Investors checklist

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Let's have a look at the significant points investors look for in a business. These eight key factors are: team, attractive market, a compelling product, customer interest, your credibility gap, the business model, flexibility & focus, and the potential return for your investors.

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Team is a very important concept to understand, investors often don't necessarily put money into the idea but rather the team. So, do you have the right team to take this idea forward? Do you have co-founders? If you're a single founder and you're working on your own, chances are a lot of investors will not consider you as an investment opportunity. Make sure you cover the key skills. This is the business skills, technology skills, hustler, visionary, design skills, technical skills that you need in order to take your business forward.

A great example of this is one of our previous companies: Lifeonics were a bunch of PhD students from Massey University that together came up with a really awesome product in the biotech space.

Although the team themselves were very knowledgeable, very technical and created the company out of nothing, later on they knew that as part of the team being stronger they needed some more business skills. This is when one of their co-founders came on board, Clive, and acted as a CEO. He brought with him huge business skills and a huge network internationally that helped them grow their company out of little New Zealand into the world. Make sure your team has got a good balance of skills, and also really important is that your team shares the same passion and knowledge as the founders do.

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Another key area that investors will look out for is the attractiveness of the market. Now, this is really understanding the competition within the market and the actual dynamics within it.

So it's not just about the size of the market and the total addressable market, but it's really understanding who the players are, what the growth trends are, and what influences a market and consumer behavior. You really  need to have an understanding about the growth and profit potential of your market. Are you able to vertically segment the market or horizontally segment the market? Often you want to understand how you're currently fit into the market itself and how you can jump into other segments to further address growth and profitability of your company. Just remember that it's not all about the total addressable market. Most startups will not gain much of the percentage of shares off the total addressable market. Really what investors want to see is whether you've got access into the market and can really disrupt a new industry or market itself.

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Next what investors will look for is really do you have a compelling solution or a compelling product offering? So this is really where your value proposition comes in. Does your value proposition significantly increase benefits for customers?

A great example is that of Peter Beck from Rocket Labs. His product, the rockets enable customers to significantly reduce costs. This is a huge value proposition compared to existing alternatives, and therefore becomes a very compelling solution both for investors and customers.

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Customer interest is another key aspect that investors will look at when you're raising money. Make sure that you can demonstrate that customers are interested in your product, and most importantly, are willing to pay for your product. Beta users or free users are just not enough. Where does the money come from? Do you actually have agreements in place that demonstrate that people are willing to pay for your solution? By demonstrating customer interest you can demonstrate that you actually have found the problem in the market and are solving it with a compelling solution. People are willing to pay and revenue will come back into the company. Nothing is as good as paying customers.

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Next you want to plan for the credibility gap. This is really demonstrating your first customer, some success stories. Prove that your product works. Prove that you are a successful company. Prove that you are a great team behind your company. A good way to do this is through getting early customer references. Perhaps even finding a partner who supports or perhaps even upgrades your value proposition. A good way to do so is also showcasing your network of investors, your advisory boards to really make you stand out from the rest and show that you're a great company.

A great example of this is one of our companies, Perceptive. The founder, Chris Pescott, a young Massey University student, sold into boardrooms of large companies and tried to help them with more customer insights and more customer data. Because of that credibility gap, he didn't have any large brands behind him, didn't have much business experience behind him, selling into the boardrooms was very hard. Chris quite quickly assembled an advisory team that was able to give him enough credibility to get his first corporate customers on board. Once he had the corporate customers on board, he was then able to flag their company logos on his website and clearly demonstrate that other people trust him, that he's got integrity, and is a great company to work with.

Have a think about what your credibility gap may be, whether it's technical skills, advisory skills, or just business acumen or business skills, and plan for your credibility gap.

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Business model is another important fact that investors will look at. Although you don't often have the perfect business model early on, however you want to plan and showcase a business model that demonstrates you can run into breakeven after one to two years. Running a profit after one to two years might not be everyone's goal, however you want to show that you can run and return some revenue quite quickly early on with your customers. A scalable business model becomes more attractive as it can demonstrate high growth, and if you can also put in some high margins, it becomes very attractive for investors.

A great example of a fantastic business model is that with My Food Bag. My Food Bag started approximately four years ago with five founders, who served about 100 customers when they originally started. In 2017, the company had more than 120 staff with revenue well exceeding $135 million per annum. This is a great demonstration of a business model that was scalable and had profit or revenue put into it quite early on.

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Do you have the right flexibility in your startup? Focus is very important, especially because startups have limited resources, time, people and money. Really focusing on one target area is important to success, often if you spread yourself too thin, you're doing too many things, but none of them are actually a hundred percent right. A few companies get this strategy right the first or second time. Often you target one customer, one niche, one area, however you quickly shift as you find more profitable revenues or more profitable niches somewhere else. Evaluate the potential for flexibility, and then specific have a look at your management team, implementation, and even technology.

A great example is that of YouTube. YouTube is now one of the largest video search engines in the world. YouTube didn't start off as a search engine. YouTube started off as an online dating site. So they were able to stay flexible, keep their team and their key capabilities together, and change tactics and strategic focus.

So, have a think about what areas you can be flexible with and which ones need to be firm.

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Lastly understand your potential payoff or exit strategy. Angel investment groups often seek a 10X return, meaning that if you are raising $1 million in capital, $10 million are needed to repay that money. Be sure about your exit strategy. What is happening in your industry, what other startups are being acquired, and do you have a potential exit or selloff for yourself to repay your angel investors at the stage down the track. The potential payoff for investors is really where everything comes together. Putting all the previous points together will either pay off for your investors through revenue, or pay off for your investors through an exit strategy and a potential acquisition down the track.

Learning

Now, that we have a bit of understanding of what investors are looking for in a startup, have a go working through the list. Have a look at these eight key components and think about where your weaknesses lie. Often business models take a little bit longer to figure out and really iron out, but have a look at the team. What key skills are you missing? Is there a credibility gap? Do you have customer interest? Do you have a product or a compelling solution that people want? Go through the list and have a think about it.