Every entrepreneur dreams of having investors falling over each other trying to invest in their start-ups.
For many founders this dream hardly becomes reality.
There are many reasons an investor may decide not to invest in a start-up.
One reason may be that the entrepreneur’s line of business does not fit into the investor’s investment focus.
For instance, a VC firm whose investment interest is Fin-Tech start-ups may not invest in a textile start-up however wonderful their business model might be.
Your first step therefore, as a founder looking for investors is to make sure your business is in line with your potential investor’s business interests.
Even when business interests overlap, if a start-up fails to meet up to the requirement of the investor, the answer is still a very firm No.
Venture firms are inundated with thousands of pitches annually and so they put applicants through rigorous selection processes and only the very best comes out on top.
In the world of venture capitalists, it is not the early bird that gets the worm but the one with the best qualities.
Here are 10 Qualities Every Start-up Must Have To Get Venture Capital Funding.
1. A Great Product.
As Anish Acharya, general partner at Andresseen Holowitz says, the product, especially for early start-ups is the best representation of what is going on and what to be excited about in a company.
To attract a high-profile investor, you have to have a product that is worth their time and money.
Your product must solve a problem/s for a large market base.
It may not be a completely new phenomenon or a game changer that turns the market on its ears but it must have a unique feature that sets it apart from the competition.
Investors also agree that it is always better to have a prototype of the product or service as an investor will more likely invest in a product that has a prototype than one that doesn’t.
Before you present your product to investors, ensure that you can answer the following questions simply and precisely.
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- What is my product?
- What specific problem does it solve?
- Who does it solve this problem for?
- How does it solve it?
- Are there other products solving the same problem?
- Why would my target market use my product instead of the others?
- What do my users say about my product?
- What improvements do I envisage for my product in the future?
Answering these questions clearly and precisely will show the investor that you have a thorough knowledge of your product and will give them more confidence to put in their money.
2. An experienced and dedicated Team.
According to Harvard Business Review, Research has shown that 60% of new ventures fail because of problems with the team.
Having a great management team will go a long way in securing much needed funds for your start-up.
A great management team will be one whose members have great track records, prior start-up experience, industry skills shared entrepreneurial passion and shared strategic vision.
In as much as a stellar resume is wonderful for your team to have, they have to be equally enthusiastic about the company and its offering as well as have similar vision concerning the direction the company should go.
A management team with a CEO who believes the company should go global, a COO who believes it should concentrate on the local market and a CFO with another business on the side can hardly inspire investor’s confidence.
Your team has to convince investors that they are equally invested in the business. You need a team that shows that are ready to stick it out, to scale the business and insure the investors of a nice return on their investment.
3. A Pitch Deck That Makes a Clear Point.
A classic General Manager in a venture firm is exposed to around 5,000 pitches annually, says Reid Hoffman Linkedin co-founder and Greylock Partner.
He decides to look at 600-800 of them and ends up doing between 0-2 deals.
Your goal is to be one of those deals.
Your pitch is your first foot into the investor’s door; you have to make it compelling enough to get your other foot in.
You may have a great product but if you are not able to present it in such a way that equally convinces the investor of its greatness, you may be in for some disappointment.
A well-articulated pitch will build your credibility with investors and facilitated further conversations with them.
Once your pitch is bungled it may be difficult to salvage or regain the attention of your investor so make it communicative, creative, simple, legible and obvious.
Your pitch should clearly describe your product, the problem it is solving, the major members of your team, the competition point and the financial projections of your business. Keep it simple, short and straight to the point.
4. A Large Market Size.
A product that has a potentially large market size will get the attention of investors all the time.
It is one of the most important deciders for whether an investor is in or out.
Most investors will not invest in a product with less than a $100 million annual market potential.
Your Total Addressable Market (TAM), Serviceable Addressable Market (SAM) and Serviceable Obtainable Market (SOM) must be impressive enough to get the investors’ attention.
According to Mike Vernal of Sequoia Capital, Investors try to think about the overall size of the market and not in some abstract terms but in terms of how many people in the world has the problem a product or service is trying to solve, how many of them are paying for it and how much are they paying for it annually.
You shouldn’t only think about the overall size of the market but also its addressability. How easy or difficult is it to reach your market potentials.
These are what investors will consider when doing due diligence on your market size, so your SOM should be a major concern when calculating your Market size.
