What Investors Look For in a Startup

Investors in a meeting.

When it comes to raising money for your startup, does your business have what it takes to bring in outside investors and get a hold of their capital? 

This is a question most startup founders should ask themselves before they begin advertising their company as a solid investment opportunity. 

Whether you’ll be pitching to venture capitalists or angel investors, there are several specific factors nearly every investor will want to know about before they invest a dime in your company. Being prepared and having all of the documentation, data, and business results to back up your claims can be essential for appealing to investors. 

In this guide, we’re going to walk through the most important factors investors look for when looking for a place to invest their hard-earned money and give you a few tips for incorporating these factors into your business. Let’s begin!

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Why Are Investors Important to My Startup?

Startup companies often don’t have the funds required to start growing and rapidly scaling their company into profitability. 

While you can always take a shot at bootstrapping your startup from the ground up, some industries still require a significant amount of capital upfront before you can start doing business with clients and customers. 

Investors are important for startups who wish to take their business to the next level, whether this is by using investment funds to order more inventory, scale a marketing campaign, or hire a team. 

Certain types of investors, such as angel investors, often have extensive experience in the industries they invest in. If you decide to work with an investor who wants to mentor you and your startup’s leadership team, you can enjoy the benefits of receiving startup capital along with invaluable advice and direction. 

How Much Funding Should I Get for My Startup?

The amount of funding your startup needs to begin growing and scaling depends exclusively on your current business plan, business model, operating costs, and vision. 

Before talking to inventors, think about what your vision for growth is. How much capital will your startup require to take your sales to the next level and implement your vision as effectively as possible? 

Get together with your team and create a financial model to estimate your costs, adding in an additional percentage for overhead. Doing so lets you get a good estimation for initial costs and have a rough idea of how much funding you need to really start accelerating your growth. 

Most startups go through multiple funding rounds, including:

  • Pre-Seed Funding
  • Seed Funding
  • Series A
  • Series B
  • Series C
  • Series D and further

Pre-seed funding is often used to create a minimum viable product (MVP) and begin creating your business from the ground up. For most companies, pre-seed rounds are typically under $1 million, with most being roughly $500,000 or less. 

Seed funding is considered the “official” round and is often sought after your startup has already proved your idea and shown that there is a market for your product or service. Most seed rounds raise between $1 million to $4 million these days and are reserved for companies who have proven they have what it takes to scale, grow, and execute on their vision rapidly.

The Top 7 Things Investors Look For in Startups

When you’re ready to pitch to investors and show them why they should invest in your company, it’s important to keep several factors in mind. 

Each of the factors listed below is something your investors will likely want to know about your business, meaning you should be prepared to answer any question related to these factors in great detail. 

Do this successfully, and you just might have investors lining up at your door, cash in hand. Proving these factors to potential investors helps build trust, show them your vision, and demonstrate your ability to lead your team towards the finish line.

1. An Established Business Plan

One of the first things an investor will want to see before they invest a dime into your startup is an established business plan. Take the time to verify that your business plan is convincing, well thought out, and uses accurate information and data to make projections and predictions. A business plan serves to show investors that you aren’t just “winging it” and prove that you have a realistic expectation of growth in the future. 

Your business plan should include items such as marketing details, financial projections, and detailed research about your target market and customers.

2. Product-Market Fit

It’s a tale as old as time – an inexperienced startup founder comes up with a “million-dollar idea,” builds the product, and it completely flops with little to no sales. What gives? 

This is caused by a lack of product-market fit, which means that your product meets and satisfies the needs of an audience. When you have product-market fit, you have demand for your product and have proven that customers are willing to shell out their hard-earned money for your product or service. 

When developing your product(s), always take the time to survey your target market, ask them to use your minimum viable product (MVP) or prototype, and record all of their feedback. Do they find your product valuable? Would they pay your asking price to acquire this product? What can be improved? 

Investors want to know that your product is valuable to customers and that there is clear demand. If you can show product-market fit and provide proof with sales and customer feedback, you’ll be much more likely to attract an investor.

3. A Unique Differentiator

Showing investors how your product improves on and differentiates itself from anything else currently available on the market is a great way to earn their trust and their capital. 

If you’re improving upon a product that already exists in the marketplace, you must be able to demonstrate how your unique differentiator adds value to customers. You’ll get bonus points with investors if you can show a barrier to entry, such as a proprietary formula or patent that isn’t easily replicated by your competitors.

4. Momentum and Traction

Investors want to see that your startup already has momentum and traction behind it. Instead of just making an investment decision based on your pitch deck and business plan, you’ll be much more likely to “wow” your investors if you have proven sales and revenue numbers behind you. 

Remember, many of these investors hear hundreds of pitches every year and are often required to choose between many very good ideas. By showing them any traction your company currently has, you’ll immediately place yourself a step ahead of the competition.

5. Vision and Strong Leadership

Investors understand that the founder and leadership team of any startup they invest in is more important than dozens of external factors combined. 

Make it a priority to show potential investors your vision and your plan for executing that vision through to completion. Show them how you’ve been leading your team thus far and how you plan to lead them going forward. 

Demonstrating strong leadership potential and an engaging vision is the key to getting outside investment for your startup company.

6. The Size of Your Market

Does your market have enough customers to be profitable in the long run? If you’re targeting a small niche market that only several thousand people around the world are interested in, how will you ever be able to scale further than just a few thousand customers? 

Investors want to see that your target market is large enough to support your business in the long term and that there are enough people interested in your products or services to sustain your business.

7. A Solid Exit Strategy

Since investors are investing in your company to receive a return on their investment, you want to establish an exit strategy that gets them their money back along with a nice, hefty profit. 

Your potential investors need to know how you plan on repaying their initial investment and what plan is in place to generate a positive return over the long term. Most investors will likely ask for details regarding your exit timeframe, strategy, and plans for being acquired.

Frequently Asked Questions

How do investors find startups to invest in?

Investors tend to find startups that are ready for investment by reaching out to their inner circle, contacts, and business partners. If they are an angel investor or venture capital firm, they’ll often have investors reaching out to them on a frequent basis and asking for funds, letting the investor choose which company seems most viable. 

What kinds of investors invest in startups?

The most common types of startup investors include venture capitalists (VCs) and angel investors or “angels.” Venture capital firms use other people’s money to invest in startups in order to receive a return on their investment (ROI). Angel investors, on the other hand, use their own money to invest in startups with hopes of rapid growth and success in the future. 

What are investors looking for in entrepreneurs?

When an investor is trying to determine whether or not they should invest in a particular entrepreneur, the first thing they look at is their vision for their company, their leadership abilities, their passion, and their track record in the past. If an investor sees that the entrepreneur is a reliable founder who will do their absolute best in growing the company, they’ll be much more likely to invest.