What investors look for in a startup | Ali Akram
It’s a harsh reality a lot closed startups in their childhood. Two common reasons for failure are that they failed to meet a market need or did not attract enough financial investment to sustain their business. Sometimes these two reasons can be linked.
If your startup fails to convince investors that its products or services can meet demand, the investment may be harder to secure.
Let’s look at some common sources of investment:
● Family and friends: Some of the most successful businesses in the world have received a boost from the pockets of friends and family. Jeff Bezos, of course, accepted around $300,000 from his parents to start Amazon. To avoid embarrassment, treat any investment by people you know as a documented business transaction, with the risks and rewards clearly defined.
● Traditional banks: Major banks are the most convenient sources of financing. However, they may be risk averse and may consider several measures.
● Online lenders: Many startups turn to online lenders for help after failing to secure funding from traditional options because these lenders can secure quick loans. However, some online lenders hide predatory clauses in contracts to trap startups and other small businesses in debt traps.
● Angel Investors: People with a net worth of at least $1 million and an annual income of $200,000 who invest their own money in startups are classified as accredited angel investors. Accredited angel investors can invest in your business at any stage and can leverage their personal experience to provide mentorship.
● Venture capitalist: Venture capitalists typically put an investor’s money into a startup that is already somewhat established. Venture capitalists typically invest more money than angel investors, but expect a bigger return. They may also have more requirements than angel investors, such as a seat at the directors’ table.
Many entrepreneurs start with personal savings before looking outside to send the right message to investors. For example, Regan McGee, developer of disruptive real estate market Nobul, started his business with 15 years of personal savings. With the funds, the real estate maverick created a product demo and mobile app that subsequently impressed real estate agents, developers, and brokerage owners.
Your startup must also have strong sales management. A charismatic leader with a strong vision is more likely to appeal to investors successfully. Presenting to investors who understand your industry is also helpful.
Additionally, investors will be looking for a strong investment case. Consider practicing your pitch with your partners before approaching potential funders. Investors will also want to see a solid business plan with clear financial plans and adequate market research. Above all, they will want to see a strong value proposition.
In an interview with Superb crewMcGee shared that “A key element for any business venture is the ability to meet a need.”
Some investors also want to see a company exit strategy. Simply put, it is a plan for an investor to liquidate their stake in the startup in the future in order to make a profit. The exit strategy should have a timeline and a forecast of return on investment.
Although investors generally invest more money in companies, they also invest in less of businesses. With competition for investment getting tougher, your startup needs to have all its ducks in a row before approaching backers. After all, you might only get one chance to impress.