Global business is changing, and so are investor preferences. Your product needs to connect with consumers instantly to make a lasting first impression. You can attract investors to your startup if you focus on the consumer problem that your product aims to solve. If you too have a great business idea and want investors to fund your fledgling company, this article is for you. It explains everything you need to know about what investors look for in a startup.
Capital — the Fuel of Business
Capital is the fuel that will drive your product from ideation to execution and launch. It is a means that helps you achieve your desired goals. It’s the one factor that will make or break your business. Thus, capital is very important for any startup. Without capital, ideas can’t be implemented.
Are you looking for an investor for your startup?
Listen to “How to Create a Product That Investors Will Commit To” on Spreaker.
If you are, you need to make the right connections and have access to relevant platforms to be able to meet with investors. You could connect with a top-notch investor, or you could ask your rich relative to invest. You could get in touch with a bank that serves as a node for government schemes that support innovation. If you’re lucky enough to have the right contacts, you can directly approach an investor who supports startups.
Sending your email to an investor, you should mention your unique tech, show understanding of the product’s market value and introduce a team. It should be a few paragraphs with an offer to send more details at the end of it.
Types of Investors
Looking for the correct type of investor is the key. In fact, it is a prerequisite that budding entrepreneurs acquaint themselves with the types of investors available. Once you know who to pitch to, it’s all about perfecting your pitch to seal the deal.
Banks are the age-old source for capital lending and loans. Early-stage startups are unlikely to receive bank funding. However, banks run numerous industry-specific loan programs to promote innovation and support early-stage ventures.
- Owners retain control of their business — Many entrepreneurs prefer debt financing compared to losing equity. Taking a loan enables them to keep their control over the company. A bank loan provides much-needed working capital. While it does increase the company’s debt, the owners can run the firm the way they want to, as the ownership is not diluted.
- A bank loan is temporary — A bank loan is a temporary source of funding. It needs to be repaid as per the terms and conditions of the loan. This keeps your capital commitments intact, and the capital requirements can be fulfilled without sacrificing ownership in the company.
- Interest is tax-deductible — The interest on the bank loan forms part of the financing costs of the company, and thus is a deductible expense. This reduces your tax bill. Even though you’re not getting any extra money, a penny saved is a penny earned!
- Tough to qualify — Banks require collateral or security worth more than the value of the loan before approving a loan. This is a tough ask for startup founders, who often struggle to fulfil this condition. Thus, taking out a bank loan is more suitable for established businesses than startups.
- High Interest Rates — In the unlikely event that a bank approves an unsecured loan, it will charge a risk premium. This pushes up the interest rate, and servicing the loan becomes more difficult. This will remain an expense on the company accounts until the loan is completely paid off. Regardless of whether you have profits or not, you will always have to pay the interest on the loan to your bank.
How to Find a Bank for a Loan Application
It’s important to choose the correct bank and open a separate dedicated business account. Since financial institutions offer several borrowing options, you need to choose the best viable option. Traditional banks offer customized loan products and accounts to meet the needs of businesses of all sizes. Startups might choose to open a business account at the same bank where they have their personal accounts, since doing so usually offers certain perks.
True to the name, an angel investor is a private investor who supports entrepreneurs by backing their ideas with capital. It is typically a high net-worth individual who invests their money in exchange for a share of equity in the company.
- Less risky than debt financing — The angels become a part owner of the company, so you don’t need to repay their debt in a structured manner. If your product takes a while to take off, you’ll have one less thing to worry about. On the other hand, you must repay your debtors, no matter what your P&L statement looks like.
- Offers valuable knowledge — These investors have acquired their wealth through astute business decisions – and they can pass it on to you. Since their own money is at stake, you can count on them for expert guidance.
- Suitable source to get business going — Investors want to see your product succeed, as their own capital and reputation are on the line. They are part of your management committee, and can offer valuable input and constructive criticism.
