What goes on in Investor’s Mind? Part 1
Investors and VCs continuously evaluate their strategies, goals, resources, and options according to market conditions. They have a wide range of views on the economy and startup industry. It depends on which startups they are willing to invest in.
They think about how much money they can invest and what their return could be if they decide to back a startup. An investor's brain is constantly busy considering many factors that affect the outcome of a startup's funding round; it pays attention to everything from market dynamics to internal processes. The deeper you go into what goes through an early-stage investor's mind during the fundraising process, the better prepared you'll be for your next raise or acquisition effort. Let’s discuss how investors make "their mind up" on startups, which factors determine their decisions, and how they take their decisions.
Table of Contents
Type of Business
The type of business is the foremost question that investors and VCs often ask when they are investing in any startup. Startups can be categorized into two types:
Traditional – Low-risk low return
Traditional businesses are those that still rely on physical goods or services. This type of business includes manufacturing, trading, and services. Traditional businesses have a low degree of automation because the process is structured and repeatable. They are also not as data-driven and therefore have fewer opportunities for machine learning and AI to be applied.
The key to success in traditional industries is to have an adequate supply of raw materials, people with know-how, and access to markets.
Technology Enabled – High-risk high return
This type of business includes product, data intervention, data-driven, and automation. Technology Enabled businesses to have high levels of automation where processes are structured and repeatable but are also highly data-driven which means they can easily apply machine learning to their operations.
The key to success with technology-enabled businesses is to have a good understanding of the business model and its impact on the customer's needs.
Type of Startup
Revenue Generating – Incudes Edu tech, e-commerce, ridesharing, health tech, and fintech.
Revenue-generating startups are companies that generate revenue from a product or service. Some examples of revenue-generating startups include Uber, Airbnb, and TaskRabbit.
Future Monetization – Includes deep tech, space tech, blockchain, EV, and allied business and data analytics.
Future Monetization is the idea that startups will continue to innovate and grow as they develop new products and services. The type of startups that are most likely to become future monetization companies include those that have a revenue-generating component and will eventually be able to monetize their product or service.
What Investors Look For?
Investors are not looking for a perfect team. It is not about finding 5 geniuses that can create an amazing product and make it successful. Investors are looking for the right combination of people with different skill sets and personalities to work together in the same direction.
The right team has the potential to execute the vision and deliver results in a short time frame. Investors want to see that a startup's leadership understands its capabilities, technology, and business model.
In addition, investors want to see that a startup has a plan — not just an idea. They want to know where they are going and how they plan to get there. For example, if you are trying to build a mobile app for your company, you need to know what metrics you need from your data before you can develop this app or any other solution based on those metrics.
• Pedigree • Experience • Age • Full-time participation • Vision • Agility • Risk Appetite and Growth Mindset
Pedigree: The pedigree of a team is important because it indicates its ability to execute its vision. Investors want to know that the founders can put together a team that can scale quickly and executes the vision of the firm. The team should have experience in building successful businesses.
Experience: Investors want to see the founders' experience in their areas of expertise, which will help them execute their vision. It also helps if there’s someone who has been through this before so that they can guide others through their journey as well. The team needs to have experience in dealing with customers and solving problems.
Age: Investors prefer young teams with the potential to grow fast, so older teams with less time left may not be a good fit for some investors.
Full-time participation: Investors want to see full-time participation from all team members, including founders and key employees who play key roles in the execution and scaling of the business model.
Vision: Investors want to know what your business model looks like and how you plan on executing it (e.g., revenue generation strategies). You don’t want too much detail here as this could take away from other aspects of your pitch depending on what type of investor you’re pitching (angel or VC).
Agility: Every investor wants to know that the company has the right skills and talent to deliver on its own.
Risk appetite: Investors want to know how well founders think ahead and how they can adjust their plans in response to changing circumstances.
Growth mindset: Entrepreneurs who have a growth mindset tend to be more optimistic, less risk-averse, and more willing to make bold moves than those with a fixed mindset.
Startups need to learn before making the initial contact. Before heading to the investor, they must prepare themselves and make sure that they are ready.
The most important thing to remember when dealing with investors is that they want what's best for the company. They don't care if you make a profit on your shares or not; they would rather see the company succeed while doing what is best for the customer, the supply chain, and the employees. If you can show them that you are aware of this fact and can convey a general understanding of business practices, you should be able to negotiate any deal with an investor reasonably easily.