What investors really look for

Just as you are doing your research on your potential investor, they are doing theirs on you. After all, it is their money – or their fund’s – and they won’t be writing you a cheque without going through their own process.

Founders often ask me what investors look for. Their investment processes — from the heuristic to more analytical approaches — will be as diverse as the investors themselves. Whatever their general approach, most investors look at six key areas when assessing whether a startup is investible:

The Team

The importance of the team and the founders cannot be overstated. Previous chapters have prepared you to be a fit founder — one with great levels of self-awareness and maturity. Investors will be sizing you and your team up. Experienced investors know how hard the startup journey can be, so they need to be convinced that the team can go the distance.

Are you a leader, and do you have a co-founder team that complements your strengths and weaknesses? They will test your self-awareness to assess whether you are coachable. This is the first thing I look for when I meet a founder I am considering investing in. Uncoachable founders are a nightmare.

Your passion is also important. Are you authentically connected to the problem you are solving? Do you care? Can you demonstrate empathy for the customer? What experience do you have in this field? Why you? They will also look favourably on prior startup experience, whether or not it was successful.

Lastly, and most importantly, do you convey a sense of integrity? Don’t bullshit investors. They are thinking about giving you a lot of money. They need to build rapport with you and they need to trust you. You need to demonstrate that you are trustworthy.

Market

Know your market. That doesn’t mean putting 57 slides in your pitch deck on market size, but it does mean knowing the key sizing statistics in your chosen market. Some investors are detail oriented, others just want a high-level feel. Have the detail available as an appendix if called for. You are looking to communicate the attractiveness of the market and how you intend to take advantage of the market opportunity.

Plans

If you have done it right, you will have completed a Business Model Canvas and a documented value proposition. You may or may not need to produce these, but again they are useful as an appendix. You will need to understand in detail and speak to your business model — your value proposition and how you will make money.

Tech

Tech is cool. It’s shiny. What gets investors excited is unique/ defendable tech or, even better, real technology that has been developed. Nothing is more powerful than a product demonstration. If you have an MVP or a product, demonstrate it early! Don’t wait until the end of the pitch.

A good product demo tells your story better than you can. If you don’t have a working product or MVP, then show your wireframes. Do not pass your wireframes off as a working product. If you don’t have wireframes, what are you doing raising money?

Proof

Proof is the ultimate slam dunk when raising capital. Nothing shuts up a sceptical investor faster than real, cold, hard customer cash! Revenue is the ultimate proof point. Predictable, growing revenue is even better. If you have this, investors will usually beat a path to your door.

If you are at a pre- or early-revenue stage, then early adopters and trial customers are useful. If there is a customer – who is not your brother-in-law – who can speak to an investor and tell them about how your product solves their problem, that is awesome.

There are a multitude of other potential proof points. What investors are trying to determine here is, ‘Has the market spoken?’ Startups are built on a lot of assumptions. Which of those assumptions has the market proven true for you?

Terms

There are heaps of great resources and books you can consult to help you understand the best deal terms. A quick acid test for a lot of investors is to ask you how much money you are raising and on what valuation.

Nothing signals an amateur founder and kills an investor’s interest faster than an unrealistic valuation. If you don’t know how to value your company, do your research on current market valuations before starting the capital-raising process.

There is certainly plenty of room for negotiation, and many strategies for maximising your valuation, but if you serve up an insane, unsupported valuation in your first meeting with an investor, they will usually put you in the ‘thanks but no thanks’ category.

Treat your investors with respect and they will do the same for you.