Investors' Perspectives in New Business Investments
The primary objective of any investor is to achieve a positive return on investment (ROI). This return can be in the form of financial gain, market share, or other tangible and intangible benefits. Understanding the various perspectives and criteria that investors consider when investing in a new business is crucial for entrepreneurs seeking funding.
What Investors Look For
When evaluating a new business investment, potential investors scrutinize several key areas that determine the potential for success and value creation.
Business Idea – Innovation, Differentiation, and Value Proposition
Investors are always on the lookout for innovative and compelling business ideas. These ideas should stand out from the competition, offering a unique value proposition that addresses specific customer needs or pain points. The innovative aspect can come in the form of a new product, service, or operational model that disrupts the market.
Business Model – Product, Services, Business Development, Revenue Source, and Process
A well-defined business model is essential. This includes the products or services you offer, your business development strategies, your revenue sources, and operational processes. Investors want to see a clear pathway for how the business will generate revenue and sustain growth.
Market Potential – Market Adoption, Average Ticket Size
The size and growth potential of the target market are critical. Investors need assurance that there is a sufficient market demand for the product or service, which can be validated through market research and adoption rates. The average ticket size also plays a role in determining the feasibility of the business model, as larger transactions can be more attractive.
Scalability – Geographical, Technological, and Target Size
Scalability is another important factor. Investors want to know if the business can grow geographically, technologically, and in terms of target size. This includes the ability to adapt to new market segments, as well as the technical infrastructure and team capabilities that support expansion.
Team – Credential, Skills, Confidence, and Attitude
The team behind the business is often the most critical factor. Investors look for a competent and confident team with a shared vision and the ability to execute the business plan. Each team member's qualifications and expertise are vital, but so is the overall chemistry and alignment of the team.
Traction – Customer, Sales, and Revenue
Traction refers to the business's progress and its ability to attract and retain customers. Key metrics such as customer acquisition costs (CAC), churn rates, and revenue growth are closely monitored. Positive traction indicates a strong business model and market demand, both of which are appealing to investors.
Future Roadmap – Big and Practical Plans
A clear and feasible future roadmap is crucial. Investors want to see a well-thought-out plan for the business's long-term success, including milestones, potential partnerships, and strategic initiatives. Practical planning shows that the entrepreneurs have a clear understanding of what needs to be done to achieve their goals.
Your Ask – Investment Required and Realistic Equity Offer
When approaching investors, it is essential to have a realistic and negotiable investment requirement. Overly low or high requests can be off-putting. Additionally, the equity offered in exchange for the investment should be fair and reflective of the startup's valuation. Both the investment required and the equity offered should be carefully considered to ensure a mutually beneficial agreement.
Exit Value and Options
Finally, investors are interested in the potential for exit and the expected returns on their investment. The exit value should be aligned with the investor's goals and timelines, and potential exit routes, such as an IPO, acquisition, or sale, should be discussed. Clear communication about these aspects can help build trust and ensure alignment between the entrepreneur and investor.
By addressing these critical areas and aligning with investor expectations, entrepreneurs can increase their chances of securing funding and building successful businesses. Understanding the investor's perspective is a key step in creating a compelling investment narrative.