“What do investors look for in an investment opportunity before making an investing decision?” is the question on every entrepreneur’s mind when they begin looking for the funding to support their project.
The gist of it is that every investor is unique and has a unique set of standards. Some investors may make decisions based only on the information available, while others may be more likely to consider how they feel about the persons making the decisions. Some may be more willing to take risks, while others are more comfortable playing it safe for a while or waiting to see how well-performing investments turn out.
Nevertheless, there are some universal considerations that investors will make when assessing prospects, so as an entrepreneur, it is in your best interest to address these before presenting to investors. We will try to summarise what investors are looking for below.
1. The Numbers
You must be familiar with the numbers – your company’s financial performance. Show prospective investors your company’s strong financial performance, especially if you’re looking for bank financing. The possibility for big returns and a clear exit option are what venture capitalists want.
Investors in early-stage companies want to see a return on their investment more than anything else (ROI). More than half of the battle is won if you can show that your venture would profit them.
The Key Metrics that an Investor would want to see would be:
- Gross Profit
- Net Profit
- Cash Flow
- Assets and Liabilities
2. A Good Business Plan
A strong business plan shows potential investors that you’re serious about your venture and that you have carefully considered your financial goals. While just a good business plan alone may not be able to secure an investor, without a business plan you will definitely not land yourself with an investor. Good past performance figures with a solid business plan gives confidence that your business is on the right path to success.
Key points to be included in a good business plan:
- Target Market
- Financial Projections
- Marketing Strategies
- Competition Analysis
- Market Analysis
3. A ‘Novel’ Idea
Everyone gets excited about a business idea that will disrupt the market. Investors want to know what makes your product or service unique, so you have to make it clear. Does the market have room for your special offering? Is there a special issue it resolves? Is this an original invention or innovation?
This is referred to as your “competitive edge” or “unique selling proposition” in the context of business (USP). It’s what will set you apart from your rivals.
4. Target Market
Your task is to persuade potential investors that there is not just a sizable enough market for your goods, but also that your position within that market is secure. Additionally, you must confirm that the desired investment cash is justified.
Steps to get this right:
- Present statistics demonstrating the size of the market opportunity and the client base,
- Go into great depth on how your business strategy makes you distinct from your competitors, how you have an unmatched advantage, and what problem you are tackling that the current competitors are not.
5. A Good Story
Investors are humans, not machines, and they can be persuaded by a compelling story about why this business is important to you, how the concept came to be, and where you want to take it. What need would your business satisfy? How will the world be altered by it? What distinguishes it? An excellent method to set the stage and interest potential investors is to begin your pitch with a tale.
6. The Team
Investors are aware of how important the founding team of a firm is to its future success. They do not want to suffer financial loss as a result of a collaboration that did not work out because the founders or management team lacked industry knowledge or compatibility. For this reason, investors would want to know about you before they decide whether to invest in you.
Key qualities that investors look for in a startup team:
7. The Investment Structure
Investors will want to know that you have already figured out about the legal implications of investing in the company. Your company must be set up in a way that makes it possible for other parties to invest. A detailed plan for the investment’s operation is also required. Will the investors be permitted to cast votes for corporate decisions if they are partners or shareholders?
A clear structure would include:
- Figuring out the Legal Ramifications
- Clear Plan of the Investment
- Clear Valuation of the Business
- A Strong Shareholders’ Agreement
- How do Investors Gain Profit from the Venture – Dividends and/or Capital Gain?
8. An Exit Plan
“Begin with an end in mind” is what a seasoned investor would think of before making the final decision of signing off the cheque for investment. When investing in a company, investors will want to know your long-term plan and how you intend for them to get their money back when their investment reaches its end. More often than not, business owners start their business without ever considering exiting the business.
In order for angel investors and venture capitalists to get a return on their investment, the majority of equity investments depend on the success of the business exit. This means that unless you include exit strategy in your pitch, you are very unlikely to attract equity capital from outside investors.
Common exit plans would be:
- Initial Public Offering
- Management Buyout
- Retail Investor
- Reverse Takeover by a Larger Corporate Company
Once again, there are no hard-and-fast standards for what investors deem as a suitable investment. But if you just want to take away one thing from this, this is it: investors want amazing ideas led by passionate, reliable and responsible business people. They are seeking exciting concepts that have a strong foundation with a strong team to grow together.