What are investor's looking for? This article will be looking upon some of the important concepts and areas that what are investors looking for, in terms of a business as a whole, entrepreneur characteristics and personalities as well as business plans and financial records and statements. Investors thought process may be conducted prior to investment or during the businesses pitch for investment. Have a read below!
What Are Investor's Looking For?
What are investor's looking for? Let's divide this question into further sub-categories so it becomes easy for us to understand. Prior to making any investments, it is fundamental that an investor goes through the process of thorough research and due diligence to understand what they are investing in and what is the return that they are receiving.
Attitudes and approach to investing are being dramatically changed by the minute because of the ever-growing business environment. An investor in one geographical region will not have the same requirements as another. Investor's goals and expectations also vary from their age and demographic.
Investor Characteristics By Geographical Region
According to a survey by Visual Capitalist, to analyse the reasons why most investors prefer to invest their money and how does it differ from one country to another. A handful of countries chosen made Canada stand at the top at 78% where the majority of investors are investing their money for the reason to save for retirement, followed by Australia at 74%, United States and the United Kingdom at 71% and Singapore at 57% respectively. Whereas, 12% of Singaporean investor also spends their investments in estate planning and beneficiaries.
Other countries showed different trends as shown below. Majority of Chinese investors, for example, chose to spend their investments towards beneficiaries and estate purchases rather than saving for retirement in comparison to North America and Europe. French population saved 26% of their investments for the purpose of needing it for emergency funds whereas UAE saw a trend of 31% savings towards starting their own businesses.
Not surprisingly, as investors get older, their goals shift away from making immediate big-ticket purchases and holding riskier investments for a higher rate of return. Later on in life, goals are more focused on retirement and maximising wealth.
What Are Investor's Looking For In Entrepreneurs?
What are investor's looking for in terms of entrepreneurial skills, personality, work ethos, ability to work in a team and the list goes on. There's always a clicking moment that happens between an investor and a founder that plays into the investment decision. Sometimes it's easy to identify - an affinity based on a common background, such as shared work or educational experiences -- or perhaps a co-investor that's mutually known and trusted.
In other cases, it might be harder to put a finger on, such as likeability of the entrepreneur, or merely an instinct or impression that the investor develops, good or bad, either way, the investor is going to be asking a lot of tough questions and requiring in-depth detail.
What are investor's looking for in an entrepreneurs business skills and personality traits? Initially, you might think that all investors make their decisions based on the business plan, but there’s another set of factors just as important to most investors, and it’s all in the entrepreneurs' personality.
Humility. What are investor's looking for in humble founders? Entrepreneurs need to be grounded with humility for several reasons. They need to be willing to listen to outside opinions. As an entrepreneur, you aren’t going to know everything, and you’re going to make mistakes. Being humble enough to listen to outside insights is imperative to improve the business. This is important because this characteristic will allow entrepreneurs to be able to listen to investors and be able to positively take constructive criticism.
What are investor's looking for in humble entrepreneurs? Humble entrepreneurs understand that mistakes and pitfalls will occur, and their ideas won’t become successful overnight. This humility leads to greater long-term thinking and more rational responses in a crisis.
Passion. What are investor's looking for when it comes to being passionate about the business? When founders of businesses are passionate about the goals the company is pursuing, that passion often motivates other team members in the company to be passionate and therefore more members and so on. Not only that, but when you are out meeting potential investors, that passion will show and being able to get your vision across with this enthusiasm will have a lasting effect.
A perfect example of a passionate entrepreneur and leader is automobile giant Henry Ford. What many don’t know is that Ford Motor Company was in fact Henry Ford’s third attempt at making a car manufacturing company. In the face of failure, Ford was determined that nothing would stop him and he would achieve his dream and solve the problem that there were no reasonably priced mass-produced cars available — this is when the Model T was made and it was so successful that more than 15 million Model Ts were sold during its years of production (1908 to 1927).
Being Opportunistic. What are investor's looking for in an opportunistic entrepreneur? Being opportunistic is a huge trait to have for any entrepreneur. It’s not about taking unnecessary risks or moving into territories, sectors or markets you have no experience in. Instead, it’s about being able to locate and capitalise on opportunities that come available in the marketplaces you know. Sometimes the opportunities will be outside of those, and whether you look to try and take advantage of these or not is down to a separate trait: your willingness and ability to adapt.
What Are Investor's Looking For In A Startup Business?
Startups need to know how to attract investors if they want to get funded by them. In this section, there is a discussion of the key items investors look for when making an investment decision, particularly for startups.
Market Size. Most investors are looking for a business opportunity with growth potential. This is where most investors will start. How big is the addressable market that your company is looking to serve? If it's a market with existing solutions, be prepared to spend a lot of time explaining to the investors how your solution is different from your peers. If it's a new, emerging market, the focus will be on how big the market is expected to get and what's driving its growth. Be sure to be able to target the exact question, what are investor's looking for from your market analysis and research.
If the product is not new but a new entrant to an existing market, the same issues hold. However, it is assumed that any market share you attain is coming from some other competitor; thus, your competitive advantage must be demonstrable to the investor(s).
Passion Amongst Founders Team. Having a passion for their startup is pretty easy to come by for business founders. Most startups exist today because of the passion to be creative and doing what their owners enjoy to pursue as a profession. They believe in the product/service they want to provide. They are confident that it is an improvement over existing products or is a new way to address an old problem.
