Part 3: Investors look for 5 features in start-ups
The competition for venture capital is high. You'd be surprised by how many start-ups aren't exactly rocking it but are still 100% convinced that they're an attractive investment target. Fundamentally, investors look for five key features in a start-up:
Vision: A vision that inspires and addresses a significant opportunity.
Product: A solution that is (or will be) 10x better than what competitors have.
Growth: Sign of a growth engine that turns $1 into $3+ at scale.
Team: A complete co-founding team that's appropriately incentivized.
Funding: A reasonable ask (cash, valuation) and efficient use of proceeds.
Make sure to cover these features in your pitch deck, elevator pitch, and anything else you communicate. In fact, use these features to inform the strategy for your start-up.
Note that the more money you ask for, the higher the bar that you will need to meet with regard to the 5 features. Market conditions, location, vertical, and investor preferences also move the bar higher or lower.
For example, early-stage start-ups won’t have to show much regarding growth (and maybe even product). At your Series A, you’ll have to have data validating that you have a functional growth engine and are ready for a growth investment round. At Series B, things will start to look and feel like private equity more so than venture capital (i.e., heavily data-driven).
Similarly, raising capital in Europe is harder than in the US. You can raise a Series Pre-Seed or Seed off of just a pitch deck in the US. In Europe, that's usually impossible (unless you're a rockstar founder) and you'll waste your time trying to raise if it's too early.
Let’s dig deeper, though. Here's why each feature matters:
Vision: A strong vision can keep the founder, team, and customers engaged when it gets tough - and it will get tough. It's easier to keep going when you know that you're solving a meaningful problem. Investors also want to invest in start-ups that have unicorn potential. For this, you need to be in a market that's large enough.
Product: This should be obvious, but most markets are competitive. Every idea that could have been had has been had. Think your idea is unique? Think again. And competition is good. Healthy competition suggests there's a market for what you do. However, you need to be differentiated in some way that customers care about (and are willing to pay for).
Growth: This feature won't be a must-have for early-stage start-ups, but it sure helps if you have it. Ultimately, investors are looking for money-printing machines. And if you can turn $1 in customer acquisition cost into $3 in customer lifetime value (or more) reliably, then that's effectively what you are. All growth engines will get less efficient at scale, but you want to start from a healthy position.
Team: It's insanely hard to build a start-up, including everything that goes into it (not just product, but also the processes, systems, and teams that you need to scale). That's why you usually need a team with complementary skills. The specific skills you need will depend on the niche you're in and the product you're building. But you'll want to have a complete team. Solofounders will face headwinds in raising capital. It doesn't mean it's impossible. It has been done. It will be done. The more progress you make as a solofounder, the better. Because you’re showing that you can do it on your own.
Funding: This is especially true now that the economy is hurting, but your ask needs to be in line with your progress as a business. We constantly speak to founders who are looking to raise at valuations in the double-digit range without meaningful traction. Look, your business is likely not worth as much as you think it is, and – more importantly – you'll have to live up to the valuations at which you’re raising. Inflated valuations can hurt you at your next round if you didn’t meet expectations and are now raising a down round.Talk soon,
Talk soon,
Rafael
PS: How do we help you? My team and I build pitch decks, review existing decks, and offer pitch simulations. Get in touch if you or someone you know may be interested.
PPS: This mini course is based on our popular “Fundraising & Pitch Deck” newsletter.