Investors consider many factors when analysing an investment. However, there are a few factors that are almost prerequisites for getting an investment. Meeting these prerequisites can’t guarantee a positive answer, but starting your fundraising process without meeting them might be a waste of your precious time.
Here are the 7 factors by order of importance:
1. Having a great Team – Many people have great ideas, but only few can really execute well. Therefore, the quality of the team is the first and foremost important factor for investors. If an investor doesn’t believe that your team can ‘make the dream come true’, there’s no chance he’ll move forward. More on what it takes to have a great team in my next post.
2. Targeting a big problem – Investing in a startup is very risky. Thus, investors are looking for startups that can generate extraordinary returns. In order to achieve that, you must target a big problem. A big problem doesn’t necessarily mean a big market today, but rather having the potential of becoming a big market. I would say that a good ball-park number for a big problem would be an addressable market of at least billion dollars.
3. Addressing a problem or need people care about – If people don’t care about the problem or need you’re addressing, there’s no chance they’d be interested in your solution (no matter how good it is). If you’ve seen the movie ‘The Social Network’, then you might recall that the big “epiphany” Mark Zuckerberg had, was to add a ‘relationship status’ field to the user’s profile. Why? Because getting a date is the one thing college students care about most.
4. Having a Competitive advantage – There’s no market without any competition. Even if you currently don’t see any competitors, there are at least 5 other startups out there working on the same idea. Thus, investors are looking for some kind of secret sauce that your competitor will find hard to imitate.
5. Presenting a convincing work plan – Many entrepreneurs miss this important issue. Investors want to know how their money is about to be spent. The clearer and more convincing your work plan is, the more chances you have to be funded.
6. Having a working prototype of the product (alpha version) – Although there are few exceptions, investors don’t tend to invest in startups that don’t have at least some kind of working prototype or demo. Why? Probably because it’s much easier to believe in something you can see than in something you need to imagine.
7. Showing Traction – Unless you’re looking for pre-seed money to build your beta version (less than $50,000), investors want to see an increasing number of users who are regularly using the product (i.e. traction). From the investors’ perspective, traction is an initial proof that there’s a real market need for your product. If you’re looking to raise an A Round (one million dollar and above), investors would even ask for detailed matrices on the conversion rates, customer acquisition cost and customer lifetime value. a