Depending on the investor be it Venture Capital, angel investors or other type of funds, each will have differing criteria to evaluate whether the business is for them or not. Usually there will be common factors running through them that businesses seeking funding should know about.
I have summarised the 6 most common factors that investors look for in a start-up or business. These are not in any order of importance since some investors will place more value on some criteria than others.
1. Strong or growing target Market for the Product or Service
Investors usually want a market that is sizeable or will grow rapidly, so that their investment can grow and make returns acceptable to them. Usually, investors won’t be interested in mature markets unless your product or service is going to revolutionise it. They will evaluate how big a market share your business will command usually over a 5 to 10 year period. Most large VC funds are competing to invest and several have developed market niches or specialisms. Such investors will be very knowledgable about your market place, the players and the size of it too.
2. Strong Margins
The higher the margin, the better. This is because the risks of investing is reduced if margins are high which enables the business to weather any storms or weaknesses.
3. Strong Management Team
The more experienced the management team in your market place, the lower the risk for the investor since they are investing into a team who know what they are doing. If there are certain key members that you may not have at, the investors will want those appointed as a condition of investing, say for example a Chief Financial Officer. Experienced teams would have managed in times of crises investors do not want to step in to manage businesses once they have invested. Such experience reduces the execution risk that every start-up or business faces.
4. Credible Business Plan and Projections
Your business plan and projections must be credible and realistic. The business plan maybe the first time investors read anything about your plans and the assumptions should be made clear and alternative scenarios worked out in case the business doesn’t achieve what you want it to achieve. Investors will be knowledgeable about the market and in any event if they are interested in investing, will have experts carry out due diligence on your business plan. Having unrealistic projections doesn’t help and will put off investors even before they get to meet you. Investors will also want to know how you will execute the plan and how their money will be spent. Have you got enough budgeted for marketing and for working capital? How much contingency funds have you planned? Most investors will not want to keep putting money in every time the business comes up short. All this has to be well thought and planned in the business plan.
5. Exit strategy
Most investors will want to look at a time horizon of 5-10 years to realise their returns and exit the business by selling it or floating it on a stock exchange. You will have to work out what your own exit strategy is and be prepared to align that along with your investors’ strategy. Most investors will want scalability since that gives their investment stand the best chance of growing rapidly. If your business cannot grow significantly and have barriers to growth, no investor will be interested since there will be several other potential investments competing for their money.
6. Passion and Commitment
All of the above alone is not enough and investors’ like to see ‘passion and commitment’ from the founder of the business. You must have a clear vision of what you trying to achieve and have an indefatigable attitude in achieving it. When investors see this attitude from you and your team, they are more likely to be convinced that their money is in good hands and that you are more likely to succeed.
At the end of the day investing is all about balancing risks and rewards and usually investors are looking to invest into people and their ideas.