Knowing how to approach investors is key to your business success. Even if you have a strong vision and work ethic, you can’t turn your vision into a reality without funding.
That’s why it’s so important to understand how early-stage investors think. When you know what matters to them, and what factors they consider when deciding to invest in a business, you’ll be much more likely to convince investors your idea is worth their money.
Don’t worry if this isn’t a process you’re very familiar with. It’s certainly possible to learn about what is most important to early-stage investors. You simply need to keep the following essential points in mind.
The Essence of Early-Stage Investing
As the name implies, early-stage investing refers to investments made during the initial phases of a business’ growth. That means early-stage investors generally take risks on unproven companies. Although their founders may have had success growing businesses in the past, that’s no guarantee their current venture will be equally successful.
This is one of the most important points to remember when approaching early-stage investors. If they choose to invest in your business, they are taking a chance on you. Understanding this mindset is key to presenting your idea effectively and persuasively.
Talent Matters More Than Ideas
Again, a smart idea for a business is not the only factor early-stage investors consider when making decisions. That’s because startup ideas can evolve and change over time. For example, Instagram originally began as an app that allowed users to check in to public locations, similar to Foursquare. Upon releasing the app, the company’s founders learned it wasn’t as popular with users as they had anticipated. The only feature users seemed to care about was the app’s photo-sharing capabilities.
This inspired the team to pivot. Instead of pursuing their original vision, which was failing, they adapted. This is evidence of a strong and flexible team.
It’s also a relatively common occurrence. Investors know that an initial business idea may not represent the final business model. The idea is less important than the team you assemble to execute it. Investors want to know they’re working with responsible, skilled, hard-working, and qualified people.
That’s why it’s important to have various experts onboard. For instance, maybe have a business idea, and you possess the experience and talent to bring it to life. What you don’t possess is thorough knowledge of the industry. If this is the case, you either need to partner with someone who does, or you need to learn as much as you can before approaching investors. Your goal is to convince them that investing in you is worth the risk. Your idea may actually be secondary.
Keep in mind, this claim about the importance of your team isn’t a mere theory. A recent study confirms its validity. When investors were provided with information about real startups, some which included information about the team, and some which did not, researchers found investors responded much more positively to startups when they could learn about their founders. This was more significant than any other factor.
Don’t despair if you’re struggling to assemble the perfect team. In some instances, investors will help you build one. If your overall presentation is strong enough, you can find investors to help you improve your team.
Don’t make the mistake of assuming investors are only interested in vague or general factors, such as the strength of your team. They also have to feel confident they can earn a strong return on their investment.
Thus, you need to collect all relevant financial information when approaching early-stage investors. This doesn’t merely involve collecting past data. Although financial statements are important, it’s equally important to look to the future. You have to clearly and thoroughly explain to potential investors how your business will make money in the years to come.
Make sure you understand your models by heart. Investors tend to be cautious, and for good reason. They are going to challenge many of your estimates, assumptions, and forecasts. Be willing to defend them by demonstrating your robust knowledge.
Markets & Solutions
Of course, no business can deliver a substantial return on investment if there isn’t a market for it. This is one of the most important factors investors consider when they do evaluate your overall idea. As a note, some investors who take the first steps towards investing may select to invest and trade in global financial markets. As a rule, they usually invest in crypto and stocks, and deal with Brokernotes and online brokers.
Again, although your business model can change and develop over time, you still need to begin by solving a genuine problem for your target audience. Investors want to see that you are providing real value to customers. An impressive product that nonetheless solves an unimportant problem is likely to fail.
Additionally, the market and industry you’re tapping into will play a role in convincing an early-stage investor to provide funding. First of all, many investors are more comfortable investing in businesses when they are familiar with their industries. It’s easier to take calculated risks when you have some knowledge of the field an investment prospect operates in.
Some investors are also interested in emerging markets and industries. They may not be experts in certain topics, but they don’t want to miss out on an opportunity. This tends to be the case when new technologies, such as artificial intelligence, demonstrate the potential to significantly disrupt existing markets.
These are all reasons to perform thorough research before approaching early-stage investors. You need to have a team of skilled experts, a thorough understanding of your own financial prospects, and enough knowledge of your industry to connect with an investor who shares your interests. The more you understand what truly matters to them, the more likely you are to attract investments.