The Top 5 Things Investors Want to See Before Committing Capital to an Early Stage Company.
By Bernie Dixon
If you have been fortunate to score a meeting with investors or have a Zoom presentation end with investors asking for more information, probably you are thinking that you are well on your way to getting a capital infusion for your company. Well, maybe you are. Maybe you have covered in-depth information that investors need to know and confirm about your business. However, chances are you have piqued interest from investors who want to know a whole lot more about you, your company, and your industry. Regardless if the investors are bankers, venture capitalists, or angels, here’s a list of the five most important things that an investor wants to know before sinking money in a company.
1. Financial performance.
Every founder or CEO must know the numbers. Do not abdicate to an accountant or CFO. You need to know your numbers. It is of utmost importance that you prove that you have excellent financial performance and potential, especially if you are seeking funding from a banking institution. VCs and Angels will look for the potential for high returns and a clear opportunity for an exit.
Prepare yourself to answer questions about the financial stability of your company. Clearly depict and explain indications that your company has high and manageable growth potential. Show your plans for equity sharing, issuing shares, or borrowing money to stimulate growth. If you have already incurred debt, then present your debt repayment plan. Investors want to see that your business is fully capable of handling its financial obligations while growing the business. You can expect that investors will evaluate your revenue streams, customer acquisition costs, turnover rates and that your current assets are enough to cover short-term liabilities.
2. Background and experience in the industry.
Never underestimate the power of confidence. Your passion and commitment should be evident to inspire confidence in investors and stakeholders.
Investors look for experienced entrepreneurs and management teams with a track record of high performance in the same or related industry or in a previous venture. It minimizes the risk of entrepreneurs making mistakes on their dime. Most investors will research your business experience and your background in the industry.
For angel investors, “Investor fit” is particularly important while VCs will take interest in companies within the scope of their investment focus. Angel investors place great importance on “chemistry” between themselves and the entrepreneur because they generally take a more hands-on approach in the businesses in which they invest. With more interest in financial results, VCs will assess a company’s performance and potential and usually have access to talent that can replace nonperforming leadership team members.
3. Company uniqueness.
Prove to your investors that your product or services are unique. Investors will want concrete evidence that your market potential is big enough to make investing worthwhile.
Venture capitalists are influenced by product characteristics such as proprietary features and competitive advantage. Investors look for features that distinguish you from potential competitors and give you some sort of advantage, such as intellectual property protection, exclusive licenses and exclusive marketing and distribution relationships or the ability to lead in the creation of new industry standards.
4. Effective business model.
Your company will start to display its strategic value as soon as it begins to generate profits. Present your current business model and show how it will help your company become more profitable. It is OK to depict the profitability projections over time while identifying the necessary investment milestones.
Different investors seek different attributes from a business plan so do your own research on the investors and their previous investments, companies that they have passed over and why they walked away from those companies. It is important to customize your business plan and pitch to each investor individually. For example, venture capital fund managers and angel investors tend to put more emphasis on both market and finance issues, performance and potential so those are areas that you should focus on when approaching these types of investors.
5. Large market size.
Whereas angel investors typically invest in solutions that address major problems for identifiably large target markets, venture capitalists look at market characteristics such as significant growth and limited competition when investing.
The size and stability of your company’s customer base draws interest from every investor type. The larger and more stable customer base that your brand has, the stronger competitive advantage you will have and the more success you will achieve when briefing investors. A larger and more stable customer base will serve as proof that your company has a great impact to its target market.
Investors look for companies that can grow quickly and manage this high growth scale. Investors must see that the company can generate significant profits beyond the initial product idea with adequate financial projections and a plan to include multiple sources of revenue.
Confidence underscores your approach. All these factors contribute to the true goal for angel and venture capitalists alike: an exit event. Ultimately it is the potential of a sizeable exit event that excites investors. Your background and experience along with the financial performance of a unique business model or approach operating in an attractively large addressable market may win you that initial investment with the right investor, Your confidence in presenting that opportunity could be the factor that seals the deal.
Bernie Dixon is the founder and chairman of Launchpad2X, a founder-to-CEO accelerator training organization for women entrepreneurs based in Atlanta, GA.