The more you think about it, the more obvious it becomes, all businesses are really in the same race in their initial stages—the race to get funded by investors.
After all, no business can survive without secure funding; it doesn’t matter if you’re running a website or opening up your brick-and-mortar location; someone has to pony up the cash to stay open and keep your employees paid and happy.
The startup investment world has changed a lot during the last few years. Thanks to the introduction of platforms like Kickstarter and AngelList, it is easier to raise money from multiple accredited investors at once rather than trying to pitch one wealthy individual at a time.
But with all this change, what makes investors invest in startups? And how can you help your business attract funding from investors? Read on to find out!
Anybody who trusts others with their money with the expectation of a profit is termed as an investor. So anybody from the close of kin to an unknown organisation can be an investor. Let’s look at some of the investors whom you are likely to meet in your entrepreneurial journey.
1. Angel Investors
They are literally the guardian angels for emerging startups.
They invest in small startups or new entrepreneurs. They might be someone who is close to the startup and the first person to give funding to take your venture off the ground.
Their focus is mainly to help the startup move forward. The profit part is secondary for them, which in turn helps the startups to get favourable offers.
2. Venture capitalists
Venture capitalists are the long-term visionaries of the investment world.
They invest in startups that they believe to have a promising future. In return for the investment they made, VCs ask for equity shares and board seats and be a part of the company's decision-making process.
To secure funding from VCs you need to have a solid business and promising POC because they think about their profit more often than you know.
3. Personal investors
Personal investors are your family and friends who believe in your idea and genuinely help you through donations or loans. The limit of investment they can offer is so limited and it's just the gas money for the initial push for your investment.
4. Peer-to-peer lenders
Peer-to-peer lenders are groups or individuals who lend capital to businesses based on the application prospective clients submit. After careful evaluation of the business, they decide whether to fund the business or not. If you think this is a simple procedure, the reality is going to knock you out.
These are just a few of the investment options you can look into, but there are other ways to acquire startup funding and the initial investment is not the end of it all, you need to find funding opportunities for all stages of your startup.
A key tip to all the entrepreneurs who are searching for investors, an idea seldom gathers funding whereas a thriving business attracts.
Investors look for certain key areas in the business and the business owner alike. Some are above any data metrics you can provide.
How can you ask for investors' money without really asking?
Here, the real goal for an entrepreneur is to know what they are looking for and help them find it in your business quickly, and here's what they are looking for.
Your passion
When starting a business, the passion in the eyes of budding entrepreneurs will be at its flaming best. Just when you’re about to start something new, the enthusiasm, the adrenaline rush and the hunger to do awesome shit will be at their peak.
Then begins the trial of time, the question of how deep is your passion; begins.
Entrepreneurs who wish to gather funding will need to go knock on many doors before getting an investment. They would be rejected more times than you can fathom, and no matter how hard your passion is, this will leave a scar.
But the quality that attracts investors will be your willingness to pursue your dream relentlessly. The will to wake up the next day, grab those data sheets and knock on more doors than yesterday.
Investors also like people who have created a business from their own money. This gives a feeling to others that they believe in their own ideas and that shouts confidence.
A startup with some progress or early traction is more likely to get funded.
Leadership and team
Many investors' eyes light up when they see promising prodigies leading a business or someone who is a prominent figure in the tech industry in the core team of a business.
Who would you fund?
A team with Elon Musk as the CTO or A team with “ he who you do not know” as the CTO?
There is a “team” checklist for investors here; the more you tick, the more likely your team will get funded.
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- Are any reputed tech people in the team?
- Team history
- Experience of the team
- Are they open-minded to investors' suggestions?
- What is their team strength?
- What unique strength do the members bring to the team?
- What motivates them? Passion or wealth?
This is just the checklist of some crucial things investors look for in a core team.
Traction
How do you convince an investor who has doubts about the scalability of a business?
You show them you can.
With a great MVP and a good amount of pilot customers, the traction gained by the company will be so visible in the papers that investors would be head over heels for it.
But all said and done it's just an ideal scenario. Let’s take a step back into reality.
When we say traction it doesn’t have to be a business profit, it can be a strategic partnership or a significant presence in competitive platforms or even customer testimonials will do the trick. If you have anything to show that affected the company in a positive way is always welcome.
Investors before investing in a startup check if the company has gained any traction or if it is an emerging one. They want to make sure that they are spending money on something they can get a profit on and your company’s traction is the “proof of concept” for them.
When you are trying to get an investor for your business any kind of positive traction can be a huge boost for your business to be on their radar.
The market size of your product
US$ 1,597.1 billion by 2030 is the predicted market for AI.
The market you choose to set foot in will be a catalyst for investors in selecting your startup. Investors are always on the lookout for markets with growth potential and if you are tapping these markets, then the probability of getting funds is higher.
