What Are Investors Looking for When Evaluating a Startup for a Potential Investment?

Jenna Rodrigues
October 2, 2021

inclined to take risks and lean on their gut feeling when making investment decisions.

Despite the various different selection criteria that investors use, there are several boxes that the majority of investors like to check before investing in a startup.

Let’s dive into these evaluation criteria in detail to give you a better idea of what investors are looking for when evaluating startups.

Is There a Great Product with a Competitive Edge?

Investors want to invest in great products and services that will give the startup a competitive advantage in the long run. What makes your product or service unique? Why do users care about your product/service? What are the key outstanding features of your digital product or service? There should be something unique about the product that makes it stand out from the rest. Also, they are looking for a solution to a real, pressing problem that hasn’t been solved before by other businesses in the same space.

Investors are also interested in a startup that will give them a competitive edge in the market. This means that the product should be capable of generating sales and profits before competitors come into the market. The fewer the competitors, the better.

Is the Market Size Big Enough?

Most venture capitalists are interested in a business that can scale and acquire a large user base. How big is the market that your company is looking to serve? By big, it’s not just for today, but the future as well.

Your business needs to have a significant market reach, at least at the regional level based on the nature of your product. If it’s a market with existing solutions, you will need to spend some time explaining to investors how the solution stands out from its peers. If it’s a new, emerging market, the focus will shift a little bit to how big the market is expected to grow and the factors that are driving that growth. Overall the size of the market should be quantified and it should be clear why your product and service is unique enough to justify a slice of that market.

Do You Have a Great Team?

“It really takes likable superstars to get the attention of the masses.” — Jennifer Wyatt.

The team behind the startup is as important as your product or service. If an investor is interested in your business, the next thing they want to know besides the product is whether your team has the right set of skills, experience, drive, and temperament to execute the business plan and grow the business.

The investors will also want to know the founders and key team members, the kind of domain expertise the team has, the unique capabilities of the team to execute the company’s business plan, and how well they collaborate, just to mention a few.

Ultimately, the investor will be comfortable investing in a startup that has a great team in place, where members have excellent skills and have enough expertise to execute the startup’s vision.

Has the Company Achieved Any Positive Traction?

Today, there are a lot of great talkers, but at the end of the day, it’s all about action. Many budding entrepreneurs have great ideas, but very few of those have real results to show. It’s important to remember that almost no one will invest in “ideas on a napkin,” but there is a spectrum for what investors are interested in when it comes to the traction of the startup.

A new venture will have to demonstrate that it has a product that matters and is marketable. Demonstrating that the market is already engaging with your product and you have a “proof of concept” to show investors will set the startup apart from others.

You can throw in some real figures of some early customers, profits, or results of a pilot program you may have launched. This reflects the level of commitment and effort that the team is making to get things rolling.

Do the Founders Understand Cash Flow and Financials?

Financials and cash flows. It’s easy to see why this one is important. Yes, venture capitalists want to see the classic projection model. But, the financials need to be realistic and achievable at the same time.

The most critical part of the business plan is the cash flow plan — the amount of money coming into your business and the amount going out. The investor needs to see a good return on investment as well as the financial projections to give them an idea of how long it will take for you as the founder to make a profit and for them to recoup their investment.

Always go with something conservative and break the financials into various components. Perhaps include details such as price to produce, processing fee, selling price, and your profit margin per unit. Such a simple exercise will help you and the investor better understand the business and score a high chance of getting an investment.

Wrapping Up!

There is no shortage of advice especially on what factors investors need to look for when making their funding decisions.

While there’s no perfect information, if you invest enough effort and ensure you give investors enough certainty about your business, they are more likely to consider investing in your business. Remember, an investor is always gambling on whether or not an investment will be successful. So, do your best to make a good impression on your business.

If you want to create a great product from inception to long-term sustainability and even land a potential investor, get in touch with our experts to turn your idea into a reality.

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