What are investors looking for in startups? 4 unmissable startup investors criteria
Category: Understanding startup investment
There’s a reason startups are called startups. These types of companies have one common trait, and that is a scalable business model that can reach high growth rates over time. This can transform into a wide variety of products or services and be specific to certain industries or markets, but startups are judged by their growth and that is one of the key factors startup investors rely on to choose whether to invest or not.
It’s important to understand that investors are looking to help the teams and entrepreneurs they back with one goal in mind: to make money. This doesn’t mean that ethics and morality don’t come into play when investing as a business angel, Venture Capital firm or through equity crowdfunding platforms or syndicates. They do, but investors want to make money and that’s why they invest their money in risky and technology companies.
What do investors look for in startups?
There isn’t an investment thesis for every single investor out there, but in most cases it all comes down to understanding what variables will make a particular project or startup attractive for an investor. The team, the product, the size of the market and the stage they’re at.
4 unmissable startup investors criteria you should meet, no matter what your startup is about
– Team: Mark Suster said it best a while back in his ‘The four main things that investors look for in a startup’ article when he wrote that “for any investor it takes a miracle to get investment dollars out of them if they’re not impressed with the team”.
The people behind a startup are going to define its future and they will be the ones making the decisions that will push a company one way or the other, thus the importance that investors put on teams and founders. There’s no written rule that applies to every single startup, but investors have often said that a combination of the following is a good start:
* Technical and business-oriented co-founders
* A team that complements each other
* Previous experience in the industry they are facing
* Co-founders trying to solve a problem they previously had
– Product: judging a product at the early stage, when all you have is a working prototype, is not an easy task. If the startup’s product is not supported by valuable metrics, investors will have to make a decision to invest or not based on their gut feeling or previous experience in the space.
This does not imply that a good product is enough to attract investment euros or dollars. There are a lot of examples of startups that have launched good products that have failed at getting users and traction. Sometimes the cause behind this is that the products themselves are not solving a significant problem -or are in search of a problem- or that it’s not the right time for that product (like Twitter in 2005).ç
The characteristics that startup investors pay attention to: team, product, market size and valuation.
– Size of the market: what drives most investors is finding startups that at some point can become big, large companies to get a significant return on their investment. Excellent returns for investors are those that can pay back ten times the amount invested, and only high growth and scalable startups are able to reach those levels.
The size of the market that a startup is in might influence its future growth. An interesting aspect about this is that the size of some markets is not clear at the early stage, when a startup is just getting launched. Airbnb and Uber are two clear examples of this; the former probably never expected to steal clients from hotels and the latter is fast becoming a logistics company that goes beyond the transportation of private individuals.
– The stage (in other words, the valuation): the valuation that an entrepreneur chooses for his or her startup affects how attractive it might seem to investors. In theory entrepreneurs will look for high valuations in order to own as much as possible of their companies; investors, the exact opposite.
If a business angel or Venture Capital firm considers that the risk associated with a startup is too high, it will try to own as much as possible of that startup, thus pushing down its valuation. Another risk associated with startups that raise high valuations is that they might have a hard time justifying future rounds of financing at even higher valuations.
These four variables will probably affect the investment decision of an investor and will determine how interested -or not- they are in your startup. Understanding them is key.
Finding and analyzing the investment criteria of investors and funds is not an easy task, and that’s why every investor in Startupxplore has the chance of specifying their criteria in order to facilitate life for startups and themselves.
Entrepreneurs: not every single startup needs external funding
Entrepreneurs often complain that there’s not enough capital in the startup market, citing that as the reason for investors not being interested in their startup. That might be the case in some situations, but if you talk to VCs and business angels they will usually give a different reason: “Startup founders don’t understand that our goal is to make money and that not every single startup needs or should receive external funding”.
This correlates to what we said at the beginning of this article. Investors are in the game to make money and pay back its limited partners, and if they consider that a startup will not be able to grow enough to justify an investment, they won’t invest.
What is important for entrepreneurs to understand is that the fact that they can’t raise external funding doesn’t imply that their startup can’t grow and be successful. Startups such as Craigslist, AppSumo, Github or Braintree grew with no external money and by the time some of them received funding from institutional investors they were already big companies with significant traction and revenue.
Investors are a key part of the ecosystem and can provide the capital that many startups needed. That said, they are always looking for a return on their investment and for exceptional teams and products. Something that startups should take into consideration when approaching them.