While most startups will not succeed, yours might. A variety of factors can lead to failure, but much of the time, it’s because they simply ran out of funds. Raising capital is a challenge for all businesses and many entrepreneurs fail to realize that investors have set criteria when evaluating a company as a potential investment opportunity. In this article, we’ll look at six reasons why an investor will say “tell me more” to your company.
1. Your Company Has Traction
Traction equates to forward progress and demonstrates to investors that your company has the ability to grow. Investors want to see companies that have built a customer base, generated a certain degree of revenue and achieved other milestones that indicate a company is capable of success with the resources that are currently available.
Investors want to work with entrepreneurs who can develop innovative solutions to the problems that their businesses face. What they don’t want to see is an idea with almost no follow through. Investors tend to shy away from entrepreneurs who cannot provide legitimacy to their companies. If your company is already accomplishing things now, that’s a sound indication for what is to come.
2. There’s Social Proof
Social proof is a phenomenon where people observe and copy the actions of others, believing that those actions represent the proper way to act. How often do you read product reviews before purchasing something? In all of those instances, you were looking for social proof. It’s herd mentality at its finest (read: safety in numbers), and it’s an effective method to lower doubts and generate support for your company.
Investors who perform thorough due diligence want to know how your customers respond to your product or service. They want proof like user reviews, testimonials, case studies, and media mentions that show your company is legitimate and would be a worthwhile investment. This type of information can raise an investor’s confidence in your business.
Investors also want to know if you have a lead investor, or someone who was the first to commit to investing in your company. If you’re the lead investor, it certainly demonstrates that you have enough confidence in your company to put in the sweat equity to get it running; however, having an outside lead investor plays far more into the social proof element as it indicates to potential investors that someone else has likely conducted due diligence and has enough faith in your company to provide you with capital.
3. Your Team Fits Your Company
When investors evaluate a company, they’re not just looking at its performance; they’re looking at you. An investment in a company is an investment in its people. Investors want entrepreneurs who have experience in the startup world, know how to efficiently manage others, and have a solid background in their industry. What they don’t want to do is support your learning curve in these areas.
Finding a team that fits your company is essential to its success. You want people who are passionate about achieving your company’s goals and have the knowledge and skill sets to make them happen. Hiring an expert in manufacturing is great if you’re producing industrial supplies, but will not add value if your focus is on software development.
You and your team also need to be able to take advice, accept criticism, and let others take control of certain responsibilities of the company when warranted. Investors often find it difficult to work with entrepreneurs who maintain a “my way or the highway” attitude because it displays an unwillingness to work with others. This can be indicative of an unbalanced and potentially toxic company culture that can be disastrous to the company’s success. Instead, investors want to see that the members of your management complement each other’s strengths to form a well-balanced team.
4. Your Company Falls Inside an Investor’s Parameters
Many entrepreneurs make the mistake of using “spray and pray” tactics when they first start engaging investors, where they reach out to any and all investors they can find. As a result, their deals are largely ignored simply because they fall outside of many investors’ interests. An investor based in San Francisco with a track record of investing in medical device companies will almost certainly have no interest in an office supply company based in Boston.
While you’re conducting your fundraising rounds, you need to research the investors you plan to contact prior to doing so. You’ll need to find information on what types of companies they typically invest in, the average revenue stage of those companies, and if the investor only focuses on companies in a particular geographical area. If it’s obvious that your company falls outside those and other criteria, don’t bother making contact.
5. Your Have Done Enough Market Research
All markets are dynamic, so what held true a few years ago could be completely irrelevant today. It is absolutely critical that you are thorough with your market research and are able to convey it concisely to investors. If your market research consists of only a handful of Google searches or a few casual conversations with someone who is “in the know,” then you might want to reconsider engaging investors. You probably won’t be taken seriously.
When conducting your research, keep in mind that there several factors you will need to analyze such as the size of your market; its growth potential; demographics of your potential customer base; social, political, and environmental factors that could affect market trends; customer spending habits and patterns; perceptions of similar products and services; and information about your competition.
Smart entrepreneurs know that they have competition and don’t hide this information from investors. Be sure to focus on explaining why your product or service will have a competitive edge once you go to market.
6. Your Financials Are in Check
If your cash flow statements, balance sheet, financial projections or other financial documents and information should be complete and add up, it’s likely that an investor will not have doubts in your ability to bring success to your company. Investors need to know the financial health of your company before they can make a decision.
Entrepreneurs are generally an optimistic bunch, which is a much-needed trait in a startup environment, but many will often present extraordinary projections that are frankly, impossible to expect. Including realistic projections with justified assumptions will result in investors being more likely to believe your projections
Finally, keep your valuations realistic. Every entrepreneur has an attachment to their business, but if you base your valuation on emotional ties or intangibles like branding, you will likely hurt your chances of receiving funding. It is essential for you to have an accurate and realistic valuation of your company. Once a potential investor sees an justifiable valuation, they will be more likely to accept that you are ready for the next phase.