Raising Capital for Your Startup? 5 Things Investors Are Looking For
Fundraising is a process. It takes time and energy — more time and energy than you might think. And based on the conversations that we’ve had with experienced startup founders, raising capital for your startup, on average, takes three to six months.
The savviest startup founders look for ways to expedite the fundraising process. Why? Access to quick funds gives founders the extra leverage they need to outpace competitors, deploy rapid prototypes, hire additional talent, and more. The fact is — 90 percent of startups fail without the appropriate funds in place.
Raising Capital for Your Startup: 5 Things Investors Want to See
To streamline your fundraising efforts, you need to be well-organized and blindly optimistic. Your job as a startup founder is to convince venture capitalists and angel investors that your business is a worthwhile investment. In this article, we’ll give you the top five things investors want to see before funding your startup. Use these insights to maximize your fundraising effectiveness, achieve top-tier funding, and accelerate growth.
1. Financial Performance
Start by preparing a financial performance report. What kind of monetary traction have you achieved thus far? In the financial performance report, be sure to include:
- Sales Forecast
- Expense Budget
- Cash-Flow Statement
- Income Projections
- Assets and Liabilities Statement
Overall, this report should highlight and emphasize considerable growth metrics. Investors want to see that you’ve achieved some growth and with their help, are well-poised to continue on that path of success.
2. Competitive Advantage
Next, showcase your startup’s unique competitive advantage. How is your startup uniquely qualified to address customers’ problems quickly and efficiently? In order for investors to see the real value of your startup, the problem should be especially relatable and painful. Look for ways to position your startup as the “hero” and the problem as the “villain.”
Moreover, show how your startup is better equipped to slay the villain than your competitors. Use this as an opportunity to explain why your startup is the best at what it does and how it is uniquely qualified to make investors a ton of money.
3. Business Model
Next, prepare a short outline of your startup’s business model. The business model outline should explain exactly how the startup makes its money. There are a variety of business models including:
- Cut the Middle Man Model: Sell another business’s product or service. Warby Parker capitalized on this model after realizing that the same company owned LensCrafters, Pearle Vision, Ray-Ban, Oakley, and more. By cutting out the middle man, Warby Parker was able to drastically reduce prices.
- Subscription Model: Sell a product or service weekly, monthly, or annually. Dollar Shave Club was one of the first services that made it easy for men (and now women) to access great razors.
- On-Demand Model: Sell a product or service instantly. Uber made it easy and convenient for users to connect with taxi rides.
- Freemium Model: Offer a product or service for free. LinkedIn offers a free service but up-sells users on a premium model with advanced features.
4. Product-Market Fit
Next, show that you’ve achieved some level of product-market fit. At this point, you should, at the very least, have a basic prototype in place and a few early adopters. If you haven’t yet achieved product-market fit, there is a strong likelihood that investors won’t even lift a finger for your startup.
“In today’s cash-strapped funding climate, investors are looking for one thing above all else: product-market fit,” said Adam Root, Founding Partner at Tricent Capital.
5. Clear Investment Structure
Finally, give venture capitalists a clear investment structure. Show them exactly how and when they’ll get their money back. Selling business equity to an investor is one of the most common methods of raising capital for startups. This type of equity within the startup is often referred to as stock. There are two basic forms of stock:
- Common Stock: This is the simplest form of equity. It is a type of equity typically held by the company’s founders. However, there are minimal investor protections, making it less attractive for VCs.
- Preferred Stock: A class of ownership that generally carries an agreed-upon dividend at regular intervals.