In spite of all the recent global events, it continues to be a great time for new startups and small companies looking for investors. According to reports from the Wall Street Journal, the number of US startup financing deals of $100 million or more has increased by over 800% since 2016, and 2021 is well on its way to double the record number from 2020 with a recent surge of young investors also having a hand in this.
While there is a great flow of cash ready to fund new ideas, only some ideas end up getting funded over others. As you may have guessed, investors are not easily glamoured by a good pitch, and there are more startups seeking funding than ever before. The reality is that founders perceive their startup as their baby, and investors perceive startups as buses: “If an investor misses a chance to invest in you, even if you’re a super cool bus… There will be another bus along in 15 minutes”, explains Glen Hellman.
So how do you get an investor to hop on the bus? To begin, it is wise for any new company looking for investors to know what investors specifically look for in a startup, and what they absolutely want to stay away from. It takes multiple things to convince a business angel to invest, but only one to convince them not to. To put chances on your side, we’ve made a list of major deal breakers and makers to watch out for when approaching investors.
How investors hunt for good startups
If a startup is looking for investors, they should know where an increasing number of deals are being made these days. In-person professional networking used to be the most common way for investors to meet promising startups, with research showing that human connection is essential to build longer lasting business partnerships. However, because things have drastically changed due to the COVID-19 pandemic, you can expect any startup that is worthy of interest to be on platforms like Angel.co, or Crunchbase in the case of upcoming companies in the tech industry.
Online networking platforms such as these are constantly improving to provide a more effective and enjoyable deal hunting experience for investors and startups. They give greater chances for both to make the right match by providing access to an otherwise off-limit pool of talent, new knowledge, and partnership opportunities. Having a profile on an online networking platform is mighty helpful for a startup – some would say an absolute “must”– even when pursuing many in-person meetings and networking conferences.
However, before putting themselves in front of tens of thousands of investors, it is very important for startups to mindfully fill out their profile. Here are some potential deal-breakers to avoid from the very start:
- A broken or unfinished company website: Even if it is a simple landing page, investors should see a well designed and fully functional website.
- Poor LinkedIn profiles: Investors should see up-to-date profiles of every co-founder, professional headshots, and preferably the startup listed as their primary and most current position.
- A sloppy company profile: Investors should see a clear, concise and compelling description of the business. A profile with a confusing mission, missing information, and glaring typos can deter many investors in a heartbeat.
To avoid an immediate faux pas when reaching out to investors on these platforms, the startup team should research the investor to make sure their interests and experience aligns with what the startup is developing, and personalize the approach if possible. Spamming investors with generic messages will most likely never lead to a deal.
Getting investors to invest in your business
It’s quite common these days for an investment fund manager to receive up to 800 proposals from startups every month, from which they will choose one or two to take to Due Diligence before they invest. What captures their interest and drives their decision? Some key points investors are looking for in a company that we could consider deal-makers are:
The killer idea
Investors see opportunity in a startup that develops a unique product or service that gives the company a solid competitive advantage. They look for an idea that delivers value to the consumer, often by determining if your idea is solving a significant problem or pain points in the market.
This all seems quite obvious, but what kind of questions are investors asking themselves in order to evaluate your idea? To seize their interest in making a deal, your company should be ready to explain and demonstrate:
- Why should this be in the world, and why hasn’t it been there yet?
- Has this idea been tried before? If it hasn’t, why not? If it has, why did it fail?
- What makes you uniquely capable of achieving this? Is it your expertise? Your technology?
- What stage of production is the company at? i.e. pre-prototype, prototype, product validated by end users, orders received, etc.
If your idea stands the test of this sequence of questions, it is on it’s way towards a deal-maker.
The bullet proof business strategy
When investors are presented with a comprehensive, properly thought out business plan, they can understand a lot more about the startup, the product or service, the team, and the potential success they want to be a part of.
When reviewing your business strategy, you can expect investors to be very attentive to the following:
- Your marketing plan
- If the market has been well researched
- Who the competitors are
- Your pricing model
If your business plan can show that your startup is targeting a good market, that your marketing plan and pricing model can challenge your competitors – Your startup passes another test on its way towards a deal-maker.
The fine-tuned financing strategy
This goes hand in hand with the business strategy and plan, as conservative and achievable forecasts, expenses, and projected margins can provide investors with a view on the feasibility of the startup and its future potential.
Because financing is the main purpose of investors, you want to make sure your business plan answers the following questions:
- How much money is the company trying to raise?
- What is the likelihood of raising the total asked for?
