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Here's What Investors Consider When Valuing a Startup

Make sure to consider these critical factors before approaching investors about your business.

So, you're ready to take on investors? Congratulations. This means you likely have customers, revenue, and have generated a bit of buzz. A growing business is a great thing to have.

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But before you begin the process of seeking early investors, entrepreneurs should know exactly what those investors are looking for in a prime, early-stage startup. Here, we outline the common criteria.

A good reason why you're raising money in the first place.

Seeking venture funding usually means you're at a specific phase in the startup journey. For many entrepreneurs, you might have customers and are now looking to scale. Or maybe you're a bit earlier than that, in that you have a product, but need to conduct a series of tests to find your consumer base.

In most industries, however, if you're seeking venture funding, you almost always should already have a tested, viable product, says Lewis Hower, a managing director at Silicon Valley Bank who works with startup communities. Whereas in the past, building a software company required intensive investment, "now with all the free tools out there, there are people building entire companies for less than $50,000," Hower says.

While there are exceptions, not having a product could mean your business isn't ready to seek venture capital just yet. "If you've a hunch or an idea and want money to chase it down, investors are going to say, "Come back to me when you have something and then we can talk,'" Hower says. For entrepreneurs at this stage, he recommends pursuing other avenues, including bootstrapping, applying for grants, or plugging into university entrepreneurial support programs.

A growth plan.

Venture investors are looking for companies that have the potential to aggressively scale. It's a model that prioritizes growth, which means it isn't a great fit for every company, particularly those looking to take a slower path.

Many successful startups reach profitability without venture funding, Hower says. "The best way you can raise money is revenue. Then you don't have to sell any of your company to make it work."

But venture capital can be enormously helpful for startups with big-market potential, which need an infusion of cash to spotlight their product and rapidly grow their consumer base. A core question for investors, Hower says, is whether a startup is entering "a big enough market to become a big enough company to make the return economics work."

In addition to the size of the industry, investors also need to believe in the viability of the product or service. If you're not solving something that is truly a pain point or a problem in the market, consumers likely won't flock to you—and neither will investors.

A sense of what you're bringing to the table.

"Given the early-stage nature of these kinds of companies, investors are often looking to back the people and their ideas more than just the company or its growth," Hower says. In other words, does the founder or founders have what it takes to make it big?

While a company can pivot in pursuit of growth and profitability, a founder's personal abilities and appeal is less mutable. "If you are a founder who has that grit and determination, usually you are in a good position," he says.

Access to networks is also important. Being well-connected within your industry can a significant factor, as it shows investors that you're well situated to hire talented people and find the right advisors or mentors. When it comes to fundraising, "the individual is becoming more and more important," Hower says.

Click here to find out how Silicon Valley Bank can help you find the investment you need to grow your business.

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