7 Things Investors Look For in a Startup

what are investors looking for

Show me a startup founder, and I'll show you someone looking for funding. It's a stage you have to go through, and chances are you'll need to go through it more than once as you raise money for expansion and other needs that come with scaling up.

Of course, the first place you look for money is in investors. But you have to give them a solid reason why they should invest in your startup with thousands of others just like you fighting for the same money.

We pulled together a list of seven items an investor looks for when making an investment decision to help you put your best foot forward.

1. A Strong Business Plan

Your business plan is the ticket that admits you to the investment process, and it must be outstanding if it is to win you funding. Essentially, a well-thought-out plan presents your business accurately and attractively.

It should detail the company's current status, needs, and expected future. It also needs to justify ongoing and changing resource requirements, marketing decisions, financial projections, production demands, and personnel needs logically and convincingly.

Also, it should also have:

  • A description of the market - which includes both existing and prospective clients, customers, and consumers of the product or service.
  • Investors
  • Producer โ€“ whether that's the entrepreneur or investor

2. Traction

Traction involves having clear indicators of your startup's growth tendencies and the speed of that growth. It's more like demonstrating that you have a marketable product or service โ€“and that you've started operating and have the ability to sell your products or services in bigger volumes.

For example, demonstrating that you have a user base for a fintech startup is a powerful early sign that it will do well. Even when you haven't grown a user base big enough to brag about, you can demonstrate traction by showing that the few users you have are engaged and love your product.

3. Product-Market Fit

Statistics show that 90% of startups fail, with 42% failing because there was no market need for their product or service. Beyond proving that people need your product, a product-market fit demonstrates that they are so satisfied with your product that they recommend it to others enough to sustain its growth and profitability.

A good product-market fit is also a solid foundation that enables you to move forward with strategic objectives like growth or upselling existing users. However, each business is different, and there isn't a general stack of metrics that all startups can use to measure their product-market fit. All in all, these scenarios would be a great indication that your product-market fit is intact:

  • When allowing customers to sample your product some say they will switch from their current brand to yours.
  • Some users who've rejected similar products on the market are willing to try yours.
  • When product testing, people group your product accurately with the right competitive offerings
  • Users understand your unique value proposition
  • Your user retention rates measure up against your competitors

4. Market Size

Your market size is the number of likely buyers for your product within a given market. Investors care about your market size because it determines how big your business is and which kind of investor is the best fit for it.

For example, a big venture capital firm that wants huge returns from your business will not invest $30,000 in your firm. Similarly, if you have big dreams, you can't pursue capital raising with an investor who can only put down $20,000. The moral of the story is, to go for big investors if you're looking to venture into big markets.

5. Minimum Viable Product (MVP)

MVPs help business founders test the viability of a product before venturing into the market. Ideally, you introduce a new product in the market with basic features to assess the product-market fit. The results tell your investors whether your business is worth a shot or not.

You can create your MVP by answering a few questions:

  • What's the general idea?
  • Who are you making the product for?
  • Why would the person want it?
  • Why are you building it?

Your MVP could be the difference between moving on with the product or abandoning the idea to look for an alternative that people actually want.

6. Exit Strategy

An investor's end game is seeing a solid return on their investment. An exit strategy is a way of reassuring them that should the business fail, you have a good plan to sell the company or your share to other investors or firms.

Investors will typically require information on how you'll navigate acquisition, sale of shares to principals, etc., and your timeframe for the exit. If you can't give a clear picture of both, investors may be unwilling to trust you with their money.

7. Organized Finances

Investors are wary of ambiguous financial statements because they could be a way to hide big debt or signs that a business has shady financial dealings.

For startups looking for funding, having organized, transparent financial documents are not just good for you, it's also a basic requirement. There's also something else that tells investors your finances are organized: an ESOP.

An employee stock ownership plan (ESOP) is an employee benefit plan that gives workers ownership interest in the company. They help a business owner sell all or part of their firm to cash out, facilitate management succession, or allow employees to share the profits of their labor.

Because employee-owned companies have a reputation for giving outsized returns and giving shareholders tax exemption status, going to an investor to raise capital with an ESOP plan as part of your exit or management strategy improves your chances of getting the funds you want.

But putting together and managing an ESOP takes hard work. The best way to save money and time and get the expertise you need is by letting an ESOP expert handle it. Cake has helped dozens of businesses to build and manage an ESOP with seamless ease. How? By providing you with dedicated software to help with administration, participant visibility, reporting, and everything in between that make ESOP workflows beneficial.

Finally

The million-dollar question in every investor's mind is 'what's in it for me?' Before you get to the negotiating table, your job is to build an airtight case for your startup to get the investors to buy into your vision.

While at it, keep in mind that three things set your business apart from your competitors: how you handle key marketing, production, and finances.

It would help be prudent if you showcased these differences and must emphasize appropriate areas while deemphasizing minor issues to win the best investors. A cookie-cutter, fill-in-the-blanks presentation of your business will turn off even the most willing of them.

At Cake, we love rallying behind entrepreneurs because we know it takes an expert, trustworthy team to get your startup off the ground and watch it thrive. Whichever role you take up in a startup, you get to reap the benefits of legal and financial workflows that simplify raising money. Learn more.

This blog is designed and intended to provide general information in summary form on general topics. The contents do not constitute legal, financial or tax advice and should not be relied upon as such. If you would like to chat with a lawyer, please get in touch and we can introduce you to one of our very friendly legal partners.