Most people have, at one point or another, had an idea for a business, a product, or a service that they think could be the next big thing. However, turning a great idea into a successful startup is no easy feat.
In addition to having a solid business plan and a talented team, startups need to be able to seek investors. So, what do investors look for in a startup? Here are 10 things that can make a startup more attractive to investors:
10 Things Investors Look For In a Startup
Following are the 10 things that investors look for in a startup:
1. A Strong and Passionate Team
When it comes to investing in a startup, one of the things that investors look for is a strong and passionate team. After all, it takes more than just a great idea to succeed in the business world. A startup also needs a team that is dedicated to making the company a success.
Investors want to see that a startup has a team that is not only knowledgeable about their industry but also has the drive and determination to see the company through the tough early days.
They want to see that the team is united in their vision for the company and is willing to work hard to make it a reality. A strong and passionate team is essential for any successful startup.
2. A Big market opportunity
When considering investing in a startup, one of the things investors look for is a large market opportunity. They want to see that the company has the potential to grow quickly and achieve a significant market share. This can be a difficult thing to quantify, but there are a few indicators that investors will look for.
Firstly, they will assess the size of the total addressable market (TAM) and the company’s projected share of that market. Secondly, they will look at the growth rate of the market and try to assess whether the company can maintain that growth.
Finally, they will consider the barriers to entry in the market and whether the company has a sustainable competitive advantage. If a startup can demonstrate a large opportunity in all of these areas, it is more likely to attract investment.
3. Traction – Evidence That The Product is Resonating with Customers
Investors will be looking for several key things when they decide whether or not to invest in your company. One of the most important factors is whether or not you have traction – evidence that your product is resonating with customers and that there is a market for what you’re selling.
While a great idea is essential, it’s also important to show that you’re able to execute that idea and create something that people actually want to use.
If you can demonstrate strong traction, you’ll be much more likely to attract investment dollars. So how can you show investors that your startup has what it takes? Here are a few things to keep in mind:
- Have a clear vision for your product and be able to articulate what need it fills.
- Do your research and make sure there is indeed a market for your product.
- Build a prototype or MVP (minimum viable product) and get feedback from potential users.
- Launch a marketing campaign and track the results carefully.
- Gather data on your user base, including things like signups, retention rates, and conversion rates.
If you can show investors that you have a clear plan for your startup and that there is significant interest in your product, you’ll be much more likely to receive funding. So don’t underestimate the importance of traction – it could be the difference between getting your business off the ground or watching it stall before it even gets started.
4. A Well-Defined Customer Segment and Target Market
Potential angel investors want to see that a startup has a clear understanding of its target market. This means that the startup has identified a specific group of people to whom it plans to sell its products or services.
The target market should be large enough to support the growth of the business but not so large that the startup will have difficulty reaching its customers. Additionally, the target market should be well-defined so that the startup can create a marketing strategy that will reach the right people.
While there are many factors that investors consider when deciding whether to invest in a startup, a well-defined customer segment and target market are essential in demonstrating that the business has potential for growth.
5. Good Unit Economics – A Clear Path to Profitability
Investors want to see startups with strong unit economics – that is, a clear path to profitability. This means that the startup’s business model should be able to generate enough revenue to cover its costs and then some. The ideal situation is for the startup to be generating more revenue than it spends on operating costs.
There are a few ways to measure unit economics. One is to look at the startup’s gross margin – that is, its revenue minus the cost of goods sold. This number should be positive, and the higher, the better. Another key metric is the company’s customer acquisition costs (CAC).
This measures how much it costs the startup to acquire each new customer. Once again, this number should be positive and, ideally, lower than the lifetime value of a customer (LTV).
Investors will closely scrutinize a startup’s unit economics in order to assess its long-term viability. Startups with strong unit economics have a much better chance of attracting investment and eventually becoming profitable businesses.
6. Strong Intellectual Property
When investors are considering whether to put money into a startup, one of the things they look for is a strong intellectual property portfolio. This includes patents, trademarks, and copyrights.
A strong IP portfolio gives a startup a competitive edge in the marketplace and can attract attention from larger companies. It can also be used to generate revenue through licensing and enforcement.
In addition, a robust IP portfolio can help a startup attract top talent, as employees are often attracted to companies that are working on cutting-edge technologies. As such, building a strong IP portfolio is an essential part of any successful startup.
7. Solid Business Plan
A rock-solid business plan is a road map that startup companies use to navigate their way to success. It is a living document that outlines the company’s goals, strategies, and financial projections. A well-crafted business plan will articulate the company’s value proposition and give investors a clear sense of how the business will make money.
