Taylor Ryan has co-founded 5 startups, is currently the CMO of a venture backed Ai company Valuer.ai and has published several marketing e-books. He considers himself a mentor, startup junkie, technical marketer, and growth hacker. As an expert in start up financing and investment, below Taylor provides CEO Today with professional insight into the world of startup growth.
Persuasion takes effort and having venture capitalists fund a startup can be daunting if done wrong. How does one ensure that funding is captured in the right way? Well, this one may be trickier than you thought. It’s not only about how great the investment pitch is, but it’s also the signs that indicate to potential investors whether the startup should be funded.
There are various indications, reasons, and signs that an investor must look for before investing in a startup, and here’s a list of the most critical ones:
This is the initial sign that venture capitalists and potential investors look for. Momentum is the first signal that enables investors to decide whether the startup is on the right track. It can be defined as revenue stream, margins, partners, goals, or the overall plan.
Each investor has their own definition of this term, but if these aspects don’t show promise, they won’t be interested in investing. It could mean sales for some, while others may refer to it as market share. Once you define this momentum and see it in a startup, it should have a greater chance of securing your funding.
Every startup needs to have a dedicated management team in order to grab the interest of potential investors. The success and growth of a startup depend largely on how well-coordinated and devoted the team that runs the show is. Most investors decide whether or not to invest based on two vital factors:
- The product (weight assigned: 0.3)
- The team (weight assigned: 0.7)
As an investor, you need to ask questions regarding each member of the team, and the choice of team will determine whether you should feel like funding this brainchild.
The market size is yet another fundamental aspect or sign that you must consider. It’s okay for startup companies to start lean. No investor, venture capitalist or seed-stage investor is impressed with early exits, quick flips, and useless mergers and acquisitions. They want to see the startup grow organically and over time. Thus, you need to be convinced of the huge potential in the market that the startup has targeted.
Organizations, big or small, are good for the economy. Not only do they provide one or more of the much-needed product or service, but they also ensure job opportunities. Employment is one reason why an investor funds a startup that is believed to create more than a few job opportunities for people.
This is another great sign that indicates the investment in a startup is somewhat beneficial. If startups have a diverse portfolio with products that span different markets, it seems like a reasonable idea to invest. It secures your investment effort since loss becomes limited to one or two products in that portfolio.
This is one of the essential reasons for a venture capitalist to invest in a startup. Without there being a future outlook and growth, what good is the startup anyway! If you decide to step up and make such an investment, it’s likely to have advantages for the market as well as the economy.
Ownership for Sale
Another sign for a potential investor to invest in a startup is the stake of ownership being offered. If a company has good momentum, something such as 20 percent might work, but otherwise, it could put off potential investors.
As an investor, you should be interested in this factor and be on the lookout for a share of ownership in the business.
Venture capitalists are on the lookout for companies that are highly scalable. If the startup has something out of the box that can really present the business as having ample traction and momentum, it has already accomplished half the task.
A unique product or service is one that allows the company a competitive advantage over others in the same market. It has demand, it is scalable and it will sell.
Use of Funds
It’s unreasonable to have a startup idea, inquire funds and not have a plan of action. The money may be used for several aspects such as hiring resources, bringing in inventory, overhead and operating costs. If a plan is in place and it is concrete, it should signal to you that your money will be safe and put to good use.
If there is a meticulous financial or business plan in place, it speaks volumes of how good the startup scheme is. It also says a lot about the leader, planner or executioner of the startup or idea.
Reasonably drafted cash flows, expenses, and projected margins will assure you about the feasibility of the startup and its future potential.
Know the above-mentioned signs that indicate how successful your investment could be for a certain startup. These critical signs can make or break any investment, so make sure these are accounted for the next time a startup is out looking for financing. Otherwise, it might just remain an idea, far from reality!