About to start fundraising for your startup? Wondering what investors want to see in a company before they invest?
Below are the 5 key things most early stage investors will be assessing when they go through a pitch deck or hear you present. Being able to show you have already come some way with these can greatly increase your chances of raising, as you will be ahead of other startups they might be considering alongside yours.
Not only that, but also the more progress you can demonstrate in these 5 key areas, the less “risky” the opportunity will feel to an investor. And therefore, the higher the valuation they are likely to accept their investment to go in at. In other words, having them in place increases your negotiating power when it comes to determining the terms of the deal.
1. A MVP (Minimum Viable Product)
A minimum viable product is the most basic and cheapest version of your product. It is the bare bones of your product, that demonstrates to the investor that you’ve created a prototype that you can test with some very early users, having committed a minimum amount of time and resources. It needs to show enough promise to keep early adopters engaged and not put them off. Investors know that a good MVP will have allowed you to gain valuable insight into what works and what doesn’t. Most importantly it may already provide you with proof that customers are willing to use your product, and perhaps even to pay for it, which is exactly what investors want to hear.
Don’t go out to raise investment if you have not released a basic version of your product and gathered some feedback, if only to prove to yourself that you’re on to something.
2. A Credible Team
At a very early stage, you might not have launched your product, or even finished designing it yet, let alone have a history of customer transactions. So investors will look at the team, as they won’t have much else to go on. Here investors are looking for a strong team, with credentials and expertise in the market you’re launching in, and a breadth of skills that are relevant to the product you’re building.
Many early stage investors do not invest in sole founders. This is mainly because they are more comfortable with two or more founders balancing each other out, and they know that a complementary set of skills at management level greatly increases a startup’s chances of success.
If you are a sole founder, consider bringing on a co-founder, or at least a strong senior leadership team that complements you well. It’s good to show that you know what you don’t know, and that you’re not trying to retain control of all aspects of the business but can let go of crucial areas that or not your forte.
3. A Viable Business Model
The main two questions here are: can your business generate revenue and can it scale? Have you worked out what and how you are going to charge your customers? And does that make sense in terms of your customer segment, and considering your key costs for delivering your product? Do you know how much product you need to sell in order to cover your costs and break even?
If you haven’t worked out how you are going to make money, this can be a hard sale to investors. Unless you think you are going to be the next Facebook, in general, investors will want to know you’ve figured out your monetisation strategy early on. They will also want clarity on whether it can scale, and how you plan to do so.
4. Early Signs of Product / Market Fit
Product / Market Fit is famously defined as “being in a good market with a product that can satisfy that market”. It is the holy grail for startups.
Ultimately It is the moment where your product starts to sell itself (or your customers sell it for you), because it solves a real problem in the best way, in a market where there is a strong need. This takes some startups years to achieve, but any early signs that you understand your customer and that they are responding well to your product will be a huge pull for investors.
Every founder thinks they have a great product - but the one true proof is paying customers. Share some early growth metrics, trial results or customer testimonials early in your pitch deck to prove you understand the importance of this and whet their appetite.
5. A Strong Plan for Growth
Investors will assume that you're raising investment because you’ve got ambitious plans for your business. So you should only go out to raise once you know what you are going to do with that money and how the way you plan to spend it will allow growth.
Make sure you can describe key milestones that will help you grow and increase the value of your business, ready for the next round.
We know it’s hard to achieve these 5 requirements before a first raise, but we recommend you can show good progress on at least 3 of them. You can then build your fundraising story around achieving the other 2.