Do you dream of creating a successful startup? Are you thinking about investing in a startup? Both are increasingly popular activities these days. And lots of businesses can provide a good income for the founder. But what makes a business ‘investable’? That is, what are the characteristics of a startup business that attract investors?
Jonathan Friedman of LionBird, a digital health investor, wrote in VentureBeat about these six factors which, if present, dissuade him from making an investment:
If you want to attract investors like white on rice, then follow these expert tips on raising capital:
A healthy management team is typically made up of individuals who have experience bringing a product to market, or some previous form of successful startup experience. Venture capitalists take a big risk when investing in a startup, but a successful track record can ease their minds and open their pockets.
Your company should also have a serious board of directors, says Craig Everett, PhD, assistant professor at Pepperdine University’s Graziadio School of Business and Management. He explains that investors like to see a board made up of outsiders (i.e., non-employees) who have also invested their own capital into the startup. Investors are more comfortable if they know that the founders have attracted expert outsiders, and that they are not the first to write a check.
Is there a need for your product or service? Does it solve a problem? Can you provide evidence of its effectiveness with user testing? If your product doesn’t have a market, then it doesn’t matter how fancy or unique it is; it won’t attract investors.
However, investors do take some risks if the product proposes major changes to an industry. A study by researchers at the University of California, Riverside and the Rotterdam School of Management found that investors like to invest in products that are disruptive. Though investors are not as likely to put up large amounts of capital for disruptive ideas, the odds of startups receiving first round funding from investors increased by 22% as disruptive messaging increased. Disruptive products or technologies may promise huge returns for investors, but investors tend to hold off on making larger investments until later stage funding in order to offset the risk of backing an unproven product.
We’re not saying that your product needs to be disruptive, but that it should fix, improve, advance or transform some aspect of the customer’s life.
Before you pitch to venture capitalists, you should make sure that your company and its product fit into their investment portfolio. Do they know your industry? Have they invested in similar ventures? Do they want a managing stake in the company? If so, are they located close enough to take a hands-on role? Does your business require a social impact investor that is equally interested in maintaining the societal or environmental implications of your product? When pitching your business, it’s important to make sure that you and your potential investors share the same vision.
It’s not just a question of whether or not your company has growth potential; it’s also a question of whether or not your company can handle that growth. Scalability is a major factor for successful startups, and it’s absolutely vital to attract investors.
Martin Zwilling, CEO of Startup Professionals, lists several tips for making your startup scalable, including:
The bottom line is that investors want to make money. To attract investors and become a successful startup, you need to position your business for growth and prove to investors that people are interested in what you have to offer.
[Editor’s Note: To learn more about this and related topics, you may want to attend the following webinars: Turning an Idea Product into a Business, The Very Basics – Forming the Business and Raising Capital: Negotiating with Potential Investors. This is an updated version of an article originally published on October 25, 2015.]
For more about Stephanie Strait, check out her LinkedIn profile: https://www.linkedin.com/in/stephanie-strait-b5b14670/
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