If you are planning to raise from a VC or angel it is critical that you know what investors look for when evaluating investment opportunities. Not only will this help you craft a better pitch. It will also force you to ask yourself tough questions about your proposition. Is our ambition big enough? Are we the right team to do it? Have we done everything we can to validate the idea and solve the problem with limited resources?
It is a buyer’s market out there. Investors see many more opportunities than they can invest in. To be successful you'll need to be strong in these key areas so that you stand out from the crowd.
A strong team is the most critical component that investors look for in a startup. It’s a bit of a cliche, but an outstanding team with an ok idea/product is going to get more attention from investors than a great idea/product with an ok team. Before any startup reaches scale and profitability, the original vision will have been iterated and improved several times. There will be tough decisions required. Do you have the right people with the right insight and resilience to spot the problems and the opportunities, and take the required action?
Ideas are relatively easy to come by; it’s the execution that is the hard part. And this comes from great teams. And unless you have some key piece of technology that no one else can emulate, your unfair advantage will most probably come from the teams background and experience.
What does a good team look like for investors?
Previous startup experience is important, particular if there are past exits and success stories. Working in startups is not easy - someone who has been there and done that is a comfort for most investors. Obviously not everybody has that experience, which is where mentors and advisors can be a big help
Domain expertise - solving a problem you have yourself or know well - is also a plus. Of course there are plenty of examples where successful founders didn’t know their market, but these tend to be the exceptions. According to Paul Graham, it is important because:
among other things, it ensures the problem really exists. It sounds obvious to say you should only work on problems that exist. And yet by far the most common mistake startups make is to solve problems no one has.
Investors look for the right mix of skills and expertise in the core team. A frequent discussion point is outsourced tech. You need to “own” your tech to be able to iterate and constantly evolve to meet customer needs. This can be difficult when you have third parties building your product for you.
And finally, the drive, the energy and the passion. Not easy to measure but it is the defining factor. Why are YOU doing this? Why will YOU be successful? So often this gets lost in the pitch, when in fact it is the most significant element in your investor proposition.
Market Size and Return on Investment
Investing in early stage tech is risky. It requires a great deal more luck than most angels and VCs would let on, which is why it is important for them to have a diversified portfolio. And why, for each investment, they need to see the potential for at least a 10x return on their money. This is so that successful investments will generate sufficient returns to (more than) compensate for the investments that die off or stagnate.
To generate such a return your business needs to be focused on a large market with plenty of potential customers. Sizing your target market credibly, and identifying what share you hope to attain in that market are good guides to scaleability.
There is a lot to be said for building a sustainable lifestyle business that makes good revenues and isn’t aiming to be a huge success. However, this type of model doesn’t really fit into the economics for early stage tech investing and requires a different model for funding.
Idea vs. Traction and Momentum
Financial investment is pouring gasoline onto a fire, not sparking it. You need to have your fire burning at least a bit.
Going back to the ‘ideas are the easy part’ theme - the proof really is in the pudding. It is very hard to raise money on an idea. And since you are an early stage startup, this means being clever about how you validate an idea, building the minimum solution you can to solve the identified problem, and ideally getting people to start paying you for it.
This is all part of doing a lot with a little. You are trying to persuade the investor to part with their hard-earned money, or forgo investing in another great company. To make a good case to them, you’ll need to show you have validated and built your product and early traction while making the very most of the small resources at your disposal. Investors want to see that you have created something that people want, and that you have generated momentum in the company and its market, taking it as far as you possibly could before approaching them for funding.
You want to make investors think - if they did all this with nothing, imagine what they’ll be able to achieve with our investment.
These are only a selection of the criteria against which you will be judged by investors. For a more complete description view our full criteria for investment committee.