- The loss of complete control — The investors have a fair amount of control over the company. If you fail to grow your business, or the investor feels that growth is stagnant, the investor may demand an additional stake in the company without an infusion of extra capital.
- Higher Expectations — Investors fund a lot of companies, and they know that some of them will eventually sink. Therefore, they expect heightened profit margins from the ones that get off the ground. The owners are always under pressure to deliver higher margins and bump up valuations so that early- stage investors can get a decent return.
Best Way to Find an Angel Investor
Occasionally, there are events where startups are invited to pitch their ideas. Angel investors are never far from these stages, as they’re always on the lookout for promising ventures to invest in. Even if you do not attract investment straight away, you can meet a lot of helpful people. Networking is the best way to find investors.
A personal investor is a person who invests money in capital markets and is not associated either with an investment firm or financial institution.
- Trust relationship — These investors could be normal people, like your relative, a friend, or anyone who wishes to invest in your business. Since they trust you, attracting investment for your startup becomes much easier.
- Simple investment structure — Since these are personal investors, the complex formal regulatory requirements don’t need to be completed. Often, your deal is based on good faith and a handshake.
- It can ruin the relationship — There might be a low ebb where the business is not doing well and the lender is losing patience and wants to be repaid. The situation then becomes difficult, as the withdrawal of their support could strain your personal relations.
- No added value to the company — A personal investor is often a well-known person who may lack business expertise. This is not a good situation for a business, as their presence does not help in any way other than by providing capital.
How to Find a Personal Investor
Friends and family are a great resource in case of a financial crunch. Ideally, they will stand by you with startup money and seed funding. They already trust you and your search for capital can go more smoothly.
Peer-to-peer lending (P2P) enables an individual to get financial assistance from another individual directly, without the need of a middleman or a financial institution.
- More accessible source of funding — Peers are always there to help you. They will have gone through different journeys and gained valuable experience along the way. They can understand your product and invest in it if they see promise.
- Flexibility — P2P loans are unsecured and can be more flexible than traditional loans, as the terms of the loan can be amended by mutual agreement.
- Lower interest rates — Some people have excess funds, and to earn something from cash they may offer money to their peers at lower interest rates.
- Credit risk — Since there is no proper documentation or formal processes, for the creditor there’s always a chance of a default.
- No insurance/ government protection — These loan transactions are executed without much scrutiny. Therefore, the investor is at a higher risk of losing his/her money, since there is no security to liquidate if the business fails..
How Do I Attract a P2P Investor to My Business?
P2P lending websites connect borrowers with investors. This facilitates the free flow of capital. Networking is always a great way to track down investors.
Venture Capital (VC)
A venture capital fund is a pool of investments managed by professionals. They usually invest in innovation and technology-based startups with high potential, and exit after the business achieves the desired valuation.
- Expertise — VCs can provide guidance, as they know the market forces well and keep an eye on changing consumer preferences. They are experts with cross-industry experience. This is an asset for passionate founders who need constant guidance.
- Connections — VCs can connect startups with additional resources. They know how to identify ideas and people with potential. They have built a great network along their journey and can point you to the right people.
- No repayment of capital — Since VCs usually invest in a company by means of a stake in the company, they don’t ask for repayment, as they already own shares in the company. They often offload their shares at an appropriate time to secure returns.
- Loss of ownership — The investors have a say in the management and day-to-day operational matters of the company. If you fail to grow your business, or the investor feels that its growth is stagnant, the investor may demand an additional stake in the company without infusing additional capital.
- Higher return expectations — VCs invest in many startups and expect high profit margins. If the margins are not met, they may pressure you to generate returns by hook or by crook.
How to Find a VC For Your Startup
VCs are organized players, and they keep a keen eye on the startup scenario. They often specialize in a given sector (often technology) and are receptive to new ideas. However, they will not invest in your business until they are convinced that your credentials and your plan are solid. Therefore, be prepared to be grilled for long hours before receiving a check from a VC. The part below will explain how to pass the test successfully.
