What Investors Are Looking For In A Startup

STARTUP INVESTING

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I often come across some would-be entrepreneurs who request that a business plan be prepared with accompanying pitch deck for prospective investors.  Preparing a business plan with this intended purpose can be extraordinarily challenging when a client-proponent had only an idea and a few research notes about the startup.  It will be difficult for them to find investors (outside of family members or close friends) who would be genuinely interested in this startup even though how comprehensive and aesthetically pleasing the business plan is.

Most investors (angels or VCs) have almost common strategies and criteria that they follow when considering a startup for investment.  Some remarkable ones are the following:

1)  Product-Market fit

Essentially the product or service should solve existing problems or relieve pain points for a large number of people or businesses.  The needs to be filled should be real.

Investors would like to see some customers who had tried the solution being developed or offered by the startup.  It is important to have unattached and unbiased prospective clients who had used the product or service and subsequently gave an objective, honest, and impartial feedback whether it has effectively addressed their needs or problems.

The startup should take into serious consideration the various feedback and factor these in redesigning, reformulating, revising, or changing significantly the product or service being offered.  This process should be iterated until such time the startup shall have established a good fit between the product/service and its target market.

2)  Customer acquisition

Once a good fit has been established, the startup can focus its resources on acquiring customers.  Getting the first few satisfied customers (20 to 30) is crucial.  These initial customers can give the startup continuing feedback about the product/service.  Did it actually fill the needs, did it solve their problems, did it deliver the promised benefits? Most important, are the early users willing to continue using the product/service or recommend it to others?

With a favorable feedback from these early users, the startup can firm up its go-to-market strategy and marketing plan.  The marketing initiatives should capitalize on testimonials by the early users and allot the bulk of resources to marketing.  Investors look favorably at a startup which can develop a customer acquisition process that effectively brings in within a reasonable time frame (within one to two years) the number of customers that can generate a recurring revenue at a level that will sustain a profitable operation.

3)  Scalability

There should exist a real possibility for huge growth.  The startup should generate market traction and scale up rapidly without necessarily increasing expenses.  Some investors would like to see sales increasing at least ten times more over the next three years.

4)  Management team

The startup should have a strong and passionate management team.  Members are expected to have experience in business management.  Investors would even welcome a team member or the founder who had been with a failed startup before. Experience is a good teacher and would hold back an entrepreneur from committing the same costly mistakes in business.

5)  Knowledge of competition

The startup should have something different and unique that can protect it from strong competition, or something that cannot be duplicated by competitors.  This something should convince investors that the startup is way above competition.

 

There are other investor-specific criteria but those mentioned above are not only used by many but I also find these more crucial to the success of the startup and in alignment with investors’ interest.  We can prepare the appropriate business plan for presentation to your prospective investors.

 

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