What are potential investors looking for in start-up businesses?
With so many funding opportunities available to investors, the problem for many start-up businesses is simply standing out in the crowd. It is a worrying and uncertain time given the crucial nature of initial fundraising, but it helps to understand an investor’s point-of-view. Are they looking for something in particular – perhaps a disruptive product or service, or a knowledgeable and committed team? Here are a few common areas where potential investors place their focus.
The process of obtaining funding can be difficult for start-up businesses. Individual investors tend to look for different factors before they are willing to invest, and can be sceptical about potential opportunities unless they are drawn to them for specific reasons.
So what might they look for when assessing a start-up business?
The right mindset
Some investors place their initial focus on people, rather than the idea or concept they are presented with. An articulate and positive entrepreneur with a detail-oriented mindset is more likely to attract interest than a start-up business owner with limited knowledge of their own business figures, or those of their competitors.
Projecting a confident and mature personality, and displaying willingness to accept constructive criticism and suggestions for change, can be an attractive combination when identified by an investor in a new business owner.
It symbolises the potential for a seasoned investor to ‘mould’ a young business to achieve greater success without the fear of ongoing personality clashes, but with mutual respect and with the end-goal firmly in mind.
Some investors are only interested in emerging markets, due to the greater ‘space’ in which a business can flourish. If a business is starting up within an existing, potentially saturated market, but crucially, can redefine it by offering fresh solutions or innovative products not previously seen, investors may find this an attractive proposition.
History has shown us the success with which market ‘disruptors’ can implement a need and desire for radical change. Banking is just one example where a break from established methods of doing business can bring outstanding results for newcomers.
The skill and experience of the management or operational team has great significance for an investor, as they are seen as a relatively safe pair of hands. It is how they execute their plan that is a key part of the mix, however, and whether they have the potential to lead their business to success.
A strong and proactive team is key to securing investment for start up businesses. Taking practical steps to make an impression on the market, even before funding is sought, is an effective way to attract investment, which brings us on to the next aspect an investor might look for – market traction.
Commercial traction is a phrase close to the heart of many an investor. It relates to a start-up enterprise moving forward within their market, which means the business can be seen as having already proved itself up to a point.
Investment may be attracted on this basis alone, but it certainly enables a new enterprise to stand out from its competitors when seeking finance. So how would market traction be measured by an interested investor?
Revenue is an obvious way to demonstrate traction, but customer satisfaction is also a good indicator, and relatively easily measured through social media response. Setting and meeting business goals in themselves displays commercial traction, and is likely to impress potential investors.
Return on investment
Return on investment is clearly a major factor in any funding decision, and generally speaking, investors will want to own a significant percentage of a company they are investing in. Most will have a minimum equity stake in mind before they are prepared to invest, or will want to include a clause that allows them to invest more money in the business later on.
Correctly timing the launch of a start-up can influence a potential investor. They may be attracted by new technology, for example, that disrupts an existing but stale marketplace, and which immediately sets the company apart from its competitors.
Gaining market share in this way indicates demand and interest from consumers, and using the economy, market trends, and results from competitor businesses, can result in fast growth for a market newcomer.
A business plan or strategy is crucial when a start-up seeks investment. Detail, thorough research, and a coherent strategy that addresses the potential issues and threats the business could face in the start-up stage, are all vital to success in this area.
New business owners need to know and understand the figures presented in their business plan, however, as investors will want to ensure the implications of failing to meet these forecasts are recognised.
An investor may be looking for the potential to mentor the owners of a start-up business - to increase the likelihood of their success, for example, and allow them to benefit from the investor’s experience.
In general, investors are looking for their own specific needs to be met before they will fund a business. This could involve many different aspects, but fundamentally, a clear and detailed knowledge of both the business and its competitors by the business owners is essential.