Here's What's Brewing in the Minds of Startup Investors Are you a startup entrepreneur looking for investment opportunities? Learn what's on the minds of potential investors and increase your chances of success!
By Vikas Agrawal Edited by Micah Zimmerman
Key Takeaways
- - Global VC funding has seen a decline in 2022, with venture capital investment falling 37% from Q2 to Q3 of the year.
- - Investors seek key characteristics in a company before investing, including a product or service that stands out, a well-defined possibility for growth, and a sound financial strategy.
- - You should have extraordinary market penetration strategies and be able to clearly articulate how you differ from your competitors and why an investor should choose your company over others.
- - A well-defined possibility for growth should include a plan for how to sustain your market position and a description of the major growth factors you will rely on after entering the market.
- - A sound financial strategy should include a clear understanding of the financials of your business, including revenue projections and a plan for profitability.
- - Investors also look for a business owner's capacity for and approach to problem-solving, so it is important to define market issues and your remedies to those issues in your pitch.
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While you, as a startup entrepreneur, search for suitable investors, investors also hunt for favorable enterprises to invest in. This article will explore startup investments from the viewpoint of a potential investor.
Before diving into the subject, let's analyze the current state of global VC funding to get a clear picture of what is happening in the investors' world. According to the latest EY report on venture capital investment trends, 2022 was not a good year for VC-backed businesses & startups.
2022 in light of Global VC Investment!
In Q3 2022, venture capital (VC) investment fell by 37% from $60 billion in Q2 to $37 billion invested, continuing to deteriorate from the record-breaking levels of 2021. 2022 is already the second-highest investment year on record, despite this large decline. Additionally, we anticipate that overall investment will surpass $200 billion for a second consecutive year, and VC funding will surpass $100 billion for the fifth straight year.
This is because the investor will ultimately decide whether or not to invest in your business; therefore, you must be aware of and consider what is going through these investors' minds while they search for investment prospects.
Related: 3 Alternatives to Venture Capital Funding for Startups
You may have considered strategies to enable investors to find your concept intriguing. But have you ever thought about the qualities investors seek in new businesses?
The following are the key characteristics that investors search for in a company before investing in it:
1. A product or service that stands out
Your product doesn't need to be unique to stand out from the competition, but you must have extraordinary market penetration strategies. According to GrowthBusiness - "It sounds obvious, but one of the most valuable things a business can have is uniqueness or something that makes it stand out from the competition."
You should remember that investors frequently communicate with other business owners like yourself, so they will also be comparing your products to their alternatives. As a result, you must be certain that your service or product dominates the market or that you have a realistic plan to do so.
You must distinctly articulate how you differ from your competitors, why an investor would be better off investing in your company, and how your product would outperform its rivals in terms of market share.
Additionally, you must show that there is a significant need for your products in the market, as this will justify your chances of success. Defining market issues and your remedies to those issues is the proper technique for preparing your pitch.
Investors look for this element in every pitch since it demonstrates a business owner's capacity for and approach to issue resolution.
Related: 7 Factors That Make a Brand Stand Out
2. A well-defined possibility for growth
So you've released your product into the market, established a presence for yourself through effective marketing techniques, and created a market space for your business.
But have you considered how to sustain that position while still growing your reach and growth? As a startup entrepreneur, your primary aim is to capture a market with your product and build means to preserve your industry standing. As Neil Patel said, one of the topmost reasons behind 90% of startup failures is the unavailability of a proper business model.
Startup investors seek firms with evident development potential. As a result, it is critical to describe the major growth factors you will rely on after you enter the market.
You should emphasize the expertise you will require to accelerate your growth and the technical outline of your future objectives, segmented into phases — this will indicate your entrepreneurial earnestness. You should also consider how you want to remain competitive while establishing a profitable enterprise.
Related: The Key to Achieving Your Company's Growth Strategies Is Talent
3. A sound financial strategy
Investors will be curious about the whereabouts of their funds. To avoid financial difficulties and be prepared for any potential problems, there ought to be clear strategies for handling the financial components of the firm. It is essential to have a solid financial strategy.
The amount you anticipate your product will bring in and what percent of it will be a profit should be indicated by numbers. A potential investor will be able to see from these the growth rate of your firm. Fundable published a story on this topic that says that every amount of traction counts in a startup pitch, so don't be afraid to mention it in your pitch to investors, no matter how insignificant it may seem compared to your larger goals.
Additionally, you must have a carefully determined plan for managing cash inflow and outflow. Furthermore, you must retain financial transparency; you do not need to misrepresent the level of your resources or skills.
It's crucial to remember that risks play a significant role whenever money is at stake. Therefore, maintaining openness will increase the investor's trust in you.
Related: 7 Financial Strategies for Business Owners Who Want to Live the Good Life
4. Properly delineated strategies for using investment funds
Once you've chosen what you want from an investor, you should have a clear strategy in place for how much money you'll need as an investment and how you'll use that money to grow your company.
The investor can opt not to invest in your business if your goals are unclear. The financial model's underlying assumptions must be fully disclosed to the investor, a collection of pro forma financials, including these things:
- an income statement
- a balance sheet
- a cash flow statement
- an examination of return on investment using capital planning methods
- multiple ROI calculations.
You must provide your justifications for why you require the investor's money. The investor would be interested in how you would use the funding you seek. But more significantly, they want to know if you can achieve what you're proposing.
Remember that financial considerations mostly drive the relationship you're attempting to develop with potential investors. A well-defined framework of fund allocations supported by well-evaluated proof of financial projections is required for investors to have confidence that their money will be in safe hands and generate profitable ROI over a certain timeframe.
5. A competent team of personnel
You don't need a large crew to be seen as a worthy entrepreneur. Investors typically want to see subject matter specialists on your staff. TechCrunch has come up with an interesting piece of information that says the only slide both successful and unsuccessful pitch decks had included is the "Team" slide.
Your team needs members who are experts in the field in which your company operates and not just business specialists. For instance, you need blockchain professionals on your team if your company is developing a product in the domain of blockchain technology.
The goal is to persuade investors that you have the workforce necessary to turn your ideas into reality and promote your business's financial or developmental growth. To assure the investor of your abilities, each team member should be a crucial contributor to the development potential of your company.
6. A secure exit plan
When investors invest money in businesses, they do so with the hope of seeing a profit later on when the business is sold, becomes public or is refinanced by another organization.
A startup entrepreneur should have at least a rudimentary understanding of how the investors will leave and receive their return even in the early stages of the business startup. The business plan you give to prospective investors should outline your exit strategy.
By reviewing your documented exit strategy, investors will also see that you recognize their need to have their funds refunded at a certain juncture. You need to make it apparent that you don't expect them to continue supporting your business indefinitely.
Related: Exit Strategy Through the Eyes of an Angel Investor
You and your investors may sell out of the investment jointly if the firm is sold to another business. However, there may be a situation in which you would like to keep owning and running the company. If so, you'll need to provide the investors with other exit options.
You need to focus on these technical issues on your exit strategy slide:
- List companies which are the potential buyers of your company.
- List your competitors or similar startups who have successfully exited.
- Project and add the valuation of your company at the time of exit.
Over to you
To sum up, capturing an investor's attention with your business plan will be simple if you are a driven entrepreneur with a vested interest in the outcome and can show considerable growth potential. But remember that the best way to create a strategy for seeking funding from an investor is to consider things from their point of view.
It won't be tough to win over potential startup investors if you learn to think like them. Finding the proper investor who will invest the appropriate sum of money under reasonable conditions will need some homework. But if you have faith in what you're doing, keep working hard until you find what you are looking for, even if it takes some time.
