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As a startup owner, you must prepare your business for various fundraising rounds. During these capital raising rounds, you need to know what investors look for in a startup to attract the best investors. In addition, investors will need to be assured that they are investing their money in a worthwhile startup with significant growth potential. This article will outline the key aspects that startup investors look for before making investment decisions. 

Solid Business Plan

Your potential investors will look for a business plan that shows you have thought about how you will run your small business. A great business plan proves to investors that you are serious about your startup and are prepared to put the capital raised to good use. Your business plan should include:

  • company overview;
  • management team;
  • intended market and market trends;
  • financial projections;
  • sales channels with relevant data;
  • marketing plans;
  • analysis of the competition; and
  • potential problems and your strategy for dealing with these.

Size of the Market

Many investors will be heavily interested in the size of the market as it indicates the future growth potential of your startup. Investors look for startups that can become large companies. The larger the company, the bigger the return on investment for the investor. However, only high growth and scalable startups can provide vast amounts of return for investors.

The bigger your market size, the more potential your product or service has to gain revenue. To understand your market size, you will need to conduct market research and identify:

  • your market;
  • how big it is; and 
  • how big the market opportunity is. 

You can further convince investors to invest capital in your startup by understanding your customers and creating customer profiles. By understanding customer needs and wants, you can adapt your product or service to fulfil demands. 

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Your Team

An investor is unlikely to invest in a business with a dysfunctional team or a company whose success relies solely on one person. A dysfunctional team can hinder business activities, reducing your growth and sales potential. Likewise, you can turn off investors if the startup’s success depends on you, because only one person holds everything up. This creates a weak foundation and higher risks. 

Importantly, you should have a team with the right people and the right skills. A great team enables your business to perform well and to be positioned well in the market. Furthermore, a diverse team creates opportunities for innovation through higher skill and talent levels. Thus, this will lead to higher productivity, increased motivation, and a better chance of the investor’s money being used to its full potential. 

When ensuring that you have a solid team to conduct business activities, you must ensure that all employees are included and create a strong sense of unity. Consequently, each member should feel valued and comfortable sharing their ideas. 

Minimum Viable Product (MVP)

When attracting investors, you need to have an MVP that meets the needs of your target market. An MVP consists of enough features to validate a product idea early in the product development cycle. Before raising the capital, you need to ensure that customers will buy your product over your competitor’s products. Your MVP needs to align with business objectives, so your investors know that you can achieve your goals through your product or service. When creating your MVP, you need to consider:

  • your overall idea;
  • the customers;
  • the end-users;
  • why your market would want it; and
  • why you are creating it.

Traction

To convince investors to invest in your startup, you need to show them more than just an idea. They want to see traction behind your idea through early customers, skilled employees, and the company’s performance so far. The higher your traction, the more investors you can attract, creating more funds for your business. 

To create traction, you need to develop goals and a strategy to achieve the goals. This will show investors how your startup will progress and grow in the market.

Before showing investors your traction, you need a method to measure traction. You can measure traction through:

  • sales;
  • customer responses and feedback; and
  • market research.

Key Takeaways

When raising the capital, you need to attract investors with suitable funds. Before investors start providing you with money, they will want to see a solid business plan, a significant market size, a skilled team, an MVP, and good commercial traction. If your startup has these qualities, investors can feel assured that your company will make enough revenue to create a return for the investors. 

While this article sets out the commercial considerations for preparing your business for external investment, there are also several legal considerations and compliance requirements that you need to ensure you are across before going to the market to seek investment.

If you need help preparing your business for investors, and understanding your legal compliance obligations, you can contact our experienced startup lawyers to assist as part of our LegalVision membership. You will have unlimited access to lawyers who can answer your questions and draft and review your documents for a low monthly fee. Call us today at 0800 005 570 or visit our membership page

Frequently Asked Questions

Do I need a good business plan?

A solid business plan will indicate to investors that you are serious about running your business and have a plan for putting their money to good use. Investors will feel more comfortable investing in a business that is prepared and can create a return for their investors. Without a business plan, investors are unlikely to invest. 

What is an MVP?

An MVP is a version of your product with enough features to be usable by early customers who can provide feedback to you for future development. With an MVP, investors can be assured that your idea is viable in the market and that you are prepared for a market launch. 

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