Attracting external investment in your startup is tough – competition is stiff, and there is a limited number of potential investors. So, how do you ensure you are the lucky startup an investor chooses? Below, we outline six specific points Australian investors are looking for when investing in startups.
1. Return on Investment
Investors are looking for a startup that is more than likely to provide a return on their investment. To help determine this, they will want to see how your startup has performed to date (if applicable). In particular, they will want to see your numbers – your revenue, burn rate and profit.
It includes forecasts showing how you expect your business to perform in the future. They will also want you to explain how you have come up with these numbers and projections so as to give them some comfort that they are realistic.
Linked to this, they will want to see a realistic pre-money valuation. You will need to be able to explain how you calculated the valuation based on your numbers. Make sure you can justify both the valuation itself and the methodology you choose to use.
Investors want to invest in something which they believe can accommodate rapid growth over a relatively short period. You need to persuade them that your business is scalable. As well as showing them how quickly you intend to grow, you will need to demonstrate how you intend to achieve this. Explain to them what systems and processes you have put in place (or plan to put in place) to achieve such growth.
3. Inspiring Founders
Investors are looking for founders who are inspiring. They want to find the next Bill Gates – someone who will lead the business in achieving great things and someone who they entrust their money to.
Make sure you do everything you can to convince the investors to believe in what you are doing and your success. One actionable way to show them your loyalty to the company for the next few years is to make your shares subject to vesting provisions (if they aren’t already).
4. Product Potential
Investors will want to invest in a product (or service) that has great potential meaning it is something people need or want. Although not necessary, a new product or service will give you an advantage over your competitors. Show your investors what makes your product or service unique and stand out.
5. Market Potential
Investors will want you to demonstrate that you know both your market and your existing and prospective competitors. They want to invest in a startup which:
- Has a huge number of potential customers;
- Knows who those customers are; and
- Knows what those customers want.
They want you to demonstrate to them why you are better than your competitors and how you intend on becoming the market leader. You will need to show them how you plan on stopping future competitors from entering and dominating the market, making you redundant. You will need to do your research.
6. Investor-specific Issues
Each investor is different, and this means that they each have their own specific investment criteria.
For example, they might want to invest in:
- A particular industry which interests them; or
- A particular industry in which they have experience; or
- An idea that has the potential to be a global company from day one; or
- A particular person because that person has been successful in the past.
Do your research and find out what type of startups investors have invested in the past. Start by approaching the investors who you think will be interested in your startup and would be a good fit for you.
Capital raising is extremely hard work and very time-consuming. Make the task easier by doing your research and finding out which investors may be interested in your startup. Approach them first rather than approaching everyone simultaneously. It is much simpler to convince someone with a similar interest than try to persuade an investor to make an exception.
You also don’t want to waste time attending meetings with investors who have no real interest – save your time and energy for those who are interested. Once you secure a meeting, research and find out what questions that particular investor is likely to ask. Ensure you know your business and your numbers inside and out and can answer any questions investors may throw at you. And remember, convince the investor to invest in you.
If you have any questions about raising capital or preparing for external investment in your business, get in touch with our startup lawyers on 1300 544 755.