What do investors look for in startups?

09 July 2021

HR

Share this post:

It is statistically known that less than 10% of startups will last beyond five years and investors are aware of it. They also appreciate the risks of a very young business and they are most likely reject the majority of startup pitches that land in their inbox.

Everyone has their own set of criteria that guides their decisions. We at GO Ventures look for tech related startups who already have a product on the market. Others look at specific segments such as startups related to AI space or that have a solution to an environmental problem. And yet there are some common aspects every investor looks at regardless of the type of idea or business the startup is in. These are elements that founders have to be aware of so if they want to make the right impression when they are looking for funding.

The Founders

When investing in a startup, the reality is that you are trusting the idea and vision of the founders and having someone with passion who fully believes in their idea is the minimum requirement. If there isn’t passion, then there isn’t really anything to invest in.
This passion isn’t expressed only by the enthusiasm that the founders can show during a pitch but also in how much they are willing to risk for it. Founders who dedicate their whole time to work fully on their idea are always going to show how more committed and invested they are than someone who is only ready to allocate their spare time to it. Same goes for those who have put in their savings and, often, those of their families into the idea.

The Leadership style

Dedication in a founder is essential, yet it is not the only characteristic that one looks for. The ability to provide strong leadership is another and the willingness to allow others to come on board, possibly forgoing part of the initial equity, if they know that they will make the company stronger is a sign of that.
A founder who accepts that they need a strong CEO or CTO, manages to find one and is ready to allocate them a share of the company, given that often they do not have the resources to pay for their services, is one that is truly ready to do what it takes to succeed.

On a similar note, another positive signal comes from the presence of a strong advisory board that includes people with proven experience in the area that the startup is operating in. The ability to convince such individuals to dedicate their time to helping the startup is a sign of confidence in the work that they are doing. Also, advisors wouldn’t be spending time with people they didn’t believe in and this provides comfort that the founders have sound sources of advice to turn to if they come across any issues.

At GO Ventures, apart from financial support, we offer a mentorship program that supports the startups to succeed. The people involved in GO Ventures have the expertise, technological knowledge and experience needed to help a startup succeed.

The Ideas

Many believe that the most important aspect of any startup is the idea. Yet the idea itself is not as critical as many believe. What is truly essential is how this idea is brought to life. Founders might have a great idea for a product that will truly solve an existing issue, however if this cannot be delivered or done in an economically viable manner then the idea itself is of no real value. It is why many investors prefer companies who already have a minimum viable product ready; this gives them comfort that the idea can be done.
Indeed, the risk of investing in a startup that does not yet have a working product is significantly more elevated and those willing to take this on typically demand higher equity stakes. In such instances, the track record of the founders comes into play: if they have experience from previous projects in delivering an idea, then it is much easier to trust their ability to succeeding again.

Another key aspect of the idea lies in what makes it stand out. It is very rare to have a product that is aimed at a whole new market; in most instances there is harsh competition trying to attract the same customer base, and in those instances you look for what will make this idea stand out from the rest.

There are various terms for this, the most common being the unique selling proposition or unfair advantage, but ultimately what investors are looking for is something that is different enough to make people interested in it and pick it over the rest.

The Business Plan

Financial plans that extend beyond twelve months are difficult to write up for any business let alone one that does not have a long track record on which to base those projections. In this case, there is a certain degree of creativity in the formulation of their plans and, whilst most investors are aware of that, they will still expect to see the forecasts.
That is because a business plan tells a story in itself. It is an indication that thought has been given to how the company will grow, what it needs to achieve and what are the potential pitfalls. Whilst founders have to be optimistic about the future of their business, their financial projections will indicate that they are also grounded in reality. Not to mention that the projections also act as confirmation that their work is being guided by a plan, rather than simply driven by instinct.

The Market

A founder might come up with a great idea and deliver it to perfection but if there isn’t a market out there, or the market isn’t big enough, then it is all at no use. One of the first questions investors ask about is the problem the startup is trying to solve. What’s more, investors have to be convinced that the market is big enough to support the startup and sustain it as it grows.
This conviction often needs support in numbers and in any pitch deck the founders have to try and size the market. The best way to do this is to find an independent source that has already looked into the matter and reproduced what it’s saying. The impartial nature of the data is important because it adds validity to it.

Sizing the market is, however, only part of the equation. Founders also have to analyse the competitive landscape so as to assure the investors that there is ample room for them. Identifying a large market is fairly useless if there are plenty of established companies that already dominate the scene by providing a product that is similar to yours.

The only exception to this lies in instances where the product is looking to disrupt the existing market. Think Spotify, who managed to carve out a share of the music market from the large record companies that had ruled for more than half a century.

In all instances, it helps significantly if the startup is in a position to show that it has traction; that it is managing to convince people to buy their product and this shows that not only is there a market but, also, that the market is receptive to the startup’s idea.

The Exit Strategy

Whilst founders might invest a lot of emotion in their startup, investors will not be so sentimental. They will like the idea and be appreciative of the founders’ efforts but ultimately this is a financial investment for them so they will be looking for a financial return.
This means that they need to have a degree of confidence that at the end of the day will benefit from investing in it. It is up to the founders to boost this confidence and that can be achieved by having an exit strategy which is nothing more than an idea of how those with a stake in the company will be able to liquidate their shares.

There are various ways that this can happen; take-over by a bigger company and an IPO being two of the most typical ones, but one has to be realistic with the exit path being eyed. Identifying startups in the same space who have had early investors successfully exit is also a great way of further boosting investors’ confidence, that this investment will pan out well at the end of the day.

Passion for innovation and technology led us setting up a sister company, GO Ventures, two years ago to help immerse GO in the startup scene and invest in many of the great ideas there are out there. GO Ventures is always on the lookout for great ideas and we can’t wait to hear yours.

Have a look at our website and contact us. Apart from financial support, we offer a mentorship program that supports the startups to succeed.

Get in touch with us and let us help your great ideas grow!

About the Author
Paul Grech joined GO in 2000 as part of the Finance Team and since then has gained further experience working in both the commercial as well as the strategic arms of the company. Currently, Paul leads GO’s Strategic Planning and Insights Team.

He has been involved in GO Ventures since its inception and has had a significant role in shaping its development. Apart from heading GO Ventures’ investment process, Paul also serves as a mentor to several startup founders, focusing mainly on helping them establish a strategic framework and achieving growth.