From the idea to inception to MVP, startups go through an interesting journey. An inevitable stage a startup comes to from there onwards is finding the right product-market fit and then scaling. For every startup, this journey can happen in different ways and the support both financial and otherwise can be important in its success.
In this post, we want to explore more in detail about financial support and what you as a startups founder can keep in mind, when pitching to potential investors. Understanding your investor, their interests, needs and pain points to address, before they can make that investment decision can be invaluable.
So what are these investor pain points and more importantly how can you tackle them?
Build a GREAT TEAM!
Everything in a startup starts from its team. Sometimes at the beginning of the startup, your team may only be of one member – You! But as time progresses and you start building it up, you will need to put together a team that will not only be able to deliver the needs of the hour but also take you to the next level of growth. In order to ensure that you’re building a startup that can be taken to new heights year or year, you must build a great team.
The team you’re building could comprise experienced members and fresh graduates, depending on your budget, requirements, and future goals. But give careful consideration that the team you put together are of individuals that not only add great value to the current and future of your startup but also those who have a great startup attitude.
What is that altitude, every startup should cultivate? It is an altitude of flexibility, ability to pivot at any moment, learning through trials, ability, and willingness to fail – and fail fast! And the general attitude of working towards a goal rather than sticking to job descriptions. A team as such that is willing to put their hard work and creativity to get to the finish line, is a team worthwhile to invest in.
Another important aspect of a team is in adding advisors in the respective domain you’re in. Sometimes as a startup, you may not have the financial capabilities to recruit highly experienced professionals in the trade. However, a startup is a great opportunity to add onboard advisors to give direction and guidance in your journey.
Your team profile, comprising of such advisors, will be valuable, impressive and give confidence to investors that you have a great team backed by advisors with a wealth of knowledge and experience to take you to success.
Build a SCALABLE business
Why do investors talk about ‘scalability’ even for startups at the idea stage? This is because, if you’re building a startup that is not able to scale the business in the first 3-5 years, then chances are investors are not going to get the returns they’re looking for.
Keep in mind that all investors, invest in order to get an X5 return and this is not possible if you do not have a scalable business model, clearly defined at the early stage itself.
Identify a BIG MARKET
What would be defined as a BIG market? Investors believe that a small piece from a big pie is better than a big piece from a small one’ and they look for founders who think the same way. To be more precise, a business that can generate USD 100 million in revenue, where the investor has 20% in shares is more valuable than a business that generates USD 1 million revenue.
In order for that business to be able to go from being a USD 1 million business to a USD 100 million business, they must be able to scale their business -FAST! This may not be possible if the target market is small or niche.
When considering your target market, startups must consider a big market. This doesn’t mean that the startup will work towards capturing the entire market. But it means that in a big market, if even 1% of a target is enough to reach the USD 100 million status, then this is considered a doable target–making the decision to invest much easier.
The more capable a startup is to scale fast in a big market, the higher the chances of the startup to succeed, thus making it a very attractive investment to investors.
Coming up with a startup idea that is highly scalable, has a big market potential will make your startup attractive. This will call for investors wanting to know the value of the investment needed and what percentage of equity they will get in return. In order to derive this number, a startup, no matter what stage they are in, requires valuation.
In the early stages, if the startup doesn’t have any revenue-generating client, then most of its valuation is based on speculation. As such, it is best not to value it too high or too low. While it’s important to stay true to the data you’ve got and the speculations derived from it, as it is still at a stage it has not been quantified, it is best to keep your valuation at a reasonable level.
Most startups find this stage of valuation difficult to do, hence this is where experienced valuation companies may come in handy. Your valuation should always consider the current status and future value to obtain a realistic figure.
Give an EXIT
Most investors like to invest in a great startup idea that has the ability to scale fast, in a big market, backed by a great team, founders and advisors, but they don’t hope to stay onboard forever. Investors look to improve their return in 3-5 years and have the flexibility to exit once they’ve made their profits. This serves well for both founders and investors as in turn founders can get those shares returned.
Investors would like to work with founders who understand this and have exit options thought through, prior to requesting investment. This makes the relationship between the founders and investors, goal-driven, transparent and easy to maintain.
As such, think through what you want to get out of the investor, how you would use the investors capital to scale your business and at which milestones can the investor exit. Have several options available for this exit. Some founders and investors prefer for investors to only part with some of the equity but still stay onboard for value, advice and engagement. Some prefer to have clear breaks and go their separate ways. However, you decide on it, ensure that these exit options are clearly defined and measurable, so that your working relationship is a productive one. Understanding your investors and their pain points is extremely important in approaching and tackling these pain points. This will help you create the right impression, build confidence, and ensure a smooth relationship can be maintained throughout your journey and your investors could very well be what you need to get those closed doors open to become the next unicorn in the industry.