Investing in start-ups: What matters the most?
As a start-up founder, you will sooner or later come to a point where you need to consider acquiring external funds to take your business to the next stage.
Nowadays, there are plenty of financing opportunities a business can benefit from depending on its development stage, especially considering that there seem to be many more capital-givers interested to invest in start-ups than entrepreneurs ready to take the risk of founding their own business.
Despite their readiness to backup young companies, financers are highly cautious when deciding whether to jump on board or not. Investors, be it venture capitalists, angel investors, or others, carefully evaluate the risks versus the rewards of the financing by analyzing every aspect of the business model- from the birth of the idea to the maturity forecast.
In this blog post, we share with you some of the most fundamental criteria's investors will take into consideration when evaluating your business for funding.
1. Founders & Team
Our co-owner and managing partner Désirée Dosch, who is an investor herself, says that finding the right fit between investors and founders is a lot like dating - you need to get to know each other well, you need to learn about the other person’s values, philosophy, and vision for the future. If those elements are well aligned, this is a good base for founding a relationship - if not, perhaps it's just not meant to be.
What investors are looking for in the founders of the start-up is a passion for their idea. As well as the ability to convey this passion by telling the story of how the idea was born. You as a founder need to ignite a flame in your audience, spread the fire of your enthusiasm and grab your audiences attention with your pitch.
«If you do not believe in your idea, why should an investor?»
Something equally important to consider is clearly expressing your motivation for starting the business. Naturally, your passion is probably part of it, however, there are certainly other factors which have led to your decision of becoming an entrepreneur.
The second crucial piece of the start-up puzzle that your potential investors would surely like to delve into, is your team. What matters the most is the dynamics between the founders and the first employees, their shared enthusiasm, vision, and values. It is very likely that as a new business your employees will have to occasionally play the “all-rounder” role until you are big enough to have experts with focused responsibilities. Nevertheless, your business can not succeed without professionals who are specialists in the market you are entering. It is key for your staff to show adaptability and for you to be ready to scale your team.
Good to Know:
The more diverse your team, the more successful your start-up is likely to be, especially when it comes to including women. So make sure to have enough female superheroes aboard.
The faster you grow your team, the sooner you can scale your business. As the good old saying goes- the more the merrier.
The key for successful start-up teamwork lies in the balance. Hire people with diverse personality traits which can complement each other. There are multiple personality test which you can use to explore the character of your teammates, for example the four-color personality test is one simple tool which can give you some guidance.
2. Industry & Product
When you think about your product there are several questions to be asked. The first and foremost is:
What problem does your product solve?
The fact is that nowadays it is increasingly difficult to come up with products and services which have not been invented and most start-ups enter already existing markets. It is challenging to invent something brand new, however, with the changing times the problems consumers face are also changing, and new opportunities arise to provide solutions.
Even if your product or service is not a new invention, it most certainly needs to be unique. What matters to investors are the traits that make your product stand out in your industry and what gives it a unique competitive advantage. Keep in mind that while you want to attract and impress investors, your target customers should be your at your focus, strive to appeal to them first and foremost.
You need to provide evidence that you have done your homework by interviewing the right people - market professionals, potential clients, and competitors. Don't forget to put industry experts on your list. Investors might become your friend one day but if they don’t challenge you to the bone in the beginning, they haven’t understood your product.
Good to Know:
Test, test, test- you absolutely have put your business idea to the test and see how your target customers respond to it. It’s the best way to improve it and make it better suited for the market.
Challenge accepted! – Ask people to critically challenge your idea and your mindset, otherwise you risk overlooking some pitfalls.
3. Focus & Plan
Apart from knowing your target audience like the back of your hand, investors must see that your business has a clear vision and strategy for reaching your target market. Your Go-to-Market (GTM) strategy can make or break the funding of your start-up, so you need to make sure that you do it right. We do recommend using a scorecard like the one illustrated in our blogpost “Der Start-up - Kickoff Guide für erfolgreiche Gründer:innen”. Using this tool allows you to lay the foundations of your GTM strategy by creating a visual overview of the relevant market segments and valuation criteria.
By assessing the potential of every segment as realistically as possible you can provide your investors with valuable information about the feasibility of your business concept.
An integral part of drawing a picture of your market strategy is pinpointing your competitors.
«If there is no competition, likely there is no market.»
If you did a good job with your market research you should be able to convey to potential investors exactly how big your market is currently, how much it is expected to grow in the future and who your competitors are. You need to back the unique selling points of your product by knowing your competitors’ greatest strengths and weaknesses as well as acknowledging in what way your proposition compares to them.
When you build and present your business plan, you need to consider all positive as well as negative scenarios for the development of your start-up. As a founder of a business, there are multiple paths you can take during the growth of your company and that is why investors often want to know what your exit strategy is. You need to be clear about how you envision your position over time and what your goals are. When it comes to funding start-ups, it is not solely about the vision of the founders, but it is important to consider the exit strategy of the business itself. This strategy tells investors when and how they will get a return on their investment. A good way to approach this is by providing examples of how similar companies in comparable markets were able to exit and what that meant for the investors’ return.
Good to Know:
Learn by example- It is often beneficial for start-ups to build their Go-to-Market strategy by analyzing best practices of successful companies. It is not only valuable to see what these business do right, but it is also important to learn from their mistakes.
Exit vs. Exit- A certain confusion exists when it comes to defining an “Exit” strategy. Clearly differentiate between the exit for your investors, which refers to the pay-out for their investment, and the exit strategy of your business, which means letting go of your ownership.
4. Business Model & Risks
Most investors would only back start-ups with scalable and profitable business models which present lower risk and a promising prospect for profit. You need to be able to prove to potential investors that your business idea is scalable, however, it would be difficult to do this without testing your concept. Using a Minimum Viable Product (MVP) would allow you to validate the scalability of your business model by collecting a maximum amount of validated learning with the minimum amount of product necessary. Based on the learnings from the MVP you should be able to show how your business could go on to improve and continue providing solutions to customer problems in the future.
If you are in the process of looking for financial support for your start-up, then you are well aware that investors need to know what risks involved. Especially considering that about 90% of start-ups fail. If you want to attract an investor, you need to identify the past, current, and future risks posing a threat to the profitability of your business. In addition, you also need to be prepared to indicate what your strategy is for minimizing or all together eliminating those risks. Risk management is an essential part of investment strategy. It is one of many internal and external factors that investors take into consideration in the process of evaluating a start-up for funding.
«An investor is not looking to back a captain who can make a perfect turn in the harbor, he wants to invest in a team that knows how to navigate the ship through a storm.»
Good to Know:
Consider early on the right legal entity for your business. Is a Sole Proprietorship, a Partnership or maybe a Limited Liability Company the right choice for you?
Get experts on board - no matter how knowledgeable and well prepared you are, you and your founding team cannot be experts in every field. That is why it is important to have a reliable lawyer, accountant, and other experts on board from the very beginning.
It’s not a hobby it’s a business- becoming an entrepreneur does give you certain freedom but it also demands complete devotion and attention. Don’t treat your business as a hobby- it will be your full-time job.
✨ Investors look for entrepreneurs who are truly passionate about their ideas and are not afraid to be challenged out of their comfort zone.
🏆 Your team will have a crucial impact on the future of your business and investors know that; work with people who share your passion and vision.
🎯 Attract investors with a strong Go-to-Market strategy and a validated and scalable business model.
🤝 Lastly, when it comes to accepting an offer from an investor make sure that you do connect on a personal level and share similar values and philosophy.
If you want to find out more about the aspects, we at Alvicus look into when evaluating a start-up for investment, go ahead and download our Due Diligence one-pager here.