It’s a common question among founders and entrepreneurs - "What are investors actually looking for?" Unfortunately, no uniform answer exists to this question. Of course it’s the case that investors are always looking for a positive return on investment, however, that outcome alone cannot solely help you figure out how to position your business in the eyes of investors today.
Each and every investor evaluates businesses based on his or her own set of characteristics and criteria. But, as a whole, there are many common trends that investors share.
By understanding the various criteria that investors react to when reviewing a proposal, you will be more informed and better positioned to ensure that your deal is selected for investment. You will also be able to better understand why investors may not be reacting as positively toward your proposal versus others.
Before you start pitching, you need to first be sure that your proposal is in alignment with the types of investments your prospects are making. This is the easiest way to find investors that are the right fit for you and your venture.
Starting a cupcake business? You’ll want to find investors who specialize in food and beverage enterprises. It won’t do any good to pitch to a private equity firm whose investment portfolio is only made up of biotechnology companies that earn over $15 million in revenue annually. You must do your homework to ensure that you’re finding the right investment partners that match your industry and business.
When researching prospects, you’ll want to look for investors with offices in the same metropolitan area as you, have a long history of investing in firms similar to yours in the same industry, and typically choose to invest at the same stage that your company is in.
The more aligned your business is with these characteristics, the more likely you will be to receive a warm reception from potential investors who are looking for ventures similar to yours.
When reviewing proposals, investors are keen to focus on the relative size of the market opportunity that each investment option presents. A $200 million venture capital firm that seeks to generate relatively large returns is not likely to spend time considering a $50,000 investment in a local bakery, for example.
Although the bakery may be wildly successful, in order to realize sufficient returns on the $200 million in capital that the fund plans to invest, the VC needs a much larger outcome than a single bakery outlet can provide. This is why market size is a big deal.
All other things being equal, offering your products or services to a sizeable market is the most assured way to get investors interested in your idea. Put yourself in their shoes – would you be more interested in an idea that has a potential future value of a million dollars or a billion dollars? When it comes to market opportunity, those additional zeros matter.
Your current and potential position in the market compared to your competitors is an area that will certainly be looked at closely by investors. They’ll want to see that your business currently has or has the potential to have a sustainable competitive advantage that other players in the industry cannot easily match.
Perhaps you have personal relationships with vendors in your industry that allow you to obtain more favorable contract terms. Or maybe you were able to secure a patent on a new and innovative product that will cement your business' position as a market leader in the industry for years in the future.
When putting together an investment proposal, be sure to highlight some key areas of leverage that are part of your business model. This will help you convince investors that you will be able to secure a sustainable competitive advantage in the market.
Social Proof has become an increasingly important factor in long-term business success, but it is still rarely included as part of a business plan or proposal. At its core, social proof provides prospective customers and investors clear evidence that your vision and business ideas are not only trusted but championed.
There are more than a few ways to provide evidence of social proof. For example, you could set up a committee of advisors who are well-known and respected in your industry. As part of your pitch, you could include anecdotes from them and have them attest to your personal characteristics and your venture’s potential.
Another way to establish social proof is to pilot your product or service with early adopters who could provide testimonials that your business idea not only fills a void in the market, but if it were readily available for sale today, they would purchase it.
Investors review thousands upon thousands of business pitches. To sort through the pack, they will oftentimes first take a look at an idea’s social proof to help them understand whether your product has established success with early users and if other smart and respected industry players have spent time with you and your business to warrant their attention.
Being able to demonstrate to investors that you can make your business a reality is a great way to get them interested. Many entrepreneurs are able to adequately articulate their ideas, but very few can actually put those ideas into action.
Securing early customers, recruiting amazing talent, or bootstrapping resources to manufacture your product or launch your service offering are all great signals that you, as an entrepreneur, are resourceful enough to bring your idea to life even without significant upfront capital investment.
Being able to prove traction is invaluable when pitching your startup, so do not hesitate to highlight it in your pitch. By doing so, you’ll signal to investors that you’ll be able to turn any amount of capital into a net positive return.
So what are investors actually looking for? Considering the key points discussed in this article, the answer seems pretty obvious. Investors are not seeking out unicorns or get-rich-quick schemes. They’re looking for lucrative opportunities backed by thoughtful and reputable entrepreneurs. It’s that simple.
Ultimately, business investors are people too. They make strategic gambles based on their own measurements of success. Oftentimes they are trusting their gut just as much as any entrepreneur is. Your job is to ignite that spark and give each and every potential investor something to believe in.
Natalie is the Co-Founder of Investors Finder. Skilled in Business Management, Lean Startup, Venture Capital, Digital Marketing, and Leadership. A strong business development professional with a Master's degree focused in Business Administration and Management, General from Boston University.
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