Getting outside funding is likely to propel a business out into the stratosphere. Most entrepreneurs start off with little more than experience and a great idea, so investors need to come in to provide a company the ammo it’ll need for growth.
But what exactly makes a company investment-worthy? There’s a million ideas and startups out there now, so why would a sophisticated investor pick one over the other?
While it’s hard to pin down the exact things every investor looks for, there are a few common traits that most professional VCs seek out in their search for the next big thing. Here’s a look at some of the traits that may make your venture more likely to get funded.
The right economics
Warren Buffett, perhaps the most influential investor of our times, once said “when a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.” His message was clear, even the best management team in the world cannot make money when the business model of the company is wrong.
You could have had a great new idea for making horse carts go faster at the turn of the 20th century, but everyone was going to end up buying cars and you’d be left bankrupt anyway. So, when the economic fundamentals of a particular sort of business makes sense, the business is more likely to be a hot pick for investment.
(Somewhat) Predictable Outcomes
Put yourself in the shoes of the investor. You have millions, perhaps even billions and need to put it in the right place. You could simply leave it in a bank and earn the minimum return assured to everyone, risk-free. The whole point of putting it in a business instead is to earn more than the risk free rate. It’s called the ‘opportunity cost’.
The investor’s job is to minimize risk and maximize return, and for this predictability is really important. An investor needs to be able to foresee where demand and revenues will come from a decade down the line. A business that is likely to have a good idea of where the industry is heading is a much better candidate than one that could become irrelevant in just a couple years.
Founders need to work hard to prove to their investors that the opportunity they claim exists really does, which brings us to the next key essential for fund-worthy companies.
The right founders
Even with a great business opportunity, a massive gap in the market and a fantastic idea, the startup is likely to go nowhere without a set of leaders willing and capable to lead it. From the investor’s perspective, there’s not a lot of information about where the industry is likely to be heading or if the idea is really the next best thing or just a dud. That’s why most investors say they fund ‘people, not businesses’. What they mean is a team of driven, young, ambitious and well educated group of founders is more likely to dig itself out of trouble, and adapt to a changing environment. Having the right founders is the key to getting funded.
A common question VCs like to ask is “What do you offer that’s different?” It’s an important question. Why would a business be funded if it’s trying to be another Google or just another Snapchat? Success in business is only likely to come to those with a competitive edge over everybody else. If your startup isn’t faster, better, cheaper or easier than others, why would it get funded?
This ties into the previous trait. It’s great having a competitive edge over your rivals, but is it likely to last? MySpace, for example, was the market leader till Facebook came by and ate its lunch. The best investors go beyond a great product and relative advantages to see just how long the party is likely to last.
Finally, every inventor and entrepreneur out there is absolutely certain their startup has what it takes to attract millions in funding. Self assured entrepreneurs are convinced their idea has all the elements I’ve mentioned on this list, but what about the investors? Investors aren’t going to take an overly optimistic entrepreneurs word at face value. If they’re going to risk their client’s money and pump in massive sums that they may not see for years, they’ll need some proof it’s all going to work out. This means a business that already has users, better yet paying clients or even a tangible proof of market demand, is much more likely to get funded.