Top 7 Things Investors Look at Before Investing in a Startup

16 Feb, 2016 / Comments: Comments Off on Top 7 Things Investors Look at Before Investing in a Startup / By

Starting up your business typically takes many resources, aside from those you can provide. You might have the idea, but without the funds, it is impossible to get things going. The good news is that there are investors out there looking to fund startups, but you have to have the right tools and plans in order for them to consider your business.

 

1.  Business Plan

You have to look serious about your business, which means starting with a business plan. This should be in writing and include everything such as the mission, problem the product/service solves, the target market, competitors already in the market, and what you provide that others do not. Your business plan is not only a way to get your business up and running but a way to show investors how serious you are about this venture.

 

2.  Strong Credible Team

Anyone can come up with an idea, but without the expertise and credibility in the field, the likelihood of the business taking flight is slim. Investors want to see a team of people with the right experience on your team. Aside from you and your experience, they want to see leaders that have a proven track record that they can show to investors. If you have never led a team, don’t showcase yourself as the leader – let an executive with a track record take control.

 

3.  Solving a Problem

Some investors prefer to invest in companies that do not have any competition. These true “startups” have an idea that solves a problem no one else has been able to solve. Yes, this is a gamble because there is no track record for the industry, but it also paves the way for a profitable endeavor if the idea takes off. Investors will look for a company that is intuitive while also intelligent, combining the need for a credible team with the new idea to make for a great venture.

 

3.  Momentum

Investors want to see the momentum building for your product or service. This means from the moment you first introduce the idea to them, you have gained ground and are increasing the speed in which it is introduced. If you have press coverage, new customers, beta products, and a better handle on the market, your momentum is building and investors can see a value in providing you with money to get that startup going.

 

4.  Large Percentage

Most investors do not want to fund just 5 percent of your company; they want to own a large enough percent that they will see a difference in the future. With just a 5 percent investment, they are unlikely to pay much attention to your business and will not care as much about what happens. An investor with a 20 percent investment, however, will pay close attention to what occurs in your business and will care what happens to it down the road.

 

5.  Proof of Likeability

It is not enough for you to like the idea of your product or service; investors want to see excitement in the general public. You need to build up the social following, aka excitement, about your business to get investors interested. Hold focus groups or use social media to your advantage to gain the momentum and excitement investors want to see in order to help you start up your business.

 

6.  Movement Towards your Goal

Anyone can have an idea, but if you don’t put that idea into motion, what is in it for investors? They want to see you making steps to reach your goal before you have the money to really get started. This means finding potential customers, creating a business plan, creating a mock-up for your product, or anything else you can do to show investors you are serious about getting started and will do anything to get to the point that you have the money to make it reality.

 

7.  Proof of Research

Research is the key to success in anything in life, especially a new business. Have proof of your research to show investors, whether it is research on the target market, the problem your product solves, the success of the industry your product falls into or any other pertinent research. Showing that you are serious about this business will help investors have a desire to get you started.

 

Starting up a new business takes a lot of work and money. If you don’t have the money yourself, you are going to have to rely on others, which means pitching a deal for them. You need to figure out how you are going to prove to them that your product or service is the best. The only way to do that is to get your ducks in a row and to get your feet wet in the industry. Any chances you can take to gain the momentum necessary, the better luck you will have.

William Mahnic
William Mahnic is a Finance Professor at Case Western University and has spent more than 20 years in the finance industry before becoming a professor. Mahnic has appeared as a commentator on both TV and radio talk shows including NPR, Crain's Cleveland Business, WKYC 3 and The Washington Post. He has been interviewed in BusinessWeek, Wall Street Journal and The Los Angeles Times.

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