What Investors Are Really Looking For
Every investor has different criteria for what they're looking for when they consider funding a startup. Truth be told, investors can change their minds from one potential client to the next. While there is no science to attracting the attention of any one investor, there are some key steps you can take to make yourself stand out from the hordes of other business owners seeking capital.
Investors want you to:
- Be completely honest. Especially if you are facing any business challenges, let investors know that. You don't want to hide anything that could come out later and kill the deal.
- Do your homework. Shuki Lehavi, the founder and CEO of Gumiyo, recommends that you learn the value an investor brings to the table. That goes beyond just providing capital. They should advise you, expand your network and benefit you in other ways. That's why you should research and contact only those investors who make sense for the type of business that you run or want to build. Look for investors who are located near you geographically, have invested in startup businesses or in businesses similar in size and profitability to yours, or who have a history of investing in businesses within your industry.
- Know your business. Investors are going to ask you many questions about the state of your industry: projections for the business, your competitors, your target customers and what they can afford, production requirements and costs, how you will market your business, and so much more. You need to know the answers. If you don't, many investors will worry that your business isn't ready for funding. Seek advice from other entrepreneurs who have had great success starting businesses, and ask about challenges you'll face and unexpected issues that might come up. Then develop and hone your business plan until you feel confident that you have all of your bases covered.
- Commit to the partnership. Throughout the entire "courting" process, you have to show that you can handle feedback and criticism, that you are flexible and that you will adjust your idea for the sake of the business.
- Explain how you will use their money. Outline what you plan to purchase with the money, and detail how that purchase will benefit your business—and what kind of profit boost you will realize as a result of the investment.
- Define your competitive advantage. Any investor worth his weight is going to scrutinize how you stand up to current and new competitors in your industry. You must be able to show clearly why your business has a distinct advantage over anyone else in the market and how you can maintain that competitive advantage for years to come. Arve Hanstveit, who has been an early stage investor since the mid-1990s, says that his No. 1 criteria when he considers an investment is whether the product or service is "a game-changer." He wants to see something smarter, cheaper or more efficient than anything that is currently on the market. Be prepared to talk about how your product or services compare to others in the market, and be honest about advantages those products or services have over your own. Investors will do their research and will know what you are up against, so don't exaggerate the benefits of your offerings.
- Prove public support. You might believe that you have the best product in the entire world, but if other people—or rather, customers—don't buy-in to it or purchase it, your product is worthless. Investors want to see evidence that people believe in your product. Bring in a panel of experts to review your product or service, and share their positive insights regarding the value it brings to the market. Or allow a group of customers to test your product and offer reviews that you can share during your investor presentation.
- Build a strong team. If you are looking for capital to grow your business (rather than to start one), the people you employ can make a difference. Investors want to see a collaborative, hard-working team that brings experience, expertise and skills to the table. Kyle Murphy, a technology CEO and investor, says that his main concern is "the jockey, not the horse." The horse is the business, and it will change regularly. However, the jockey is you and your team, and he needs to feel that you can adapt, reprioritize, stick together and be successful even during challenging times.
- Possess momentum. Show that you are determined to start your business or take it to the next level—even if you don't receive a penny of the investor's money. That could mean hiring staff, moving forward with developing a prototype or releasing a minimum viable product. You may need to contribute your own money or qualify for other loans to get things rolling before you speak to investors. If you can prove that you can gain traction in the market without an investor's money, you increase your chances of getting funding later.
- Create a plan for growth. Rick Smith, co-founder of Crosscut Ventures, expects to see a plan for growth. Once the money is allotted to you, what are the next steps to growing your business? Will you build from within? Expand your product line or geographical reach? Or are there other businesses in your market that should be acquired and merged with yours? Are there opportunities to scale your business? Present the long-term big picture for your company.
- Stay in it for the long haul. Most investors want to see you grow your business. Even if they expect you to start small, they ultimately want you to become big. The bigger you are, the quicker they see a return on their investment. Show that you have the same goals. Don't indicate that you are interested in being bought out, flipping a business or making an early exit once you get the business going. Most investors don't want to risk doing business with someone who is not committed to growing the business for the long term.