Fans of Shark Tank know the line well:
“It’s just not investible right now, so I’m out.”
The sharks frequently offer this reasoning to the entrepreneurs on the carpet. Sometimes it’s because they’re pitching a product instead of a company. In other cases, they don’t have the infrastructure, vision, or capacity (even with more capital) to scale in a way that generates returns. Occasionally their value proposition will never scale to a level where investing in the company makes sense.
Of course, pitching to investors in the real world bears little resemblance to what you see on reality TV. But whether you’re looking to attract capital, dreaming of launching your own business, or contemplating investing in one, the sharks’ go-to line underscores an important truth:
A successful startup is an investible startup.
To ensure you’ve positioned yourself for success, it’s important to understand what it means to be investible in the first place. From there you’ll be able to take the next steps toward achieving your goals.
An investible business may be defined as one where existing infrastructure, management, strategy, and growth projections offer a reasonable expected return on investment. This is typically parsed through a number of lenses.
First things first – what are you selling, who are you selling it to, and why is it awesome? You can have the best plans in the world, but if you aren’t selling something worth buying, you’ll have a hard time getting your foot in the door with investors.
It’s not just about whether your product or service is valuable, though. How well you can communicate that value matters, too. Prospective investors need to understand the pitch, but they also need to see – at a basic level – why that pitch would matter to your end customer.
Investors expect to turn a profit when they sign a check. To this end, they need to see how fast they will recoup their investment and start seeing returns.
This speaks directly to both the mechanics of and potential for scaling. Do you know what it would take to go from producing 10,000 units of your product to 100,000? Does the target market size have the depth and breadth to accommodate significant enough growth to make it worth the investor’s time? An investible startup will have (good) answers to those questions.
Those who invest in startups do not expect to get their money back tomorrow or the day after that. They understand that growth takes time, effort, and – above all else – sound strategy.
An investible startup can demonstrate that they have considered all available data, done their homework, and set a plan in motion to get where they want to go. This paints a picture for would-be investors of the road ahead and makes it easier for them to justify getting involved.
Startup investors need more than a great product, opportunity, and roadmap to sign on the dotted line. Even if you shine in those categories, investors need to know they can trust your team to execute.
Who’s making decisions? Who will they rely on to deliver? What kind of experience and skills are in the mix? Investors in startups are investing in founders as much as they are a product or service.
As any entrepreneur worth their salt will tell you, launching a startup is hard work. It takes a lot of money, hours, sweat, and tears to get from ideation to something investible.
Investors in startups need to see hunger in the eyes of a founder. They want to know what you’ve done to get to where you are and feel confident you’ll stay motivated.
Aside from the things investors want to see, there are certain red flags that will cause them to walk away. Understanding these pitfalls will help you clean house before it’s time to pitch.
The idea of being first to market, in theory, holds appeal. After all, if you have no competition, you have ample upside opportunity.
But first to market innovators and their investors face significant risks. Larger companies in a similar space could develop a similar offering and capture market share faster than a startup. Emulators may diminish the value proposition, in turn diminishing expected returns.
Investible startups need to anticipate such objections and pre-empt them operationally and in your pitch. You may otherwise find yourself hearing “no” before you get the chance to make your full argument.
Maybe you have an excellent idea and a beautiful means of bringing value to your customer. But if similar solutions to the same product you solve for already exist, you need a compelling case for customers to choose you. And investors need to understand that case.
But that’s a basic part of pitching your value proposition, right? Well, take note of the subheading above. Your argument needs to extend beyond minor advantages over the competition. If you can’t show substantial differentiation, investors may see your ability to capture market share as minimal (and probably be right).
Understanding the numbers behind your business is the first and basic step in designing an ask for investment. Unit economics will be an area investors heavily scrutinize.
In business, a unit is any basic, quantifiable item that provides value to the company. Unit economics involves measuring that value in terms of revenue and costs. Simple math, right?
