A Full Guide to What Investors Look for Before Investing in a Startup

June 8, 2022
Updated:
5 min

Tatsiana Kerimova

CEO & Co-founder

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During the early stage of a startup, finding funding is more than half the battle. You can start with your own funds, but for further growth, you may need substantial investments. 

Inspired by the success stories of Facebook, YouTube, and Uber, startup owners hope to replicate these high-profile success cases. However, investors rather rely on numbers and ROI since they know that one out of dozens of startups can bring in “home run” returns. So investors need to be confident the returns from investing are worth the risk. 

Thanks to our experience as a mobile development service provider, we have had direct communication with investors and startup owners. Thus, we have gained enough understanding to generalize how angel investors and VCs choose what startups are more likely to get funded.

Experienced investors know what criteria to pay attention to and will review various issues before making a decision. In this article, we collected the top things investors analyze when deciding whether to invest.

Dedicated and professional team

Investors don’t just invest in a business solution; they invest in your team. Many investors think that the team behind the startup is as important as the product or idea. Make sure that your investors know everything about your team and show them that your team has the right skills, experience, passion, and drive to grow the business. 

You don’t need to be a jack of all trades, but you need to have experts by your side. Investors are more likely to invest in a business that has a team in place where founders can delegate authority to the experts and create truly amazing products together. Here are some questions to consider before meeting with your investors:

  • Who are the founders?
  • Who are the key team members?
  • How do you plan to grow your team? What specialists will you need in the near future?
  • How long has your team worked together?
  • What relevant experience do your team members have?
  • What challenges have you faced, and how have you overcome them as a team?
  • How many team members are there?
  • What motivates your team and you?

Persuade investors that you, your team, and your product are worthy of their attention. For example, if you have co-founders, consider bringing them to pitch meetings to display your teamwork in person.

Market size 

Most investors looking to invest in new ideas are searching for ones that can scale. So you’ll want to make sure that investors know about the potential of your product. 

When talking with seed-stage investors, VCs, or series A and B investors, they all want to know that your startup can someday grow to be as large as Google or Uber. Therefore, presenting smaller ideas that have no chance of scaling is a waste of time and resources. 

However, a smaller idea is worth presenting if it’s a part of a bigger project, like a platform, service, or product. VCs are more likely to invest in big market niches with passionate teams. 

Finally, don’t forget to showcase your market research. Add some metrics showing why you believe your startup can become a major player in the market. 

Business plan 

Investors search for founders who know the numbers. You need to prove to your investors that your startup has a bright future and excellent financial performance. 

However, you don’t get all these stats out of the blue; you need to earn them. Get ready to prove the financial stability of your company by using the following key metrics:

  • Projected revenue growth 
  • Monthly burn rate of a business 
  • Gross margin 
  • EBITDA
  • Lifetime value of a customer
  • Customer acquisition cost
  • Other key performance indicators of your business

It’s even better to prepare a model with a monthly-level detail. For instance, you’ll want to identify how much money you need for your growth and how much money you can generate with your solution. 

Further, when pitching to different investors, consider customizing your business plan and adding particular attributes. For example, angel investors and VCs tend to pay more attention to finance and market issues, so you should consider highlighting these issues during a meeting with these types of investors.

Unique selling proposition

Finding your unique selling proposition (USP) is the first half of the battle, and the second half is selling investors on it. With investors, there has to be a selling point that stands out. For example, your USP may be that you’re the first to enter a specific market and that your app will have no direct competitors at launch.

However, it’s challenging to find an unoccupied business niche with more than 4 billion apps available on the market. Most startups enter existing markets, but there is still space for uniqueness. At ODG, we perform excessive market research and load your solution with the right features it needs to succeed. 

Early traction 

Early traction may be one of the most influential factors that helps win over investors and raise more than you’re asking. A company that has obtained early traction and users demonstrates a significant ability to sell the product. Some examples of early traction include:

  • The launch of a beta version or MVP 
  • First customer reviews 
  • Participation in startup competitive programs like Y Combinator or other technology accelerators or incubators
  • First paying customers
  • Strategic partnerships
  • Articles or publications mentioning the company

Relative background and industry expertise

Both relative background and industry expertise mean a lot to investors. The quality of the people driving the startups is pivotal to securing investments. 

Having an A-grade behind your idea can help you reach all your market heights. On the other hand, a winning idea without a team with relative background and industry experience can lead to failure. Here’s what you need to show while pitching your app idea:

  • Well-rounded knowledge of the market, direct and indirect competitors, and target audience 
  • A proven record of your team’s and your expertise in the relevant industry or business
  • Flexibility to adjust to any changes in the market, readiness to pivot, and previous experience launching a new product in a new business niche 
  • A willingness to learn, like taking advice from investors and external experts

Potential investment risks

Investors need to consider all pros and cons before making a final decision. Remember, the main goal of any investment is to yield returns. 

Also, there should be a particular exit strategy that allows investors to limit losses if it’s evident that the returns aren’t possible. Of course, investing is risky, but great investors know that managing risks is more important than making a profit.

In most cases, businesses get a positive cash flow after the first year, but a negative cash flow is expected for the first several months. This means you need to estimate your budget well enough and include all the possible risks since investors dislike when you have to come back for capital.

Eventually, investors will want to know when they will begin to see a return and how much they can expect. Building a financial model is vital for getting necessary funds from investors. Any business idea comes with risks, so make sure you can easily answer the following questions:

  • What are the potential risks of the business?
  • Are there any legal risks? Will the business need to follow specific regulations like GDPR, etc.?
  • Are there any technology risks?
  • How will you mitigate the risks?

Startups that can clearly state their risks and have a plan to mitigate them often have a considerable advantage in raising funds. 

Investor fit

Similar to market fit, there needs to be a match between what investors can offer and what the startup needs, which can be referred to as “startup-investor fit.” This fit applies to all elements of the partnership, including investment strategy, ticket size, investment stage, and the profile of the startup. 

Further, startup-investor fit can extend beyond the visible elements. For instance, there should also be an alignment of philosophies, values, and work styles. While evaluating opportunities, try to focus on having multiple conversations with investors. 

Although 2021 saw a meteoric increase in funding and tech growth stage startups raised $196 billion more than in previous years, finding the right investor is still a challenge for startup owners. Remember, venture capitalists and angel investors are getting tons of applications, and you need to make yours stand out from the crowd. 

The X-factor 

When you land a meeting with investors, there may be a connection that you cannot explain; likely, it's due to the X-factor. For example, you may have experienced an X-factor when you first met someone, and you both somehow knew that your partnership would be fruitful at the same moment. 

The best way to find out your X-factor is to be yourself while pitching your app idea. Remember, X-factors are unpredictable and may be a circumstance, quality, or person, so you should be yourself and let any X-factors happen naturally.

While pitching your app idea, don’t be over-professional. Instead, show that you are a passionate entrepreneur with an app idea and demonstrate to investors that this idea can potentially grow to be socially and financially beneficial. 

Summing up

Investors play a key role in building a successful business. They’re critical in the ecosystem and can provide funds and expert advice that many startups need. Luckily, investors are always looking for a return on their investment and exceptional products and teams to facilitate this goal. 

Finding the right investor can take some research, but in the end, you’ll get more than just funds for your business. It may take some time, but you should keep going until you find your “yes-investor.” 

And at ODG, we can support you during the early stage of your startup and take the technical issues off your plate. Contact us to discuss your next big idea.

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