You've developed an idea that can take your startup to the next level. Customers are expressing interest in it, and you've validated it as a viable product. Your budget is running low, but you know that with more funding, you can continue developing the product making it even better. But will investors bite?
When should a startup look for investors?
To seek investors, entrepreneurs must first prove that their startups are worth investment. You must be able to show investors exactly how they will receive a return on their investment and what you plan to do with their money. Building relationships with investors and proving your trustworthiness will take time. This is why spending as much time as possible learning about the market and your product before seeking investors is essential.
What makes a Startup attractive to investors?
Whether you are thinking of approaching angel investors or have already developed a strategy to appeal to venture capitalists, there are several metrics they will use to evaluate your startup.
Angel investors and venture capitalists have different roles in the startup business life cycle.
Angel investors are typically involved with startups in the early stages, while venture capitalists generally wait until companies are further developing before investing. A majority of angel investors provide startup funding out of their own pockets. A venture capitalist usually manages funds for a group of investors called limited partners.
Angel investors and venture capitalists are looking for a potential investment to demonstrate, based on its operational records, that it will likely earn them a profit. To convince potential investors of your company's worth, you must present them with evidence such as the following.
Passion
Passion is an essential element of a successful business model. Although passion alone isn't enough to gain capital, it will give you the strength and drive necessary to pursue investments — and to withstand the rejections you may encounter along the way. Without passion, there's no reason to do any other things.
Passion will also help you persuade potential investors to back your company. If you don't believe in your business, how can you expect investors to believe in it? You must be confident that your product or service will solve problems like no competitor ever could.
However, while passion can be a great motivator, your ideas will only interest investors if they are good. The first quality is a way to catch readers' attention, which will help propel your drive to succeed.
Significant market size
A wise investor thinks about the long term before lending capital to any business, especially if it's a startup. Your startup must have growth potential. For example, if you're working in a market that can't be digitized and doesn't extend beyond your local area, don't expect to attract the interest of a significant investor. They think your business model needs to be expanded and will not be able to grow.
Of course, your startup can capture only some of the world market to be successful. But you must reach a large enough market that the cost of producing your product or service is low enough to make it profitable.
Investors may also want to consider how many similar businesses are already in your market. To succeed, your business must have a competitive advantage and the potential to grow into a market leader.
Traction
It may seem more challenging than it may seem for a founder to approach investors with a business plan and a dream and expect them to back a new startup. It is essential that your business has already begun operations and exhibited its ability to produce and deliver the product.
You will gain traction in your business, which can help you raise seed capital and attract the attention of venture capital firms. Remember, one of the goals in business is always to turn a profit. Everyone has an excellent idea for a startup; find investors who can help prove that your picture is worth investing in.
An advantage over competitors
Consider what makes your startup unique. Many entrepreneurs have had the same idea, so how will you make your startup stand out? Most startups face competition, and having something different can be a competitive advantage.
Sometimes, the location of your startup is its competitive advantage. If you live in an area where no one else offers a particular service, you live in an advantageous position.
Team Members and Delegation
Early in your startup, you may have a small staff. Finding staffing may be difficult since only one or two members have seen many startups. The number of staff members employed by your company isn't necessarily a primary consideration for potential investors. Instead, they're concerned about whether your company has enough employees to perform essential tasks adequately. This means you're ready to grow, handling any growing pains as your staff rises to meet the increasing demands of your business.
Furthermore, your expanding startup must have complete control of its operations. You and your staff should develop operating policies to control the business to attract investors. Also, have you empowered your team members to make decisions in their areas of expertise? Investors like to see that your startup's team members have the power to act independently.
Exit Strategy
No matter how long your company has been in business, investors will always want to know about terms related to any investment, which include: How much should you invest? When will you receive the return on your investment? When should you support it, and what is the return on that investment? Asking questions is the best way to get information.
You should include an in-depth financial projection to answer these questions. Investors will want to see the pro forma financials, a return on investment analysis, and a sensitivity analysis around critical variables before investing. Get these models ready for monthly use, and don't be discouraged if you receive negative cash flow during the first few months. Many businesses start this way, earning a positive cash flow by the end of the first year.
Investors need to know when they will get their money back and how much they can expect. Consider including a capital budgeting analysis and a complete return on investment analysis to meet these needs.
If you're looking for an investment, whether your first or you're fifth, there's a lot to consider. Will it be worth it? Will you make use of the money? How long will it take to receive funding? These are all critical questions to ask yourself. Keep these considerations in mind as you continue your entrepreneurial journey.
