Odds are generally stacked heavily against the average startup and the potential for failure is high. That being said, a necessity of the select companies that do rise from the trenches is funding and investors. So what formula do smart investors—and smart entrepreneurs—use for success? We asked St. Louis experts to share what the most crucial qualities of an investible startup are.
Founders you trust
A high quality management team means investors can feel safe with someone else behind the wheel. Founders must be passionate and understand the true core of their business . “Investing in early stage companies is so much more about the execution than the actual idea. You’re investing in the team as much as the company,” says Matt Menietti of SixThirty. Given qualities an investor looks for are industry knowledge, flexibility, vision, etc. Coachability is an absolute must. At some point, your investor was not an investor, and he/she, more often times than not, achieved some level of financial success. That now investor (who is, by the way, funding your company) probably has some valuable, qualified advice. A respectful partnership between founders and investors makes for a significantly better funding cycle from every angle.
There has to be something to sell. Investors must see that the offering itself has value proposition. Value proposition is less based on physically “what” a product/service is and more vested in its emotional affect on the customers (and, therefore, the industry). Further, the emotional affect that the features and benefits of said product has on a customer, and how sustainable and unique that reaction is, indicates how it will compete. Evaluation of whether an innovative differentiation from competitors or alternatives exists is key to a willingness to fund—and from a customer standpoint, a willingness to pay. “A solution to a real problem” is what drives tangible success, says Jim McKelvey of Square. A company must be in sync with the human factors behind their customer’s problems, why those problems exist, the necessary route to fixing them and how to shape the experience.
Additionally, investors evaluate startups based on traction. Many seed-stage investors look for some traction before investing. They want a clearer vision of what the final product could look like and how far from that goal the startup is. This might lead them to ask for more tangible proof-of-concept items, such as a prototype, customer base information, website traffic, competitor analyses, etc. Factors like these can be measurable indicators of early traction.
What does the market say?
You have the knockout team, the knockout idea that solves a tangible problem—but scale matters. You have to have “market need, a willingness to pay and a clear, concise plan to reach the target audience,” says Ben Burke, director of operations at Arch Grants. Market opportunity polices the pearly white gates of startup success. Determining what market opportunity allows is key to evaluating where a product or service can “fit.” This goes hand-in-hand with the volume of customers in a particular market and what the competition looks like. Approach is the wingman here—”are you trying to go niche with your approach or more of a wide-spread, mass market strategy? We ask that founders try to paint us a picture of how they turn a small company into a $100M or $1B opportunity. And that’s how we, as a fund, make money, by ensuring that a couple of our investments turn into home runs, returning invested capital and profits back to our investors. Small markets can be attractive too, if competition is minimal and trends allow for quick market penetration,” says Matt Menietti. Further, you have to know who your customer is and what problems you’re solving. Knowing the market is the only way you’ll build customer relationships and know how to create demand.
Debatably of the utmost importance to investors is business model and process for scaling the venture, and how that fits into the broader landscape. Scalability is key—as revenue increases, cost must increase at a slower rate. Analyzing logistics can uncover all sorts of holes within a business model. Cost structure is an essential element to scalability, alongside evaluation of revenue streams. The logistics of a company’s key resources (suppliers, commodities, etc.), channels (distribution and sale plans) and partners (outside companies essential to the business’ success), and how well thought-out these details are by the team, tells a great deal about a company’s potential. What activities need to take place daily in order for a business model to function efficiently? Will the market grow and if so, how will the business model respond?
and last but not least,