One of the most important things investors look for in a startup is a sound business plan. A good business plan will show that the company has a clear understanding of its target market, its competitors, and its own strengths and weaknesses. The plan should also include realistic financial projections and a detailed marketing strategy.
Investors want to see that the startup has a viable path to profitability. A solid business plan is the best way to convince investors that the company is worth investing in. Without a strong business plan, it will be difficult for the startup to raise the capital it needs to grow and succeed.
8. A Minimum Viable Product
When angel investors are considering whether or not to invest in a startup, one of the things they look for is a minimum viable product (MVP) and financial projections. An MVP is a product with just enough features to be able to be used by early adopters.
The purpose of an MVP is to test the feasibility of a product and to generate feedback from users. While it may not be the final product, an MVP should be able to solve the core problem that the startup is trying to address.
For example, if a startup is trying to develop a new social media platform, its MVP might be a basic version of the platform that allows users to create profile pages and connect with other users.
By having an MVP, startups can validate their ideas and gather data that can be used to improve the product. Consequently, investors often view the presence of an MVP as a positive sign.
9. An Exit Strategy
Many startup founders are so focused on getting their business off the ground that they don’t give much thought to what will happen once it’s up and running. But for investors, a defined exit strategy is one of the most important factors in deciding whether or not to invest in a company.
There are a few different ways that startups can provide an exit for investors. The most common is through an acquisition, where another company buys the startup for its technology, products, or other assets. An IPO (initial public offering) is another option, although it’s much less common for startups.
A more radical exit strategy is simply shutting down the business and returning the money to investors, which is known as a “wind-down.” While this may seem like a bad idea at first, it can actually be a smart move if the founders have been honest with investors from the beginning about the risks involved.
By having an exit strategy in mind, startups can show exit strategy investors that they’re thinking about the long-term future of the company – and that’s something everyone can get behind.
10. Past Performance Data
When it comes to attracting investment, one of the most important things you can do is to demonstrate that your business will make money. This may seem like a no-brainer, but unfortunately, many startups fail to effectively communicate their financial prospects to investors.
As a result, they miss out on vital funding that could help them get their business off the ground. One of the best ways to show potential angel investors that your startup will be profitable is to provide data from past performance.
If you can show that your business has been successful in the past, then investors will be much more likely to believe that it will be successful in the future. This data can take many different forms, but some of the most effective examples include financial statements, customer satisfaction surveys, and sales records.
By providing hard evidence that your startup is capable of generating revenue, you’ll be much more likely to attract investment. Following are some specific metrics investors will want to see:
Gross Margin
As a startup, one of the most important things you can do to attract investors is to show them your gross margin. Gross margin is a measure of how much revenue you generate from the sale of your product or service minus the cost of goods sold. In other words, it’s a measure of your profitability.
By showing potential angel investors your gross margin, you’re giving them a clear picture of your company’s profitability and its potential for future growth. Additionally, gross margin is an important metric for angel investors because it allows them to compare your company’s performance with that of other startups in your industry.
If your gross margin is significantly higher than that of your competitors, it will give most investors confidence in your ability to succeed in the marketplace. So, if you’re looking to attract investment for your startup, be sure to showcase your company’s strong gross margin.
Revenue Growth
When you’re trying to attract investors for your startup, one of the most important things you can do is show them how your company is growing. Revenue growth is a key indicator of a company’s health, and it’s something that angel investors will be looking for when they’re considering whether or not to invest in your business.
There are a few different ways to show revenue growth, but one of the most effective is to use a line graph. This type of graph makes it easy to see how your revenue has grown over time, and it can also be used to show projected growth for the future.
If you can demonstrate that your company is experiencing healthy revenue growth, it will go a long way toward attracting investment.
Monthly Recurring Revenue
Monthly Recurring Revenue, or MRR, is a key metric for startups. It represents the amount of money that a customer pays on a recurring basis, and it provides a reliable predictor of future growth. For example, if a customer signs up for a monthly subscription to a service, their MRR would be $10.
If another customer signs up for a yearly subscription, their MRR would be $120. Most investors are always interested in knowing a startup’s MRR, as it provides insight into the company’s growth potential.
A high MRR indicates that the company is quickly acquiring new customers and growing its revenue. As such, presenting MRR data to venture capitalists is a great way to attract their interest and investment.
Net Income
When you’re trying to attract investment for your startup, one of the most important things you can do is show your potential investors your company’s net income. Net income is a key metric that investors use to evaluate a company’s financial health, and it’s especially important for startups because it gives them an idea of your company’s growth potential.
By showing investors your company’s net income, you’ll give them a better understanding of your business and its potential for success. In addition, you may also want to provide them with some information on your company’s expenses and cash flow.