5. A Good Handle on Your Financials and Key Metrics.
Finance is the life blood of any business from fortune 500 companies to start-ups. Being able to produce convincing financial projections is a must if you want to attract high profile investors.
You don’t necessarily have to be an expert in financial accounting but you have to be able to demonstrate to potential investors that you are capable of deciding where and how to use the resources of the organisation to achieve its goals.
A thorough knowledge of your KPIs is a must. These include Customer Life Time Value (LTV), churn rate, Customer acquisition cost, Cash flow, revenue, net income. Make sure your KPIs are specific, measurable, realistic and time bound.
It is better to target Metrics that are aimed to move you a step further in convincing investors that your venture is fundable. Tim Clairmont, Forbes executive council member and CEO of Clair Financials advices that it is better to focus on a few relevant KPIs as that creates a common goal for your team.
6. Good Business Traction.
Traction is one of the most pivotal factors in running a successful start-up and it plays a key role in helping you secure capital for your business.
Your traction will give investors insight into your star-ups potential growth opportunities and ability to withstand competition.
Achievements such as admittance into competitive accelerator programmes, early positive feedback from customers, etc. are ways to show investors the growth potential of your business.
For a SaaS brand, early traction could be in form of the number of visitor to your website, number of registered users, number of app downloads etc.
Good business traction demonstrates the effectiveness of both your business model and your team.
7. Knowing Your Potential Risks and Putting Mitigating Factors in Place.
Every business venture comes with risks and investors know this, they expect you to know that too and to put mitigating factors in place to protect yourself.
A start-up team that demonstrates a good knowledge of the risks their venture might face and have an on-going risk assessment process, is sure to get the attention of potential funders.
This hand on approach will allay the fears of investors and reduce the uncertainty that is naturally expected in a new venture.
Investors will trust you with their money when you demonstrate that risk management is among your core competences.
Some of the risks you may have to address are ; Market risks, competitive risks, technology and operational risks, legal and regulatory risks and systemic risks.
8. Having Technology That Sets You Apart From the Competition.
Technology is a great way to differentiate your start-up from your competitors. A business that blends in with the crowd without its own distinctive features will not attract the attention of high profile investors.
When you are offering something different, it positions your company as a serious contender in the market and investors will take notice.
As a start-up looking to attract investors, look for ways to make your offering stand out in terms of features, pricing, service, ease of use etc.
It is also important to be able to communicate this difference to your potential investor. Whether you are disrupting an entire industry or offering a slightly different angle to a saturated market, there has to be something unique about your product or service. It is this uniqueness that will convince investors that they stand a chance to make some profits if they work with you.
9. Having a Strong Ip Portfolio.
Having a strong intellectual property portfolio does not only help your business attract investors but also sets you up for success on the long run.
Intellectual property can also serve as a source of revenue because you can licence them out to other businesses for a fee.
Intellectual properties are also great incentive for mergers and acquisitions, so a start-up with a good IP portfolio promises a healthy exit with a good return on investments for investors.
It is also advised to have a good legal framework in place to protect your intellectual properties from theft
10 A Practical and Compelling Financial Forecast.
It is impossible to get funding from an investor without a good financial projection because the major reason for investments is to make money at the end of the day.
Your financial projections will show an investor there and then whether your start-up will make a profit or not.
It might be tempting to distort the figures a little or to list several streams of revenue to impress potential inventors and prove how big your company is bound to become but do not do that.
Make sure your projections are realistic. The rule of thumb is to focus on your major revenue stream and if absolutely necessary to present the rest as possible sources of revenue ease you grow and diversify.
Just putting large numbers together to impress investors is a sure way to lose their trust as you definitely cannot pull convoluted numbers over hardwired and experienced investors who can spot exaggerated revenue projections a mile off.
Testing, building business models and planning should come before financial projections. Through the process, you will learn how to assess the problem/solution fit, solution/market fit, competitive and industries fit and gather primary data that will help you develop assumptions and a market fit based on objective data and analysis.
Armed with this data, you will have a better chance of making a more convincing case for financial projections and prove that your start-up is worth investing in.
The more compelling and believable your financial projections are, the easier it is for investors to invest in your venture.
Most of the time, the survival or otherwise of a start-up is hinged on the Founders’ ability to procure funding and knowing how to position your company to attract the right investors at the right time becomes a life and death situation.
We do hope that this article has given you a nudge in the right direction as you continue on your entrepreneurial journey.