Investors and Start-ups: What Investors Look For In a Start-up
A start-up needs investments to reach its numerous customers especially when the demand for their product or service is high. The major reason for investments in start-ups is to experience steady growth. Start-up founders need to understand that an investor is not a friend but an enabler with financial capability. Such enablers help sustain the growth and development of the business. In turn, they expect to get returns in the form of dividends or equity in the overall stake.
Investments in start-ups could be venture capitalists, financial institutions, crowd funders, family and friends, corporate investors, and government organizations. So what do investors look for in a start-up before investing? Continue reading to find out.
Why Cash Flow For A Start-up Is Better Than Profit
Start-up founders get caught in the need to begin to make a profit early in the business. However, they are likely to start wearing themselves out when their business does not look profitable.
One thing we must understand is that Profitability is not the most important factor to measure business growth. Investors understand this and prefer to look out for steady cash flow and not profitability when choosing start-ups for investment. To track cash flow, investors check a start-up’s financial statements. These statements are more indicative of the healthiness of the business.
Determinants of Start-up Investments
Team
The success of a start-up depends on its team and the experience and expertise they bring to the organization. Start-ups are very delicate making them risky to invest in. However, a team with considerable experience and exposure proves to the investor that they can execute tasks with precision. Every great start-up team should have someone with knowledge of product development. Also, there should be individuals that understand management as well as the ability to connect with customers and prospects.
Traction
Traction is one of the metrics to measure the growth of an organization. How many sales have you made within a specific period of time? What is the number of downloads? How many customers is the business serving over a specific period?
Traction represents the overall cycle of how deepened the dealings of a business have fostered consistent growth with the customer. Charts help to represent in clear terms the traction of a business by showing the gradual progression.
Licenses
One major concern of investors is the level of groundwork that start-up founders do before establishment. A clear indicator of such groundwork is the obtaining of necessary licenses, intellectual property, and compliances. All of these enable the smooth running of the business. Investors want to ensure their investments are secure so they will be looking out for adherence to ethics by the businesses they invest in.
Risk Management Policy
Investors like to know what the next line of action would be if a business plan goes south. Sometimes, the business experiences difficulties despite the plan falling into place. When this happens, what would the next line of action be in order to continue to stay in business? This is where an efficient risk management policy comes into play. Risks could range from personal risks to financial risks as well as health and safety risks.
Your Competitive Advantage
Investors are aware that there are other existing businesses like your own. One of the ways to showcase that your start-up is ready for investment is to leverage what makes you better. Amplify it in your promotions and show measurably how it helps to create exponential growth better than your competitor.
Conclusion
Bear in mind, that alongside the factors above, a start-up founder with a good portfolio is the capital reason for making a capital investment. Without the strength of character, staying power, grit, tenacity, and resilience, investment in a person might not suffice. What other factors do you know? Please share them with us in the comments section and don’t forget to check out other posts on SME360.
Emmanuel Otori has over 9 years of experience working with 100 start-ups and SMEs across Nigeria. He has worked on the Growth and Employment (GEM) Project of the World Bank, Consulted for businesses at the Abuja Enterprise Agency, Novustack, Splitspot and NITDA.
He is the Chief Executive Officer at Abuja Data School.