- Are the funds being raised enough to carry out the Business Plan or will more be needed.
- What will the money be used for?
- How long will the funds that are being raised last?
- Has anyone invested already? If so, any well recognised investors or investment funds?
- How much have the current business owners invested of their own money?
- Has the company generated any revenue or profit yet?
- What do the financial forecasts look like?
- Is there any debt in the company? If so, is it secured or unsecured?
- Does the company have any 3rd party financial agreements or arrangements?
- What does my investment buy me? (i.e. what percentage of the company).
- Is the equity on offer the same type of share classification as the founders?
- Does the startup have a ‘Term Sheet’ describing the offer and explaining what investors will receive?
If your startup presents a viable financial plan that clearly demonstrates how the invested money can lead to growth and profitability, and the price asked for the equity on offer is good value – Your startup is likely to reach a deal.
Unless, of course, the investors’ interest in your startup fizzles out due to a major deal-breaker.
What can make investors turn down a proposal?
Your startup has a great idea with a well outlined business and financial plan, and your branding is absolutely stunning too. What could go wrong? Well, some factors are widely known to almost immediately tip the scales against your favor. What red flags can make a shark say “But for this reason…I’m out.”
The market is too small
Investors know that a startup needs a large and growing market for a viable chance to thrive. If your company is developing a product or service that targets a very niche market, many investors will most probably opt out no matter how good your idea is. The reason is that a product or service so focused is very unlikely to become a large company, even if it outbeats all of its competition. And as you may understand, investors are looking for big markets with big profits to make.
The impossibility for scalability
The same logic applies here: Big markets and big profits. Investors are looking for a company that can handle growth, that can adapt easily to increased workload or market demands. Don’t be surprised to be turned down if your product or service cannot be produced at a speed, cost, and volume sufficient to sell to large markets.
The unique selling proposition is weak
Investors are looking for that X factor. If your idea isn’t bringing something unique to the table, instead only improving features that are easy for competitors to surpass in little time – The chances are investors will turn that proposal down without a second thought.
The overall outlook is unpromising
Investors will often consider any possible hurdles that may arise, whether it be competition, government legislation, sovereign risk, etc. They will invest if the outlook is positive and believe the startup can achieve its potential. If something poses a problem, now or down the line, to the startup’s means to execute its plan and follow through its commitments, investors will likely decline the offer.
The startup does not have enough domain expertise
Investors will often vet the founders and the team’s background and industry expertise. Suppose they see that the founders have previously developed a proven business model, but that they are now attempting to replicate this model in a new region. This might make investors doubt if the startup will know the ins and outs of the new space they are operating in as well as their competitors. For that reason, many will likely pass on the offer.
The investor doesn’t know the industry
Investors invest in things they understand, and often stick with a field or industry they are knowledgeable in and successful with. So regardless of how great your startup’s idea and offer is, if your product or service falls in a field or industry too far from the investor’s comfort, it’s probably going to be a ‘NO’, because they don’t believe they are the right investor for you.
The team seems to lack passion
We imagine the founder and team of a startup will show some excitement for their idea, if not shine with that contagious enthusiasm to get it off the ground. If investors sense the feeling that the company isn’t all-in, and worse yet, are met with a complacent attitude – Don’t expect a deal to be made.
It’s safe to say that certain things are commonly considered crucial for investors if they are to partner with a startup, while other things will critically lower the chances of them making a deal. That said, there is no exact science to deal-making. What might be a deal-breaker for some investors may not be for others. For example, some investors say they will not even bother asking a company for a business plan because they consider it all based on guesswork anyway, even under the best of circumstances. So even if there are none of the deal-breakers mentioned above, it may all fall through. In the end, the outcome mostly depends on the investor, as people’s decisions vary depending on personal experience, interests, character, and financial disposition – which will likely influence their risk tolerance and overall investment strategy.
This means that if a startup doesn’t make the cut the first or second time, the team should keep trying and keep perfecting their pitch. Whenever it is possible to do so, the team should inquire about why the proposal was rejected. Feedback from the investors, even negative, can be extremely valuable if only to find out what the actual deal-makers and breakers were in the interaction. This can open the perspective and allow a chance to perhaps address the flaws for future meetings, pitches and submissions.
Lastly, in an effort to avoid one more – possibly gigantic – deal-breaker, we strongly suggest everyone in the startup team to Google themselves. Avoid online social media sloppiness, politics, alcohol, drugs, and sexism, and inappropriate images. Investors will do their research, so the team should make sure that everyone is portrayed in a strong, positive light.