It is always a point of discussion- what investors look for in the business before investing. I have tried to cover the answer in 8 most important factors.
- Team’s background and experience
Yes, believe it or not they bet on the horse. Your team is even more important than your idea, its scalability, and its profitability. That is the reason why most of the companies who receives funding have IITians in their team. 60% of the startups that receive funding have IIT/IIM team member. Another reason for IIT graduates to get funding easily is the bonhomie amongst fellow IITians. Most of the Investor- entrepreneurs are from IIT/IIMs who place early bets on their alma mater’s people thus a closed, self-sufficient group is being developed accused of leaving good Non-IIT talent outside the loop.
Investors bet on people with prior entrepreneurship background or those who have head some good position in any company. If someone’s prior startup was a success and they got the exit through acquisition etc. than they stand a very strong chance of getting funding in their next startup.
- What you have at stake
You approach any angel investor with a very good idea and he will check your commitment by asking you if you can quit your job or how much money you have invested. Only if you have life at stake they will put their money at stake. Apart from founders past experience and capabilities, their confidence and conviction in the idea is what matters a lot. That goes not just for investors but also for your early employees. Ritesh Agarwal founder and CEO at OYO Rooms claimed in an interview that after talking and seeing his conviction people were willing to work with him regardless.
Investors would like to check whether your flesh is tied up with your company or not. If you are not fully committed than why will they put their hard-earned money in your venture, as simple as that. They would like to see your commitment in the form of time and money you have invested in your company.
- Founder’s Chemistry
Investors also evaluate the chemistry between the co-founders. This is a very important aspect, as these co-founders have to undergo a massive stressful environment on a daily basis. They have to balance and tolerate each other eve in the worst of their times. It definitely requires a lot of patience and understanding and that’s why it is very important to choose your co-founder wisely. Co-founders should be known to each other from a long time and its even better if they have previously worked together on some project.
In India mostly undergrad batch mates from same engineering college seems to form a very strong understanding team.
Obviously these are not the mandatory requirements to get funding but if you have this than you can showcase it to the investors because this is what they are looking for while making their decisions.
- Profit making capability
They are interested in numbers like your burning capital (the initial funding amount spent per month to finance overheads, before generating positive cash flows), CAC (Customer Acquisition Cost), customer repeat rate, conversion rates etc. No, they are not expecting you to have positive cash flows from the starting but if your revenue model is profitable in the long run or your customer growth rate is increasing at a very high rate than these are some parameters they would be interested in.
So many start-ups that have earned big respect are still not making any profit or even running in loss like Snapdeal, Flipkart etc. They might not be the profitable companies (Amazon became profitable after approx. 6 years) but that is a bigger gamble, the companies and investors are betting on. They are trying to change the consumer purchase behaviour.
- Scalability/ market size
Scalability is what defines a startup. Investors do not expect you to have a pan India presence, but your business model must have the possibility to expand. A global solution is always preferred which can leverage the economies of scale. Hence, an easy scalable idea has higher probability of getting funded.
- Product-Market-Fit (PMF)
Next important thing is your Product-Market-Fit (PMF). It is a marker for a stage in getting investment, according to Haresh Chawla (Partner, India Value Fund). All investment before this stage is based on business hunch and hopes. Only when investors see business approaching PMF they double their investment and confidence.
Product Market Fit refers to the stage where businesses identify the exact requirement of the customer and offers the same.
- Exit Strategy:
Investors are always looking for startups that have an exit strategy, which means they expect the founders either to go public, get acquired or get another big round of funding from PE investor. This is no evil for your company because not just investors but also your initial employee-investors want return on capital.
Venture capital investors are looking for enormous returns in short time period of less than 4-5 years. For this kind of return they are ready to take risks and they fully acknowledge this. That is why most of the venture capital investors invest in multiple companies across sectors to mitigate their risk of failure.
- Who recommends the deal:
Angel investors and VCs generally invest on deals recommended by someone known to them. Startup owners like Sachin Bansal (Flipkart), Kunal Bahl (Snap Deal), Abhishek Goyal (Tracxn) are entrepreneur as well as inventors. They bet on startups at their early stages, which also acts like a torch for VCs where to invest. These entrepreneur- investors do act like funnel for VCs who saves time in filtering from 100s startups coming up each day.
Investors are looking for DEALS- an ideal deal would be a the startup with a strong experienced team, a good revenue model, and scalable business with high burn rate but good future prospect. High burn rate is good for them because you are much in need of their support and they can negotiate equity on their terms.
Startups these days are also giving priority to successful entrepreneurs rather than venture capital funds because successful entrepreneurs bring with them lot of experience and wisdom of their domain. They act as guardians to the upcoming companies and guide them in their tough times.
Some extra tips:
Investors be it angel investor or a VC might try to delay the deal to buy more time. They will take time to share the term sheet, check legalities etc. By delaying they are buying more time to check your progress at the same time inhibiting you from approaching other investors. It is better to have your own legal advisor to get the agreements vetted.
A deal done is never a deal done until you have the cheque in your hand. Do not commit your resources (like increased hiring, additional marketing expenditure etc.) on investment anticipation. Never trust the words till the time you have dollars in your hand.