Imagine this: you’re sitting across a conference table pitching to an angel investor. They’ve got the financial resources you need and you’re one decision away from either making or breaking your startup idea. Wouldn’t it be helpful if you could understand exactly what your investor is looking for, what they would find as an attractive investment and what their due diligence criteria requires?
Lucky for you, I sat down with an anonymous investor friend of mine last week and grilled her on what she looks for when investing in early stage startups. Keep in mind, she only funds technology-based products but she assured me that this initial criteria is what most investors who are looking for a return will abide by.
Criteria For Investing
Don’t jump in unless you know all the facts! Prepare yourself by investigating the investor, the investing organization and its investing patterns. Anticipate rounds of extensive questioning so arm yourself with answers to what they would potentially ask you. Here is my list of initial investing criteria:
- Have significant market potential – Does the market size have potential to grow well beyond what already exists or what is there at the local level? How much room is there to expand?
- Fulfill a market need – Is there an obvious demand for this company? Is the product innovative? What problem is the product solving? Would the product, once it exists, be indispensable?
- Be technology based – This requirement is not for everyone but as a tech investor, this is a must.
- Have the right team in place – Do they have mentors, product builders, experts who know the industry and who have committed to the potential of your startup idea by working only for equity etc.?
- Have devoted founders – Is the founder passionate enough to sell this product all day and is he/she flexible enough to make the necessary changes when required? Does the founder have the significant time and dedication it takes to devote to this startup idea? I’m wary of founders who aren’t willing to reduce other work or social commitments to focus on their startup. Bottom line is, why am I putting up my funds if you won’t put in the most important resource – time?
- Doesn’t completely make me roll my eyes because it’s just not something I would invest in – Did the company do some due diligence on me and my investment history? Does the pitcher know which specific companies I’ve invested in in the past and does she angle this knowledge to her advantage? For example, if you know that I’ve funded two client app startups in the past year, does it make sense to listen to a pitch about a brick-and-mortar coffee shop venture?
- What tangible progress has the company made so far and in what time frame? If the startup has been bootstrapping for a few years already, I expect to at least be presented with a prototype. What did your initial sales look like? Do you have some kind of a customer base? How has your business grown, changed, adapted since its inauguration?