Most entrepreneurs in search of funding have a solid idea and focus. They’re passionate about their business, and they see a direct need for their product or service in the market. However, in some cases, these entrepreneurs don’t catch an investor’s eye right away. In other cases, perhaps an investor has expressed interest, but after a closer look felt the opportunity wasn’t a good fit for him or her.
With so much uncertainty, it begs the question: What are investors really looking for in a prospective investment? The answer is, it really depends. A lot of factors contribute to an investor deciding whether or not an entrepreneur or business is worth pursuing. We’ve listed some of the more critical factors for entrepreneurs to consider below. After all, a well-prepared entrepreneur who can speak to all of these issues will likely have a better chance of success with investors.
Create an Experienced Team
If you are a first-time entrepreneur, you may find it difficult to get the attention of investors. Though your passion is important, it does not replace experience. More often than not, investors are more comfortable pursuing opportunities led by seasoned professionals – people who have either found success in a previous startup or who have spent their careers gaining the relevant skills needed to be successful on their own.
Fortunately, it’s not just the founding entrepreneur’s experience that matters; investors will also look at the experience of the entire management team. So, if you have little experience yourself, make sure to surround yourself with others who do have the background investors want. It may be a cliché, but to investors, your business is only as strong as your weakest link—and a weak team member could leave an investor questioning your management skills.
Experience can be overlooked if you can demonstrate traction, because any investor you meet is trying to limit his/her risk. In fact, investors will usually want to see some initial traction already in place—which means entrepreneurs might have to contribute some of their own money (or money from friends) to get the funding ball rolling, so to speak. Such seed money has the added bonus of helping an entrepreneur gain…
Showing that you have an established customer base is one way to demonstrate that your business isn’t an unreasonable gamble. Another smart idea is showing you’ve made a compelling solution to solve a target market’s problem—and also have an effective way to market that solution. Above all, understanding the future of your business is key. What are your goals, and how will you reach them? What goals have you already met, and how have they driven your business forward?
Knowledge of the Market
You need to be prepared to answer some important questions about your market. Who is your customer? Why would they want your product or service? What problem does your offering solve? Does the price fit your customer’s budget, and is it competitive? What is the potential for sales and growth over time? If you don’t know these facts off the top of your head, this may signal to an investor that your business is not yet ready for funding. Investors want to see big ideas that can be put into action (and provide returns), not small ones with unclear focus.
It is extremely important that you not lie or try to conceal information. An investor is another partner in your business, and it is essential to build trust as s/he attempts to determine whether this can be a beneficial relationship. This especially means letting a potential investor know up front if there are any challenges the business faces.
Knowledge of the Competition
Most investors, particularly angel investors, are only interested in a few key industries. Because of this, they’ll ask you to compare your idea to other products or services on the market. Remember, investors do their homework: Many times, they already have a sense of how your product or service is similar to another, and they want to make sure you do as well. They also want to see how you feel your idea is unique—or different from what’s already out there. Do you have the competitive edge needed to be successful?
A clear plan identifying how the investor’s funds will be used must be in place. For instance, what milestones and achievements will their funding support, and why are they significant for your business? From there, investors must see the potential for a return on their investment. Make sure you have prepared realistic projections for when you expect to start seeing profits, and how long it will be before they can recoup their initial investment.
Remember, most of the elements investors are looking for should already be outlined in your business plan. If you don’t have a business plan, that’s a big red flag to an investor that you’re not ready for funding. However, even the most prepared documents don’t guarantee an investor will say yes to your idea.
For more useful tips on getting your venture started the right way, check out JumpStart’s helpful Entrepreneur Toolkit. And don’t forget to sign up for JumpStart for Entrepreneurs, our monthly newsletter giving you more helpful advice along with local success stories and lists of local funding/networking opportunities.