However, while most investors want and appreciate passionate entrepreneurs, they are also looking for someone willing to invest their own money as well as funding from them. This is to be able to divide and diversify the risks involved due to the unstable nature of the business environment. As a founder of your startup, you will have to raise the initial capital yourself. You can do this from your own savings, borrowings, family, friends, etc. But you must be willing to demonstrate you believe in product/service enough to invest your own money. You will have to get the business off the ground on your own.
Personal investment is not only limited and restricted to monetary investment, investor's want to see a significant degree of effort in investment. This isn’t exclusive to personal capital. They want to see your blood, sweat, and tears poured into the business because if you won’t invest, they never will.
Product/Service Differentiation and Competitive Advantage. What are investor's looking for in terms of your product/service's unique selling point? This is going to be a critical issue for investors. What makes your product/service unique? There has to be something about your product that sets it apart. If you have a never before seen product and you’re the first to the market, that maybe it. However, most startups are entering existing marketplaces.
Momentum and Traction. An important way to reduce the risk in an investment opportunity is to show investors that you're not just all talk but have already begun taking action to build the business. This may include pilot testing the market with your product/service or creation of prototypes. Demonstrating that the market is already engaging with your product and providing useful feedback will set your startup apart from many others that are still in the thought process phase.
What are investor's looking for in terms of traction and what does it mean to them? To any startup or investor, momentum or traction could be defined in any number of ways but the key component here is to exhibit some degree of progress. Month-over-month organic growth, continuous revenue growth, increased user numbers, staffing expansion, technology development, etc. all constitute progression.
What Are Investor's Looking For In A Business Plan?
Most potential funders wish to see a business plan as a first step in deciding whether or not to invest. What are investor's looking for exactly in a business plan that decides whether they are willing to invest or step back?
What Are Investor's Looking For In Financial Statements?
There are key performance indicators that investors will want to see in a company's financial statements before they will invest. Financial statements are financial records of a company's working consisting of many components, so which components to be precise, are investor's looking for?
Net Profit. What are investor's looking for in net profit to be exact? Financial statements will reveal a company's net profit, the net profit is the money that a business has left over after paying all expenses. "Are you making money?" is often the first question asked. As many business owners do not often have a clear understanding of their net profit, this is a good place to start to be able to explain to investors what your figures mean.
Sales. If you establish a track record of sales before seeking investment, investors don't take on the risk of not knowing the answer to that question. Investors also care about sales growth.
Cash Flow. Investors view of cash in the bank as a sign that you can deal with unexpected problems and capitalize on new opportunities. Free cash flow, the amount of cash that's left after you meet your expenses each period, is a sign of sustainable operations. If you have both, investors won't have to worry that you could go under at any time.
Margins. What are investor's looking for in margins you might wonder? Sales are meaningless if you aren't making money. Investors also want to see your profit margins both overall and at the individual product level. They'll also compare your margins against industry standards and their other available investment opportunities. Higher margins generally lead to a better return for investors. If you have low margins, you'll need to demonstrate a plan for improving them. For early-stage businesses, demonstrating how economies of scale will reduce costs as you grow is usually the answer.
Debt. What are investor's looking for in the debt section? Debt scares investors for two reasons. One is simply that if you go out of business, debt holders get their money back before equity holders have a chance to claim what's left. The second, and more important, is that debt payments eat up your cash. High debt payments can hinder your ability to meet payroll and other expenses during slow periods. They may also mean you have less cash available to help you handle a sudden surge in orders or an emergency equipment replacement.
One of the most common debt measures is the quick debt ratio—current assets (excluding inventory) divided by current liabilities. A quick ratio of 1 indicates that you can exactly meet your obligations, and the higher it is above that, the more flexibility you have.
Creating A Successful Pitch Deck for Investors
What are investor's looking for in a pitch deck and how can you create the ideal pitch deck to present? Summarised below are 3 key elements of creating a successful pitch deck to meet the requirements of what are investor's looking for from an entrepreneurs pitch:
Knowledge of Industry. You will likely be asked technical questions in your pitch, for example, those concerning the logistics of your industry, the science behind your product, or the current research surrounding the problem you are trying to solve. Answering these questions with confidence shows your expertise and that you have thoroughly researched the current market. Even if you are breaking into a new market that you don’t have any first-hand experience in, it’s worth mentioning how you have addressed that problem.
Marketing Campaign. What are investor's looking for in terms of how you plan on marketing and promoting your product/service to reach out to the targeted audience? Your marketing strategy hinges on who your target audience is and where they are most likely to see and respond to your message. If you are not confident in your ability to devise a marketing strategy, then you should consult with a marketing expert before your pitch to get some additional insights. If you keep these areas in mind when preparing for your pitch, you are sure to impress your potential investors and hopefully get that much-needed funding for your business.
Financials and Projections. This section is about what are investor's looking for in your financial projections and predictions? Putting together a set of thoughtful projections on both the revenue and cost sides enhances your credibility with potential investors. You must also be able to demonstrate an appreciation of the capital you are raising and how you intend to deploy it to meet milestones that will be critical for future fundraising. While your audience may feel projections are premature in assessing the business, they will appreciate that you understand financial metrics and how to “operate” a business.
For more detailed guidance, see our insights on creating successful Pitch Decks and important components required with examples.
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