It’s the question at the forefront of every entrepreneur’s mind as they start seeking the capital to fuel their idea: “What are investors looking for in an investment opportunity?”

The short answer is that every investor is different, and each has their own set of criteria. Some may base their decisions purely on the facts; others might be more inclined to factor their feel for the people at the helm into the equation. Some may be in the right frame of mind for risk-taking; others might be playing it safe for a while, or waiting to see how out-standing investments play out.

That being said, there are certain across-the-board factors investors will take into account when evaluating opportunities, and it’s in your best interest as an entrepreneur to cover these bases before approaching investors with your pitch. Here, we will take a shot at breaking down what investors look for.

The Right Fit

As an entrepreneur, you’re looking for investors that are the right fit for your business, and investors are looking for essentially the same thing in reverse: businesses that are the right fit for their investment portfolio. The best way to determine whether your business is a good match for investors is to look at investments they’ve made in the past and see whether there’s symmetry.

“Most VCs will go through a checklist and everything’s got to meet our criteria. If we’re vegetarian, we don’t want to see a steak.”
Bob Rice
Investor / Tangent Capital

Location, Industry, and Stage of Development

Are you looking to move your baking business out of your home kitchen and into its own location in Indianapolis? That’s great, but don’t reach out to a Seattle-based private equity company that only invests in technology companies with over $20 million in revenue. As you do your research, look for investors that are near you geographically, have a history of investing within your industry, and typically invest at the same stage of evolution that your business is currently in.

Market Size

One of the biggest variations from investor to investor is the size of their fund, and again, it’s important that you find investors with a fund size that matches the scale of your business and your goals. A million-dollar venture capital fund that needs to generate large returns can’t spend time on a $50,000 investment in a restaurant, no matter how successful that restaurant may be. And if you’re looking for a million dollars to take your business national, is it really worth your time to pitch to an investor who can only spare $25,000?

All else being equal, targeting a large market is the best way to inspire excitement in investors. Investors will have few qualms about passing on an investment that will struggle to grow beyond a million dollars some day; but an opportunity elegantly addressing a billion dollar market is one that even the most cautious investor will consider carefully.

“Market size matters because most investors want to know that you’ve got a big business. Bigger is generally better.”
Dave McClure
Founder / 500 Startups

Do Your Homework

As your own best and biggest advocate, it’s up to you to do your due diligence in research and seek out the investor-partners that make sense for your business. If you shirk your research responsibilities and start pitching to random investors in the completely wrong sphere, it will be a waste of their time, sure; but more importantly, it will be a waste of yours. The more closely your business aligns with a potential investor’s investment history along the axes listed above, the more likely your pitch will be to meet with a warm—or, at the very least, constructive—reception.

 More Than a Good Idea

Like a proud parent, you know that your business is one-in-a-million. But the reality is that, if you’ve done your homework and sought out the right investors, there’s a good chance that they’ve seen your idea—or something like it—before. And that’s okay! It’s the nature of the beast: a problem presents itself, numerous people try to solve that problem, and sooner or later one or two of those solutions rise to the top—and they may not always be the first ones, either. What do the one or two solutions that survive have going for them? It’s not just a good idea: it’s a good idea plus a critical mass of proof that that idea is going to make it out of the idea stage and into the real world.

A Competitive Edge

If an investor is familiar with your industry, they probably know of at least a few competitors for your business, and if they don’t already know, they can find out quickly. Before they invest in you, they will want evidence that you have some significant advantage that the competition cannot easily overcome.

“Another misconception is that VCs like to take risks. That really isn’t true. VCs like to not take risks and bet on sure things.”
Dave McClure
Founder / 500 Startups

Maybe you have unique relationships in your industry that enable you to cut deals with partners that no one else can match. Or maybe you have a unique patent on a new product that can secure your position as a market leader for years to come. Look for some key leverage points in your business model that will convince investors that you can build a sustainable competitive advantage, and touch on those virtues early and often.

The goal isn’t to prove that no one else will ever compete with you; again, the reality is that somebody probably will. The goal is to prove that when somebody does try to compete with you, they’ll lose.

Social Proof

“It’s become so sexy to pitch to investors nowadays that people forget to first go talk to customers. I have people pitch me, and when I ask what customers think about this, they tell me they don’t know. So why are you talking to investors right now?”
Paul Judge

It’s one thing if you and your mom think your idea is a good one: it’s another thing entirely if The Village Voice runs a piece on it, or if Bill Gates is a fan. Social proof is an idea most of us are familiar with, but it’s rarely outlined in a business plan or presentation. Simply put, “social proof” is clear evidence that people who are in a position to know believe in your vision as much as you do and will testify to the merits of your business.

One way to go about building social proof is to assemble a team of advisors that are well-respected in your field and have spent time with you and your vision. Another is to generate some early activity with pilot customers who will provide testimonials, not only that your product makes sense, but that if it existed today, they would buy it.

“I always look first at the people, and that covers from the customers to the entrepreneur to the team. Second is the product, because when you start a business, it’s a hunch, it’s a guess, and you have to go out and find out if people really want it or are you just a solution in search of a problem.”
Gary Sprirer

Investors see thousands of pitches, so they often defer quickly to social proof if it provides compelling evidence that respected people have spent the time and attention with your product and are excited about it.

Traction

There are a lot of great talkers in the world, but at the end of the day, it’s all about the follow through. Investors hear hundreds of entrepreneurs talk about their ideas, but very few of those ideas yield results. So one of the best ways you can stand out from the crowd is to provide proof that you’re going to hit the ground running—or that you already have.

“When it comes to business, there is a simple scorecard. Are you making money or are you not making money? Are you succeeding or are you not? So when you go to raise money, always, always catch yourself and eliminate the backstory.”
Mark Cuban
Investor / Dallas Mavericks

Signing up early customers, hiring key talent, or actually building your product by bootstrapping resources are all positive signs that you’re resourceful and determined enough to make things work, even without substantial capital. Every bit of traction matters in a startup pitch, so however modest it may seem compared to your overall ambition, don’t be afraid to touch on it in your presentation for investors. The farther you can come on your own, the more likely investors are to think to themselves: “If they can do that much with so little, imagine how effective they could be with my money behind them!”

Credibility is All

Again, there are no hard and fast rules when it comes to investors’ criteria for making an investment. But if you want a single, concrete takeaway from this, here it is: investors want incredible ideas helmed by credible entrepreneurs. They’re looking for good ideas to get excited about, with a solid foundation that proves it won’t all wash away, and take their money with it.

A final thing to remember is that investors are also people, and you shouldn’t be afraid to approach them as such. Ultimately, investors are going with their gut in investing in businesses just as much as you are in creating yours. So why not give them something to believe in?

 

 

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