Investors are curious but busy individuals.
Daily, they receive hundreds of e-mails, cold calls, and pitches about the “next revolutionary idea”. Naturally, this barrage of business plans can grow weary even to the most passionate investor.
So how can we, as entrepreneurs, ensure that our billion dollar idea stands out from the crowd? With 9 out of 10 startups failing, we know investing is a risky game to play. How can we ignite interest in the investor to be that 1 success story?
In short, it’s all about knowing what investors are really looking for (and giving them what they want). Admittedly there is no ether for success, however there are key factors all investors invariably consider before cutting you that cheque;
The Investing Trinity
This troika umbrellas the most important facets of your firm and helps in clarifying your purpose and fit with the investor. Each vertex of the investing triangle captures a view into your company’s engine and helps to identify what really fuels your company’s growth and potential. Investors hone in on all 3 to contextualize the investment so that they can justify writing you the cheque you’re looking for. Some people deem your team to be the most important consideration, others believe the market to be the golden factor– the truth is, there is no consolidated guide to which plays the most important role.
Generally, what people often forget is that all 3 are necessary for success, so the focus should be on all equally.
The way I see it is as follows:
Entrepreneurs (and their company) are a 3-legged stool while investors are the carpenters. Each leg of the stool corresponds to one of the corners of the triangle – Team, Product, and Market.
Like any good stool, all 3 legs must be in equal proportion for it to function. If one of the legs is too short, the stool won’t work as intended. The same can be thought of for businesses. You may have an incredible team and a killer product but if the market potential is not there, there won’t be any traction (and the stool will topple). Investors can recognize this immediately. As seasoned ‘carpenters’ they are able to invest and to help to align each leg of the business. However, investors must weigh up the cost of investment, ‘effort of whittling’, and their potential return. So to pique investors’ interests you must ensure that you can offer a business where each of Team, Product, and Market are all equally developed (or easily straightened).
Your team is the foundation to any business; you drive the business and proclaim the mission of the company. Many investors have walked on a similar path that you have walked (and one that you may hope to follow) – building a business and successfully exiting from it. Investors know what it takes to succeed but also how difficult this journey is. They want to be able to project themselves into your position and often look for qualities and attributes that they can empathize with and recognize. More likely than not, investors will pry into your and your team’s backgrounds in order to figure out your overall chemistry, so it is worth preparing both you, and your team, prior to investor outreach.
Here are some key “Team” questions you should be ready to answer:
- Do you (and your team) have a passion for the solution? How is this infused into your company’s culture?
- What is your (and your team’s) experience in this industry? Have any of you any domain expertise?
- Why are you the right team to solve this problem?
- Have you faced any disagreements and how did you remedy them?
- What is your vision (and if I were to ask every team member this question, will it be consistent?)
Other important aspects investors consider are you and your team’s education history and work-experience as this shows a technical aptitude for your and social cues .
Always be aware that investors will be constantly evaluating this aspect of the firm. You are going to be in communication with your investors daily ( be it through phone, video, or in person) and any reluctance on your part could come across as unreliability or skepticism of your potential. The process is as involved as most relationships (and them some) so you must play the long game and constantly be willing to facilitate any talks with your investors, while being confident in you and your team.
In the current market, product prototypes are a necessity in generating investor interest. Investors are visually and tactically stimulated – a tangible product (a click-through app, physical devices) helps investors to bridge the gap between hypotheticals and realities, while mentally engaging them with your company.
Think Shark Tank.
How often do our hopeful entrepreneurs pass out product samples, demonstrate proofs-of-concept, or are, in general, interactive. Well-designed, road-mapped, products show belief in your solution and a long-term goal. It is therefore valuable to create a detailed product timeline to show where your product came from, where it currently is, and where it is hoping to go (as well as where the investor’s cash will be used).
Here are some key “Product” questions you should be ready to answer:
- Why should your users care about your product?
- What really differentiates you from your competitors? (what is your competitive moat?)
- What are your product milestones and where are you taking your product?
- Have you any Patents, Trade Secrets, or any Intellectual Property?
- What is cost per product and can this be economized?
Most often, Intellectual Property is a hot topic for investors and can make or break the investment pitch. In an Investor’s eyes, intellectual property (IP) is a secret weapon that distinguishes a company from its competitors while potentially providing a product monopoly for a period of time. This is extremely attractive to investors as competitive advantages and monopolies in the right markets is directly proportional to cash returns.
Market size drives investors to learn more about you, your company, and what you have on offer. Investors are also hungry, so having a large market potential (a large pie) in an emerging markets means that investors will ultimately have a large slice of pie if your company becomes successful. The larger the market, the larger their returns. Investors are interested in new, emerging markets as typically the landscape is not yet fragmented or saturated, and there are opportunities to grow quickly and dominate. However, having a large potential market is not the sole factor investors consider – investors often question Product-Market fit and Traction to gauge how necessary the product is; in the end it is the customer who will buy the product and create the market you estimated in your pitch. This involves identifying your customer, understanding their needs, and tailoring your product around what is actually desired. Through this, you can show product traction and fashion a product that will be wanted, rather than trying to sell a product that nobody needs.
Here are some key “Market” questions you should be ready to answer:
- Who is your customer? What is the COCA (cost of customer acquisition)
- What is your overall Market size in $?
- What has the market’s response be to your products so far: What traction have you received?
- What percent of the market do you expect to reach in 1 year / 3 years / 5 years?
- What assumptions did you use to create your financial models?
Overall, market-based questions are a key interest for Investors as they are trying to calculate their return on investment. Knowing the $ value of the overall market, what percentage of the market you expect to reach in the future, and current traction will help the investor work backwards from a potential exit price so they know what percentage ownership they need to justify an investment into the company.
Inevitably, investors will take much more into consideration. Investors may be curious, busy, hungry carpenters, but they are also human and have their own personal preferences and risk-assessments. Some investors may not be ready to invest in a fledgling company, while others may solely work with Pre-Revenue firms. Being prepared to address the heavily weighted criteria well will give you and your team some ‘wiggle room’ when it comes to addressing other aspects of the business’s capabilities. When it comes down to it, investors are investing not only in what you have on offer, but what you have to offer. Once you sign the contracts, you’ll be working together to build and sell some really sturdy stools.