There are many startups that investors look at every year, but only a few make it past the initial evaluation. Capital constraints and time constraints are constraining factors for experienced investors, so they usually use a simple framework to quickly assess businesses that they want to explore further. They aren’t concerned with flashy presentations, but rather evidence of real demand, strong leadership, and scalable potential. These questions can help founders give their business a boost and make them better prepared in communicating with potential investors.
Does This Solve a Real Problem?
Investors will want to know if the startup is solving a real problem that customers want solved. While a product can be innovative, it’s hard to attract customers if there is very little demand for it. Businesses, in general, are preferred by investors when they solve a clear pain point or provide a valuable improvement on what already exists.
Is the Market Big Enough?
No matter how well the product is, if the market is too small, it will not succeed. Investors consider the size and growth of the customer base in the business. They tend to focus on markets that have potential for long-term growth, as there are larger opportunities for growth and higher returns in the long term.
Why Is This Team the Right One?
Investors take care of the founders and leadership team of a startup. Experience is a key factor, as is the knowledge of the industry, technical expertise, and ability to execute. Even if the idea for the business is the same, many investors think that a strong team can surmount the difficulties better than a weak team can.
What Makes the Business Different?
There is a healthy level of competition in virtually every industry. Investors are interested in knowing what makes the startup different and why customers would opt for it over other options. It may be exclusive technology, special skills, better customer service, cost reductions, or a special business model.
Can It Scale Efficiently?
A company that increases its sales but does not increase its expenses may be more appealing to investors. They seek indications to validate that the company can grow without a commensurate rise in costs. A scalable business has more potential for big returns as it scales up.
Is There Evidence of Traction?
Investors like proof and not assumptions. All of these can be indicators of a positive market response, such as customer growth, recurring revenue, partnerships, user engagement, pre-orders, and retention rates. Small gains can be more significant than lofty forecasts without any evidence or proof.
Do the Numbers Make Sense?
Lastly, investors take a look at the business aspect. They would like to see that founders are aware of revenue, expenses, profit margin, and cash flow. The numbers can help guide a founder to better decisions and communication with prospective investors.
