Steering through the globe of startups can be terrifying if the entrepreneurs do not have the proper financial aids. Although most of the entrepreneurs arrange financials on their own in the early stages of the startup process, it is the entry of investors that take the startups to a succeeding level.
Investors are shrewd when it comes to investing in a startup as they always want their investments to be mature and successful. Hence, it is important to understand what the investors are looking for in startups before they invest their time and money.
A Well-Defined Business Model and Business Plan
Having a complete, credible, and clear business model is very important for any start-up as every investor believes that any start-up without a concrete business model is on the trail to failure. The business model is a structure explaining how the business operates and makes money.
Investors want to know that you have both a vision for your business also a plan to attain your goals.
In the business plan, investors want to ascertain things like financial projections, detailed marketing plans, and specifics about your target market.
Having a well-defined business model demonstrates that the entrepreneur knows about the market and is ready to take the step forward. Market research, idea validation, building a prototype, validating that prototype, and testing the model in a sample market is important to validate the business model.
A business plan, on the other hand, is a strategic plan for a business’s future. It states the long-term goals, and the business of the route will take to achieve those goals. An investor always wants the most out of his investment and invests only in a start-up that has its priorities straight and a business plan in line.
Investors also want to check that you are achieving product-market fit. Product-Market fit means to be in a target market with a product that can satisfy the market.
Essentially, product-market fit is when customers understand and use your product enough to acknowledge its value. That is what investors want to see! They want to ensure that a big number of individuals understand the value of your product/service and want to use it.
Innovative ideas are crafted each day but fail to capture the market as anticipated. Preliminary market research and understanding is essential for the success of any startup. It provides informative and valuable insights into the market share, number of competitors, consumer personas, financial margins, etc.
If the market you plan to enter is saturated, monopolized, or relatively unprofitable then investors will quickly dismiss any possibility of providing funding. The bigger the obtainable market size, the more are the chances to get benefit from economies of scale in the future.
You will need to present a strong understanding of the intended market.
- Is the market at maturity or in the decline stage?
- What are the barriers to entry?
- Who are the direct competitors?
These are several questions for which you will need to prepare insightful answers.
For existing or long-standing markets, you will need to persuade investors how your business differs from others or what added value your organization can give that others cannot. For brand new or emerging markets, you will need to provide supporting data that reaffirms the market growth, sustainability, and driving factors.
Complete market competency is one of the valuable assets your organization can leverage to realize funding.
Experienced, Invested and Passionate Founders
Investors have a vested interest in the management team that will be bringing the concept to reality. An experienced team provides investors a greater sense of security than new or inexperienced founders. There are more confidence and assurance that accomplished founders will better manage the funds provided and elevate the organization that they represent. It is a standard belief that a competent team can uplift an inferior product or service, but an incompetent team can do nothing with a superior product or service.
Investors want to see a major degree of personal investment. This is not exclusive to personal capital. They need to examine your blood, sweat and tears poured into the business because if you will not invest, they never will.
Lastly, investors want to work with those that are truly passionate about their business. A founder who is fueled solely by profits is destined to fail, as they are going to simply look ahead to the next venture.
However, a founder who is dedicated and devoted to the prosperity of their organization and accomplishing their organizational goals presents a much more appealing opportunity for investors.
Momentum and Traction
Investors want to see more than just a good idea. They want much more than a great pitch deck or a solid business plan. they need to see that you have got some traction behind your idea. They not only interpret the financial feasibility of the startup but the potential for growth too.
They hear many pitches each year, and very few of those pitches get beyond the idea stage. One of the most effective ways to secure funding is to point out that you have already got significant momentum.
What kinds of traction are investors looking for?
To any startup or investor, momentum or traction can be defined in any number of ways but the key component here is to exhibit some extent of progress. Month-over-month organic growth, continuous revenue growth, increased number of users, expansion of staff, technology development, etc. all constitute progression.
Things like building a product with bootstrapped resources, signing early customers, or hiring and recruiting strategic talent. These all point to the fact that you are both passionate and resourceful. It proves that you are committed to making your idea into a reality.
Keep in mind that stagnant organizations seeking funding will have a more difficult time receiving an investment than ones who appear to possess an upward trajectory, even though the former is further ahead in the business cycle.
Are you building the next Facebook or OYO or OLA? If so, why? We do not need another Facebook. We want something that is distinctly different and will offer you a competitive edge over the blue behemoth.
Investors want to see that you simply have some kind of differentiator from your competition. If they are not already aware of your competition, they will easily leave and find it. Before they invest in you, they want to see some sort of proof that your competition cannot easily beat (or replicate) you.
Investors check out the fact of how much you will convince them to require a leap of faith. Empathy based on similar educational or work background trusted co-investors, instinct, or maybe impressions can prompt investors to believe the investing decisions. The most effective way you can pass this is by being truthful and assured while having a basic knowledge of the background of the investors. A startup may not be on par with other businesses but sometimes the X-factor could make a difference.
People often misunderstand the term ‘Exit Strategy’. The ‘exit’ in exit strategy refers to the ‘money’ and not ‘exit of the entrepreneurs’. This suggests that the startup brings in the money and therefore the investors get the money out. This is often why every investor looks into the exit strategy of the startup. The returns are provided by the exit.
Investors need a solid return on their investment, which means you need to have a firm exit strategy in place. Even though they are willing to wait and make a long-term investment in your company, they still need to know that at the end of the day, they are aiming to be getting a big return.
Investors will probably want to understand both your strategy (acquisition, sale of shares to principals, etc.) also as your timeframe for the exit. If you cannot provide both, they will probably be hesitant to invest in you.
*Getting investors to invest will be difficult with many startups pitching for funds. Having the above-mentioned factors into account will help the entrepreneurs achieve their objectives quickly*
If you are a startup or SME and looking to raise funds, we can help you out and take care of all the documentation and processes. Do get in touch with us so that we can help you grow!
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