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If you want to raise startup capital, such as from a venture capital investor, you will want to know how to pitch your business successfully. Accordingly, it is helpful to identify what exactly startup investors look for when sourcing their investment opportunities. This article will examine five things startup investors look for before investing in a UK company.
LegalVision’s Startup Manual is essential reading material for any startup founder looking to launch and grow a successful startup.
1. Strong Management Team
Most startups are managed by their owners. Investors prefer this because the incentives of the management team align with the shareholders. However, you must demonstrate to prospective investors that you possess the necessary management skills to scale the business and grow its value.
In particular, you should have a strong management strategy that effectively uses your employees. Your personnel structure should be logical, efficient, and suitable for long-term growth. Additionally, your employees should likewise share in your motivation and passion, as this further evidences to prospective investors that all the necessary incentive channels are aligned.
2. Solid Financials
Effective financial management overlaps with evidence of a strong management team. But professional startup investors are motivated mainly by the bottom line. Hence, you must demonstrate that their investment is necessary to unlock pre-existing value. Any backwards-looking statements should be impeccably organised and crystal clear. Moreover, any forward-looking statements should incorporate well-reasoned scenario analyses.
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3. Innovative Products
An investor looks for companies that produce a compelling good or service. Hence, your sales product should satisfy a deficit in the existing marketplace. Alternatively, your product should disrupt the existing market. For example, consider how Uber disrupted the traditionally private, surface-level transportation market.
The flip side of having an innovative product is sourcing and targeting an addressable market. From a strategy perspective, this requires you to demonstrate to investors an adept mastery of the external forces (i.e. the competitive market).
An interesting product without a customer base has little financial value and therefore is unlikely to be attractive to startup investors. On the other hand, the addressable market is prominent in some cases, and your product overcomes an existing technological barrier. Again, Uber is an excellent example of this. In other cases, you may need to attract the market by building a brand. Restaurant groups moving into new regional markets is an example of this.
4. Scalability
Your business should be suitable for rapid scaling. This means that all the necessary systems are in place to increase your product market once you acquire equity financing rapidly. Scalability looks different for different businesses operating in different sectors.
For a fintech company, scalability may mean obtaining the necessary regulatory approval to market the product to a particular subset of the market, such as retail consumers, and then market the product accordingly.
In all cases, you should already have a road map detailing how you will get from your current position to your target goal. The only thing that should be lacking is the financial resources to implement the plan. For these reasons, scalability often ties into a strong management team.
5. Evidence of Viability
Venture capital funds do not typically invest in ideas alone. Instead, they look for businesses with a track record of existing success. Unfortunately, many startup companies fail to convince investors that their business model is viable.
Again, success differs depending on the market in question. Additionally, success is not necessarily synonymous with profitability. For a software as a service (SaaS) company, viability means an operating software platform that is properly engineered and largely fit for purpose. For a manufacturing company, it means a genuine prototype. Or, for more complex products, detailed evidence that the underlying engineering is adequate and largely fool-proof.
Key Takeaways
Startup investors like venture capital funds are professional investors ultimately motivated by maximising the value of their investments. They, therefore, look for businesses with:
- a strong management team in place;
- solid financials; and
- an innovative product capable of rapidly scaling and which has evidence of viability.
This is in addition to having a strong and compelling presentation plan. Likewise, you must consider your network and how to get your business in front of the right investors.
If you need help with your startup, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
The five most important things to demonstrate to a startup investor are strong management, good financials, innovative products, scalability and evidence of viability.
Startup investors include angel capital investors and incubators. However, venture capital funds invest most capital.
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