If a product can be expanded to reach a wider market, it will also be another feather on the cap.
Who would you fund?
An app that gives you the best restaurant in the location you’re in or an app that gives you the best restaurants in Utah?
Investors look at marketability to ensure that this is a viable investment that is scalable. A business which has the flare to create an impact in the market will be a huge bonus point for you while searching for investments.
If you address the marketing possibilities of your business and they are impressed, congrats your company just proved its marketing capability.
So tell them what percentage of the market you are aiming for and how you are going to make that happen.
State your target customers and the ways you are going to approach them. Your marketing strategy and PR will give a precise idea to the investor on how he can contribute to the growth of the company.
Your pitch
The investor pitch deck you submit must be precise and convincing. Investors agree to a meeting to see if your business idea is worth investing their money. So, don’t disappoint them with poor and vague pitchdeck.
Sometimes the way you present your pitch plays a crucial role in investment decisions.
Where is my money going?
Expect this question at the end of your presentation, or you should include this in your pitch deck because investors would want to know what you are planning to do with their investment and how you are going to burn through this resource.
This helps the investors estimate whether your plans are reasonable and when will you need the next rounds of funding.
The estimated costs of investments will help clarify the role of the Investor in the company’s future. Your proposed burn rate will be the main point they would be eying when they shoot this question at you.
Your competitive advantage
A market is a ruthless place with a dog-eat-dog scenario, and knowing your competition is one of the basic data you need. Even if your product is unique at a particular time in the market, there will always be new competitors.
You need to have a plan for that; sticking to your brand identity is the most common strategy opted by companies.
Take a look at this example: Xiaomi infiltrated an already existing market with budget phones and top software, but Apple and Samsung still dominate it; their competitive advantage is their quality products.
If you can give your target audience what they want, you will always be live in the market. Investors will study the product differentiation to analyze your competitive advantage and you better be ready with a solid answer.
Having access to the latest technology will be a great competitive advantage in an existing market. Enterprises don’t quickly change their technologies, and many might be even falling behind the new revelations in AI and React apps.
Your financial metrics
First of all, you get your financial records in order and be aware of all the key metrics of your business. Second, now you have to pitch these financial metrics to an investor so that they believe this is a viable investment and has the opportunity to grow into something bigger.
Here is a metrics checklist before you pitch to an investor.
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- Monthly burn rate
- Projected growth and present growth percentage
- Gross margin
- Gross revenues and gross expenses
- The additional funds that need to be raised
- Key performance indicators or KPIs
- EBITDA
Over exaggeration never helps to get startup funding
If you pitch with projections as low as $1 million revenue in five years the investors will not be impressed.
They are looking for companies that can get them marginal profit faster. Adding more zeros to the projections than you can deliver will also backfire.
Use your pre-launch statistics and any other statistics before launch. This data is your trump card when you are looking to secure funding for your startup. If you can’t do that, then the investors will look down on you like you are unfit to run a business.
You just saw what investors look to invest in startups. Here are some things that push them away from funding your startup.
1. Internal conflicts between team members
For investors to invest in startups, you need to have a team that functions like a well-oiled machine. A team that quarrels with each other will be a huge turn-off for investors.
Investors will investigate every aspect of your startup, and if they find signs of internal conflicts, they will feel like they are investing in a ticking time bomb.
2. Mutual signs of respect
The X factor here is the way you approach the investor and talk to them. The attitude with which you present ideas and the open-mindedness to acknowledge the investor's suggestions will make a huge difference in your business pitch.
If they feel like they have a connection with you and your business, they will be more inclined to hear you out. Investments are business deals, and you can’t deal with a closed-minded person.
3. Proof of concept
You need to have a proof of concept for the things you claim. Failure to produce evidence will render your claims useless and will be neglected by all.
4. There is no clear exit route
Investors put their money in your business with their eyes on the profits. They want to get out whenever they want, and if you can’t provide them with an exit strategy, they won’t be interested.
5. CEO fails to sell
If the captain of a ship fails to sell his business, investors will turn the other way. A CEO that lacks leadership is already leading his business to failure.
Let's sum it up
You might’ve understood by now that convincing an investor to invest in your startups is not easy.
But with this short tour through the minds of investors, you could highlight your positives and work on the elements you are lacking to catch the investor's eye.
There are a lot more things to learn before you start your investor hunt. The things you just read in this blog are some inevitable parts you need to include in your pitch to investors.
A small piece of advice for entrepreneurs, money is something you need while building your empire but investors who share your passion for technology can sometimes be more valuable than the richest shark in the room.
Now it's time up to you. Build your business, take the things you read to heart and go get your investor. Good Luck!!!
Building your product will be an important part of your pitch. If you are having trouble building one It's always a good idea to reach out to professionals to help you with it.
If you want to make your product charm investors and customers alike give us a call, NeoITO is just a click away.
