Friday, January 23, 2015

What Do Startup Investors Want?

It is a well-known fact that startup investors, whether they are angels or venture capitalists, ultimately make their investment decisions emotionally, or, to say it another way, based on a gut feeling.

However, if you are an entrepreneur looking for funding for your startup, this knowledge alone does not help because it does not answer the question “what does an entrepreneur need to convey to the investor, for the investor to have the right emotional reaction which leads him to write the check”.

What then do early-stage investors in the tech sector look for when they are evaluating a project? What are the factors that make them excited about one project but not another?

People. The investor needs to believe in, in fact, be inspired by, the entrepreneur and his initial team. He needs to be convinced that this particular team has at least the following characteristics:

  1. the necessary technical skills to complete the project in the proposed timeframe,
  2. the required steadfastness, dependability, and firmness of character to see the project through, and
  3. the personalities among the founding team that will complement, rather than detract from, one another, especially when times get tough (as they often do in startups).

Some ways to demonstrate to an investor that the team has what it takes, to name just a few, are (i) a history of working together as a team on a prior successful project, or (ii) external validation of the project for which funding is being sought through market traction.

Opportunity.

Economic. To elicit the right emotional response from an investor, an entrepreneur needs to persuade the investor that, when properly executed by the right team, there is tremendous economic opportunity in the project. That may mean that the project is in a fast-growing market and that its premise is promising in light of what are perceived to be future trends. It also means that the investor can (and does) imagine a scenario where, with the right execution, the project will generate a significant economic upside, a return on investment of 10 to 30X.

Impact. Some investors will be looking specifically for projects which promise to generate a measurable, beneficial social or environmental impact alongside a compelling financial return. This is called impact investing and it is becoming more widespread. When pitching, it is critical for the entrepreneur to know whether the investor subscribes to this investment mandate. If so, he will be a lot more excited about a project that seeks to build literacy than the next “Cut the Rope” app.

Competitive Advantage. Finally, there needs to be a convincible competitive advantage, one that will allow this particular project to succeed over others in the same space. Its people, with deep specific expertise in an obscure area highly relevant to the project, for example, may be such competitive advantage. It may also be the technology behind the project, preferably protected by strong patents. Having a significant head start in an industry with a high barrier to entry might be another.

One way or another, an investor needs to feel that the horse he is asked to put his money on, the particular project that he is asked to invest in, in keeping with the metaphor, will come in first. The factors listed above, when applied to a startup especially, are highly subjective. It is the entrepreneur who is able to convince investors that his project excels in all three categories that attracts capital easily and gracefully!

Happy company making!

Inna


White Summers  Inna Efimchik, a Partner at White Summers Caffee & James LLP, specializes in assisting emerging technology companies in Silicon Valley and beyond, providing incorporation, financing, and licensing services as well as general corporate counseling.
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4 comments:

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