How Can Entrepreneurs Maximize the Chances Of Securing Early-Stage Funding?
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Every startup founder looking to secure early-stage funding has to contend with one question: What are investors looking for in a startup? Before advancing, let us take a step back to ask, what are investors looking for? Investors are high net worth individuals looking to maximize the rate at which they can generate wealth. They achieve this by investing their capital, time, and efforts in the ‘proper’ startup, i.e., a startup where they see the potential for robust returns on investment.
It is not easy to persuade an angel or a VC to fund a new business because startup equities, unlike those of established companies, are relatively illiquid and hence are considered high-risk, high-reward assets. When calculating whether to invest in a specific venture, early-stage investors typically try to determine whether the returns are worth the risk.
However, it is not just words but also numbers, figures, infographics, charts, etc., that work towards persuading the investor. Against this backdrop, here’s looking at the top factors that make a startup look ‘right’ in the eyes of an investor.
A strong founding team
Besides putting their money in a startup, an investor puts their faith in the founding team. A strong founding team can have their investors’ confidence rewarded. Such teams are identified by the degree of understanding they possess of the market. They aim to disrupt and know the challenges that their customers are currently facing, especially when they may not be aware. Then comes the solution being offered by the startup; it should be based on a robust, globally defensible IP and must be a product-market fit (PMF), but more on this later. Finally, the founders’ commitment to achieving their vision, besides turning the exiting pain points into a thing of the past, can enable sustained, if not exponential, growth of their business.
A scalable business model
A high-potential venture can maximize its profit margins and expand its business at an exponential scale, which is one reason IT and SaaS-based startups find it easier to attract investors since their value proposition typically involves a platform that can be easily scaled for millions and even billions of users. Such scalability is characteristic of startups that are designed to achieve accelerated growth. Investors prefer to fund scalable business models, including those temporarily unscalable, before acquiring the initial critical mass required to scale quickly.
Social proof, early traction, proof of concept
Founders are required to demonstrate that their product/service can stimulate demand, i.e., customers want their product. They can show this by presenting sales figures and statistics that give proof of early market traction. Founders can provide growth metrics in financial terms and a growing mailing list of subscribers, expanding user base, higher downloads, retention, NPS score, etc. Doing this provides the prospective investor with tangible proof that the startup’s solution is a product-market fit: that the product is fulfilling a pressing need-gap in the market and will find wide adoption by the target demographics once the venture is scaled.
A well-thought-through exit strategy
Investors make profits during liquidity events that can be the company going public or being acquired by a bigger corporation. An angel-backed startup receiving funding from VCs is also a liquidity event. Investors infuse not only their capital but also their time and efforts in nurturing the startup. The onus of providing them with a lucrative exit strategy, therefore, falls on the founders. When founders communicate an attractive exit strategy while pitching their startup, they increase the chances of closing the deal.
A persuasive pitch
A startup may have a great idea, a scalable business model, and a dedicated founding team. Finally, it all boils down to how well founders can convey all of their strengths, strategies, and vision in 30 minutes or less.
Founders need to be well-versed in all kinds of pitches; not only a full-fledged presentation but also a brief elevator pitch, in preparation for a chance encounter that can bloom into a profitable long-term association. After investors have scrutinized all of these aspects, and more, to their satisfaction, they give the go-ahead. And the deal is closed!