What does an Investor Look for in a Startup?
- Team — The team plays a crucial role to investors, who will be more ready to invest if the founders have a solid educational background and some business and/or technical experience. Investors need to be convinced that the people who will eventually be in charge of their investment can be trusted to run the business and have the skills required to do so. Talking about startups, investors would like to see a coachable team with a curious mindset, openness, and willingness to learn.
- Product — Investors want to invest in products that connect with customers and solve their problems. If the product has a novel approach that adds value to customers’ lives, it will sell like hotcakes. Thus, research your market and segment it so that you can understand the existing pain points of the customer, instead of replicating existing ones
- Value proposition — Founders should have brand thinking. Namely, what investors want to see in a product is that founders think not only about their unique tech solutions but about the value they will bring to customers, meaning the reason why customers will buy the product. As Paavo Räisänen from Maki.vc confirmed in the interview for Superangel, a customer value proposition is required; founders may not have it at the start, but they should be curious about that and have this in mind.
- Big market potential — Investors are interested in the size of your market, the existing players, and a clear plan about what percentage of the market you plan to capture in what time. The market size will determine the returns the investor expects. The investor might turn down an offer if the market is small or it includes too many players, which would leave little scope for a new entrant.
- Valuation — The value of the startup, its financial viability, and cash flow are the main pillars the investors will scrutinize before investing. Thus, the startup founders should present a fair and accurate picture of the company’s potential financial outcomes.
How to make an investor commit to your product
- Discover unmet customer needs — Business is always about problem-solving. Identify the pain points of customers through surveys, interviews, focus groups, and other techniques. Make a crisp report out of it, and present it to the investors. Once they see the problem, they will automatically be drawn to the solution you’re building.
- Formulate a hypothesis — Pick out the most relevant customer needs that can be met immediately. You don’t need to solve all the problems at once — it’s an iterative process. However, quantify your research and show it to the investors so they can get a sense of how many customers can be onboarded.
- Build a working prototype — A picture is worth a thousand words. In the case of a startup, that picture is a prototype. Hire an experienced development team to build an initial version of your product that solves customer problems. This is the best way to find investors. Our website has many case studies where our engineers and product managers have realized our clients’ product development ideas. Contact us. We’ll be happy to help you build a prototype from the ground up.
- Do a trial — Let a small, diverse group of customers use your prototype. They’ll give you honest feedback that can help you make further refinements. Dig deeper into what the customer expects.
- Analyze variants — You’re unlikely to get it right the first time. Customers will find gaps between what they expect and how the product actually works. Understand these gaps and make further iterations.
- Strategize your launch — Keep iterating your product until your customers love it. Once you exceed their expectations, it’s ready to be launched at scale. This is the part the investors love the most, as it is when they can see a clear path to success.
What are startuppers often doing wrong?
A typical mistake when pitching is not simplifying messages in the value proposition. Tech founders may explain too much tech, but too little its benefits of it. They have to get from features to benefits, from benefits to value.
While techies might reckon customers’ success is a marketing concern — thinking it’s not as important as to make the product good — if you’re failing marketing, it results in pressure on R&D. After all, without money, you cannot calmly develop. Therefore, it’s worth thinking about the market, even if the developers do not like to.
Another big problem is that tech startups search for funding too late. Startups often lose money during initial days, but they’re prepared to take risks as long as their customer base is expanding. The margins can be managed over time to make profit. Your roadmap for market penetration and profitability are often the key factors that will make or break deals.
The Final Word
As we have mentioned, there are multiple avenues to reach investors who can finance promising product ideas and prototypes: send emails to investors following your networking, participate in Startup Basecamp, contact Y Combinator, etc. Your primary – and hardest – job – is to build a product worth funding. Once you focus your efforts on identifying the pain points for customers and do research on your competitors, you’ll be on the right track.