It’s the age old question – “What are investors looking for?” Unfortunately there is no universal answer here. The obvious response is “a return on their investment” but that’s just an outcome – it’s not what helps you determine how to pitch your business today.
Investors want to find the right fit. They want the right Location, Market Size, and Traction among other things.
Every investor has their own criteria, but across the board, there are certainly trends in evaluating new companies that investors share.
By understanding each of the key areas that investors react to, you can be better prepared to position your deal to be more attractive. You can also begin to understand why they may not be reacting the way you would expect them to.
Location, Industry and Stage
The easiest way to see how you’re a fit for a potential investor is to align with the type of investments they typically make.
Are you starting a cookie company? Great, but you don’t want to reach out to a private equity company that only invests in technology companies with over $20 million in revenue. It’s up to you to do your homework and find the partners that actually make sense for your business.
As you do your research, look for investors that are near you geographically, have a history of investing in deals within your industry, and typically invest at the stage of your company’s evolution that you’re currently in.
The more aligned you are with these criteria the more likely you will find a warm reception from investors that are looking for your type of deal.
What varies based on the type of investor or size of the fund. A $100 million venture capital fund that needs to generate large returns can’t spend time on a $50,000 investment in a restaurant.
The restaurant may be incredibly successful, but in order to move the meter on the $100 million of capital they have to invest, the VC needs a much larger outcome than a single restaurant can provide. This is where market size is a big deal.
All other things being equal, targeting a large market is the best way to get investors excited. The idea is simple – investors passing on an investment that may be worth a million dollars some day is acceptable. But passing on an investment that may be worth a billion dollars some day is a huge loss. When it comes to potential markets to address – size matters.
Investors are simply looking for signs that let them know your business is more than just a good idea.
Your position in the market, relative to new or existing competitors, will certainly be scrutinized by investors. Investors want to know that you have some sort of sustainable, unfair advantage that others cannot easily overcome.
Maybe you have unique relationships in your industry that allows you to cut deals with partners that no one else can match. Or maybe you’ve got a unique patent on a new product that can secure your position as the market leader for years to come.
The goal isn’t to prove that no one else will ever compete with you. It’s to prove that when they do, they will lose to you hands down.
Look for some key leverage points in your business model that can convince investors that you can build a sustainable competitive advantage and harp on those virtues.
Social Proof is something we’re all aware of but it’s rarely outlined in a business plan or presentation. Simply put, Social Proof is clear evidence that others believe in your vision as much as you do and will testify to the merits of your ideas.
There are lots of ways to establish Social Proof with your idea. One way would be to assemble a team of Advisors that are well-respected in your field that have spent time with you and your vision and will attest to its greatness.
Another way is to generate some early activity with pilot customers who will provide testimonials that your product not only makes sense, but if it existed today, they would buy it.
Investors see thousands of business pitches, so they often defer quickly to Social Proof to help them determine whether other smart, respected people have spent the time and attention with your product that would, in turn, warrant the investors’ attention.
Demonstrating traction in your business is also a great way to get investors interested. Investors hear many entrepreneurs talk about their ideas, but very few actually see them through.
Signing up early customers, hiring key talent, or actually building your product by bootstrapping resources are all positive signs that an entrepreneur is scrappy enough to make things work even without substantial capital.
Every bit of traction matters in a startup pitch, so don’t be afraid to tout it in your pitch. Investors will be thinking that if you can do this much with a small bit of capital (or none!), then imagine how effective you could be with their money.
When you look back on what you just read, what investors are looking for seems pretty obvious. They aren’t looking for magical sales presentations or get rich quick schemes. They want big opportunities led by credible entrepreneurs. That’s not too hard to understand.
Ultimately investors are people just like you. They make lots of bets based on what they believe will be successful, all other evidence aside. They are going with their gut as much as you are. So give them something to believe in.