Start-ups seeking new investors, regardless of the level of investment, need to better understand what drives individual investors or venture capital firms.

Around 65% of venture capital backed businesses fail to get a positive return on capital (ROIC) for investors. Because of this risk, investors have to be selective. Most investors look for six specific things when considering an investment in a startup business.

What Do Startups Need Most?

1. A Meaningful, Unique & Innovative Product or Service

2. Ability to Gain Traction with Large Potential

Investors seek viable businesses that have traction in a well-defined core market, or at least a strong beachhead. They are looking for loyal customers, a low customer churn, and a high rate of repeat purchase. These can be good indicators of a viable product or service. According to Entrepreneur magazine, a common factor among successful startups is that they are constantly seeking to satisfy their customers and the whole organization is aligned to this goal. So, the product or service needs to be designed with the customer’s satisfaction in mind.

Further, it is essential that investors see proof that there is a large enough potential market for the product or service. Very niche products will not meet most VC company screens unless the market has a clear and significant gap. Remember that given the inherent risks and the low success rates, investors are unlikely to take a huge risk and will only focus on opportunities with a high return – a goal of a 10x return is not uncommon.

3. A Strong Team with a Solid Leader

The team, with a strong leader, is another top factor for investors and is a leading indicator that a business can succeed. The bottom line is that investors invest in businesses and the team.

Investors are looking for teams that are passionate and knowledgeable about their product, service and industry. They will be asking themselves the following types of questions of the leadership team and the CEO or Founder:

• Are they experienced, either as entrepreneurs or within the industries they aim to serve?
• Is the team fully committed?
• Are they willing to listen and take advice?
• Will they be able to find solutions or pivot if there are headwinds or roadblocks?
• Do they seem calm and competent under pressure?

23% of start-ups fail because they did not have the right team in place so as a startup, the people you surround yourself with are critical.

4. A Detailed Business Plan

Developing a reasonably detailed business plan, at a minimum of three years, is an essential part of what investors evaluate. This plan should include:

• An overview of the product or service with clearly articulated key differentiators as well as the major target prospect groups. Identify the target’s pain points and articulate how the business solves them.
• The plan to expand the organization, add marketing and selling capability, and improve the product or service (development, engineering, etc).
• A clear outline of the market, competitors and the potential opportunity (both short term and long term).
• An organization overview with key employees and any key relationships & partners, including both existing and future possibilities.
• A financial forecast which uses existing trends and educated predictions and clear assumptions to show the projections of revenues, operating costs, cash flow, and the bottom line.
• A summary identifying four to six main reasons why this business is an attractive investment.

5. Investment Thesis Fit

Investors, particularly venture capitalists (VCs), are looking for companies that fit their investment philosophy and focus on areas where they have expertise. This means they’re looking for businesses where they can add strategic value. This benefits the companies they back as investors since they can concentrate their mentorship and advice to industries where they have deep experience. Many investor groups build up their know-how and expertise in certain market verticals by engaging people with senior level experience in those verticals.

6. Investment Terms

A final key element of the investment is the terms. Startups need to clearly communicate the following:

• Overall valuation of the company, and on what basis that valuation was established.
• The amount of funding being raised and, if applicable, the sources of those funds.
• The type of funding (equity, debt, convertible debt, etc) and any associated dynamics (timelines, future expected rounds, etc)
• Use of funds, which would likely include expanding the organization, adding marketing and selling capability, furthering product development, or similar examples.

Many startups fail in at least one of these areas, or don’t present their investment terms clearly.

In Conclusion

Based on decades of experience meeting entrepreneurs and reviewing investor presentations, these six areas continue to be what startups need most. In almost every initial meeting, a startup fails to meet at least one of these criteria, and almost immediately disqualify themselves. Entrepreneurs seeking funds should remember one key factor summarized well by Paul Graham, Founder of Y Combinator: “Investors are pinched between two fears: fear of investing in startups that fizzle, and fear of missing out on startups that take off.”

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