknowns. Plenty of companies will have more seasoned or well-known executives and advisors on the board.
How do you overcome this disparity? Your potential investor has to buy into the mission of your company, too. They need to believe in the problem you are solving, and the possibility of you succeeding at solving it. And they need to believe their investment will bring you closer to completing that mission.
What size is your market?
How big of an impact can your startup have in the market? How big is the total market size? What is your total addressable market of that number? Information on your market should typically take one or two slides on your pitch deck. If your slides don‘t show your market being over $1 billion, it is highly unlikely to receive excitement from larger, sophisticated investors.
Also include their estimated share and multiple on investment for a successful exit. Few can pull off the golden 100x, but what about 10x?
The Presentation
Even if you’ve got a brilliant idea, a track record of resilience, lots of talent, sparkling data that's exciting, you know your industry and you’ve got the research to prove it - you’ve still got to shine in the presentation.
That applies to your intro emails and initial contact attempts. It applies to your live presentations. It really matters when it comes to your pitch deck. Presenting is an art form.
After your show is over, you’ve got to have solid answers to basic questions from investors. Expect to be pushed to see how you’ll react, and what you reveal about your personality underneath.
If They Can Add Value
While not all investors will care about this, many investors are in a place to "give back" and seek to add value on some level. If they have other resources and connections that can scale and catapult the success of what you are doing, or even just lend some key expertise, it could differentiate you enough to receive the funding. You’ll both feel a lot better about the deal. They get significance and a return on their investment while you get funding and added resources to realize your vision.
Timing of the Market
The condition of the economy at large and overall market can be factors that affect the amount or timing of an investment. The broader economy, media spin, forecasts, personal finances, performance of their other investments, and their own timeline can factor in.
That can seem unfair and out of your control. But it is your job as founder or CEO to anticipate this and find the investors who are the best matches. Consider stretching out your funding rounds or bringing them forward for timing at the optimal moments.
Your Research
This is especially vital for new startups. It’s tragic to see how many wannabe entrepreneurs are out there every day, trying to sell something ‘new’, which is just a carbon copy of a bigger company already in the market. It’s very important to conduct basic Google searches during the business plan building process.
You can still disrupt a crowded field, or displace a bigger company (or get bought buy them) if you bring something really unique and valuable to the marketplace.
Unless you are really the only one going to Saturn, and have more advantages, talent and trademarked IP that will put you there, you’ve got to show you are bringing something unique to the table. You’ve researched. You are aware of all the competition. You can show why you’ll still win. You’ve even tested and have some social proof.
Who Else is Investing?
Especially once you hit a series A round and beyond, you’ll often find this is one of the first deciding questions you get from investors. They want to know who else is in. More importantly, they want to know who is leading the round. That alone can be the make-or-break factor.
Later in the game, investments from and contracts with VC's, corporations and government agencies can be a big benefit.
It’s not just who is investing in this round, but who has invested in earlier rounds. Even if all you’ve got are some friends and family or unknown individuals from a crowdfunding campaign, it's still important to disclose the early investors to the later ones.