For a startup to be investible, though, these calculations require a more granular examination of factors like pricing and product complexity. Knowing where you stand with things like customer acquisition costs, lifetime customer value, and what needs to happen for those metrics to improve isn’t about impressing an investor. It’s expected. Startups without these insights will have a hard time raising capital.
A cap table, or capitalization table, is a document breaking down who has ownership in a company and by how much. Venture capital investors consider this when determining whether investing in a startup will generate enough of a return to make it worth their while.
Let’s go back to the Shark Tank example. In most cases, they ask the entrepreneurs about what kind of capital they have already raised and how much of the business they still own. They know the answers to these questions define how much wiggle room the entrepreneur has in terms of available equity and how much they can sacrifice at what amount.
As many of the sharks will say, “Sorry, 5% isn’t enough for me to get out of bed in the morning.”
When an entrepreneur has only, say, 40% of the company to their name, they may not have the ability to offer enough equity to make it attractive to the investor. Moreover, the entrepreneur will have limitations on how much equity they can offer at what price out of respect for existing investors. To this end, a rough cap table can kill a deal before it’s even offered.
Investors love a hard-working founder. It tells them they’re giving money to someone who wants a great return just as much as they do.
But investors need founders who are focused. Your pitch might be pitch perfect, but if you’re also working a full-time job elsewhere or running multiple startups, investors might decide to pass. They want to know that delivering results for them will be your top priority.
You know what investors like to see in a startup. We’ve covered what they don’t. The question now becomes: what steps can you take today to ensure you are seen as investible tomorrow?
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.
You should also consider forming a board of directors. Public companies are required to have a board by law. But small businesses and startups also benefit from having a board of directors – and maybe even more than the big brands in the room.
Beyond the value in having multiple perspectives informing your decisions, startups will have an easier time convincing investors to fork over their cash if they know it’s not just the founder making choices.
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 you can’t answer “yes” to each of these questions, you might be in trouble, with or without investment.
This is sales 101: identify a pain point, then show you have the answer they might not have even known they needed. An investible startup begins here – well before any money changes hands.
On the other side of the equation, you might be in the business of causing pain in an established market by disrupting it. Investors get excited by startups with the potential to change business as usual. In fact, the odds of startups receiving first-round funding increases by 22% with a value proposition rooted in disruption.
We’re not saying that your product needs to be disruptive. But it should – at a minimum – reduce pain by fixing, improving, advancing, or transforming some aspect of the customer’s life. Ensuring your value proposition meets this condition and knowing how will make you a far more investible startup.
Before you even begin to move forward with raising capital, you need to think hard about your company’s values and goals. Starting with this knowledge allows you to more efficiently and effectively plan your capital raises.
Not everyone who invests in startups thinks the same way. Some care primarily about the potential scale of returns and the expected timeframe for realized profit. Others want to know more about the qualitative impact of your company on the world around us. You might find investors who want a controlling stake in the company, while others want to invest less capital for less equity.
With your own values in mind, research and seek out potential investors whose philosophies and priorities align with your own. This will save you time by helping you identify incompatible investors before you pitch. But it will also allow you to more thoroughly research prospective investors, enabling you to tailor your pitch to them specifically. This increases the odds that the investor will see you as an investible startup.
Building a company from the ground up is not for the faint of heart under the best of circumstances. But when the time comes to solicit outside investment to take things to the next level, a whole new level of difficulty comes into play.
Fortunately, you have already invested in your company. That’s how you got this far. But further investment through proactive planning, smart decision-making, and hard work will deliver a return worth far more than its weight in gold: a truly investible startup.
Before you pitch to an investor, you need to have something worth pitching. You’ll have a much easier time of pitching to investors if you build your startup with that future challenge in mind. In our on-demand webinar Turning an Idea or Product into a Business, we get into what that entails, including:
For more information about our other on-demand webinar series, click here.
This is an updated version of an article from 2015. ©2023. DailyDACTM, LLC d/b/a/ Financial PoiseTM. This article is subject to the disclaimers found here.
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