This will help them to see how their investment will be used and how it will impact your business. By providing this information, you’ll be more likely to attract the investment you need to grow your startup.
Churn Rate
The churn rate is one of the most important metrics to track for any startup. It measures the percentage of customers who cancel their subscription or service within a given period of time.
Investors are interested in this number because it shows them how well a company is retaining its customers. If the churn rate is high, it means that the company is losing customers at a faster rate than it is acquiring new ones. This can be a sign of trouble, and investors will be reluctant to invest in a company with a high churn rate.
On the other hand, a low churn rate indicates that customers are satisfied with the product or service and are unlikely to cancel their subscriptions. This is a positive sign for investors, as it shows that the company has a strong chance of success.
In order to attract investment, startups should focus on reducing their churn rate. There are many ways to do this, such as offering discounts or incentives to customers who remain subscribed for a certain period of time or improving customer service so that issues are resolved more quickly.
By showing potential investors that the company is taking steps to reduce churn, startups can increase their chances of seeking investment and achieving long-term success.
Customer Acquisition
Any startup looking for investment should be prepared to show their potential investors their plans for customer acquisition. This is because, in order for a startup to be successful, they need to acquire not only customers but also keep them.
A solid plan for customer acquisition will demonstrate to investors that the startup has a strategy for not only attracting new customers but also retaining them. Furthermore, it will show that the startup is aware of the various channels through which it can reach its target market.
Investors invest if you have a well-thought-out plan for customer acquisition, startups can increase their chances of securing investment.
Revenue Per Employee
One of the most important metrics for any startup is Revenue Per Employee (RPE). RPE is a simple yet powerful metric that shows how much revenue your company is generating for each employee. This metric is especially important for early-stage startups, as it can be used to attract investment from VCs and other investors.
There are a few reasons why RPE is so important for startups. First, it helps venture capitalists to assess the efficiency of your business. If your RPE is high, it means that your company is generating a lot of revenue for each employee, which is a good sign for investors.
Secondly, RPE can be used to compare different startups. If you have a high RPE, it means that your company is more efficient than other startups with lower RPEs. This can help you to attract investment from VCs who are looking for companies with high growth potential.
Lastly, RPE is a good predictor of future growth. If your company has a high RPE today, it is likely to grow at a faster rate in the future than companies with lower RPEs.
So, if you’re looking to attract investment for your startup, make sure to showcase your company’s RPE. It’s one of the most important metrics that investors will look at when assessing your business.
Conclusion
While there are many things that investors look for in a startup, the 10 items we’ve listed are some of the most important. If you can check off all 10 of these boxes, you’ll be putting yourself in a much better position to secure funding and grow your business.
Of course, this is not an exhaustive list, and there may be other things that matter to individual investors, so always do your research before pitching your business.
Frequently Asked Questions
What are the most common mistakes startup owners make?
When it comes to starting a new business, there are a lot of things to consider and a lot of potential pitfalls. However, some mistakes are more common than others. One of the most common mistakes startup owners makes is failing to properly assess the market.
It’s important to have a clear understanding of who your target audience is, what their needs are, and what your competition is offering. Another common mistake is underestimating the importance of cash flow. Even if your business is generating revenue, it can quickly become cash-strapped if you don’t have a handle on expenses.
Finally, many startups fail to plan for scaling. Trying to grow too quickly without the proper infrastructure in place can be a recipe for disaster. By avoiding these common mistakes, you’ll be well on your way to success.
How do you know if you have a good idea?
Turning an idea into a successful startup is no easy feat. In addition to having an innovative and marketable product or service, you also need to have a strong business plan and the drive to see your idea through. However, the first step is simply coming up with a good idea for a startup in the first place. So, how do you know if you have a winner on your hands?
One sign that you may have a good idea for a startup is that it solves a problem that you are passionate about. If you have personal experience with the problem that your startup aims to solve, you will be more motivated to see it through. In addition, it will be easier for you to sell your product or service if you believe in it wholeheartedly.
Another indicator of a good startup idea is whether it fills a gap in the market. If there is already a demand for your product or service, that’s half the battle. Conduct market research to see if there is room in the market for your business. Even if there are other businesses offering similar products or services, there may still be room for yours if you can offer a unique selling proposition.
Ultimately, only you can decide whether or not your startup idea is worth pursuing. However, by doing your research and making sure there is both a need and demand for your product or service, you can increase your chances of success.
How do investors decide which startups to invest in?
Investors often look for startups that have the potential to generate high profits. They also want to see a strong management team in place, as well as a clear plan of business. In addition, investors generally look for startups that are located in growing markets.
By investing in a startup that is located in a rapidly growing market, investors can maximize their chances of seeing a return on their investment.
