What goes on in Investor’s Mind? Part 3
Every startup has a funding cycle. It may be an all-or-nothing campaign, a seed round, or an angel round but startups inevitably try to raise money to support the growth of their business. Funding is vital for startups not only to survive but also to thrive. In most cases, investors are always looking for the best startups, but when it comes to raising funds, they all want the same thing – in return, they want a return on their investment.
During the startup fundraising process, an investor's mind is filled with a lot of questions. Several things may go through their mind such as Will it is possible to reach their funding goal. Can they still raise funds? Is this a good investment opportunity? And so on. So, what goes through an investor's mind during the startup fundraising process?
Table of Contents
What Investors are Looking For?
Scalability
There are multiple ways to scale a business. However, when it comes to startups, there is one thing that investors are looking for and that is scalability. Scalability can be defined as the ability of a company to grow its revenue and profits in the long term. Various factors affect this ability and hence, every startup needs to have a clear understanding of how they want to scale their business. This is an overview of what investors are looking for in the scalability of a startup.
• Market Opportunity • TAM / SAM / SOM • Go To Market Strategy • Current Traction • Future Projections • Break Even • Financial Ratios • Entry & exit valuation
Market Opportunity: The market opportunity is one of the primary factors that investors look at when evaluating a startup. It's about whether there is room for growth, and what kind of potential exists for expansion and innovation.
The market opportunity is the problem that your company solves. It is the reason why people need what you make and why they will pay money for it.
To understand more about market opportunities read our blogs here:
TAM / SAM / SOM: The "Total Addressable Market" is the total number of people or businesses that could potentially be reached by a product or service. In other words, it's how many people or businesses might want what you offer.
The TAM is also known as "Total Available Market", which means it includes all individuals, companies, and organizations who can purchase what you're selling. This includes both existing customers as well as those who are not current customers but may become interested in purchasing your product(s).
Then there's SAM (serviceable addressable market), which is a portion of TAM that can be served by the startup company. SOM is a Serviceable Obtainable Market, a portion of SAM that can be obtained in the existence of competition in the market.
To understand more about TAM/SAM/SOM read our blog here:
Go To Market Strategy: The GTM strategy defines how you plan on marketing your product or services and reach out to customers. It includes everything from branding, packaging, and pricing strategies to reaching out to potential customers. This can be done using various channels such as websites, social media platforms, mobile apps, and others,and even offline marketing channels like flyers or billboards. How will the company be able to reach its target customers? Will it be through TV, Google, or mobile?
Current Traction: The current traction should show a growth rate that shows how much money you're making per user each month, so investors can see how profitable it will be long term. How many users do you have on your app right now? Is it growing or shrinking?
Investors love seeing traction early on — it shows you’re already solving a real problem for your customers, so you can focus on building something that solves that problem even better than before.
Consider these questions, are you able to demonstrate the traction of your product or service? Do you have current customers who are willing to pay you money or do they need special incentives to use your service? How much traffic does your website receive? What percentage of people who visit it convert into customers?
Future Projections: Investors want to see future projections for the business model of the startup. Will it be profitable in the long run? Will there be a large market for your product?
Consider these questions, what is your growth plan for the next 12 months and beyond? How are you going to grow from here? How many new customers do you expect to acquire each month, quarter, and year? How many new users can you expect within the next year? What is your next step towards reaching this goal?
Break Even: Investors want a break-even analysis that shows how much money will be needed to cover expenses and make a profit.
Consider these questions, Where do your revenue and expenses stand at present? What is your burn rate right now? Are there any additional costs associated with running your business (costs like rent or payroll taxes)? How much money do you need to make before you turn a profit?
Financial Ratios: Investors want financial ratios such as ROI (Return on Investment), IRR (Internal Rate of Return), EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), and MACRS (Modified Accelerated Cost Recovery System).
Consider these questions, Are you profitable and growing, or are you losing money and shrinking? Are all your expenses covered by revenue or do they exceed revenue? Has there been any recent change in these ratios that could indicate problems (like an unexpected drop in revenue)? How much money do you have, and what is your net income/loss? Do you have enough cash on hand to cover expenses for at least 12 months?
Entry and Exit Valuation: Calculate what price an investor would put on their stake in your company if they were selling their shares today. This helps determine how valuable their investment is, and what kind of return they could potentially expect if they sold their shares tomorrow.
The valuation of a startup depends on how much money it makes. If a company has a high growth rate, then its value will increase. If it does not have a high growth rate, then its value will decrease.
Investors want to see an exit strategy — they want to know that your startup will be bought by someone else at some point in the future. They also want to know how much money they'll make on their investment, so they can decide whether they want to invest in the deal.
Conclusion
To be successful, startups need to have a sustainable business model. They also need an exit strategy in place so they can reach their goals and make money. Investors want to see that the business has enough cash flow, so it won't run out of money during its early years.
Scalability is important because it presents investors with an opportunity to achieve returns on their investments. If you're looking for funding, you'll want your company's growth potential to look promising and your financials solid enough that you can pay back the investors who provide capital with interest over time.