One question lingering in the minds of every entrepreneur looking to raise funds is what the VCs and angels are looking out for and what backs their decision in investing in a particular startup.
Photo credits: http://dilbert.com/strip/2015-02-21
Here are 5 factors a VC or angel considers while making investment choices.
Is there a need for the solution?
Aspiring entrepreneurs find solutions to problems which they think are revolutionary. What they skip is validating the idea! Investors look for a solution which solves a mass problem and not just that of your mother or family or friend.
The key is the problem and not the solution!
A solution which is born out of an identified problem is the winner amongst other solutions looking to address some problem.
Is the market big enough?
The “total addressable market” of a business is what grabs the attention of the investors. With the expectation of returns on their investment, investors want to ensure the market size has the potential for growing sales. Your aspirations of being a market leader or creating a niche market is what will excite the investors.
The product or service may not target the entire market at once but the potential and a detailed phase-wise roll-out plan is what makes it investible.
Is it the right time?
Are you entering an industry which is bustling with new entrants or one which is here to stay?
Investors want to know about the stage the industry is in at the time of your entry. If there are already enough players doing what you are proposing to do, an investor might not see you as a good fit in his portfolio unless you have an extreme differentiating factor.
Investors want to know that your team is capable of implementing and executing the idea. Co-founders need to acknowledge their areas of expertise and their limitations.
An important factor that investors take into consideration while making investment choices is whether or not the values of the co-founders match with theirs.
If your startup is built on a value-system don’t forget to mention it. The investor will be all ears on this one!
Is it Scalable?
Growing does not mean scaling, yet growth and scalability are two sides of the same coin.
Growing may also mean you need to continually add resources at the same rate that you’re adding revenue.
On the other hand, scaling is about adding revenue at an exponential rate while only adding resources at an incremental rate. The key is to recognize the strategies that help create scalable models that explode without burning through bigger and bigger investments.
Bonus – Is there an ability to exit in say, 5 years?
Investment is just that. An asset to return future cash flows. In an equity investment, an investor is looking for how he can safely get his return augmented investment. If you dont see an exit, its fairly likely he wont as well. Which brings into question something more basic, why invest?
A few ways a VC/ Angel exits:
Future rounds of financing are raised
Strategic sale at certain milestones to larger players who may have better sales bandwidth selling your target customer
Buy-back of the investment at 10-20x times their investment (this is where a good financial model comes in handy)
IPO, 5 years from today
Since, #1 & #2 are more likely, they tend consider these are good opportunities.
So go ahead. Walk into the meeting with potential investors with a positive attitude and belief in your business proposal. Drop hints that you have already factored these 6 factors. Surprise them with preparedness on these areas. Best strategy in Investment Banking is always positive surprises. Let us know how it turned out.
At Prequate, we have worked with over 300 businesses to help them restrategize and pitch to investors of all sizes. This is based on our team’s interactions and years of studying the psyche of an investor.