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What Investors Look for When Investing in Startups

by Roveen Anyango
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Startups are often a great place for investors to invest as they are companies that have the potential to reach high growth rates over time.

Often, investors will seek to help the entrepreneur get their startup off the ground. However, keep in mind that the main reason an investor would risk their funds in a startup is to make money.

So, what do investors look for in a startup?

Traction

There is quite nothing important to a venture capitalist but a product or service that is marketable. You might have a good idea, but if it does not elicit a strong reaction from the masses, then investors will unlikely invest in it.

So, startups will need to have begun operations and demonstrated a great ability to sell the product or service. This is a ‘proof of concept’. So, to get investors, you will need to get your product or service up and running.

Scalability

Having a market is great to get investors, but the size of the market is also important. So, an investor will look to see if your business can grow beyond the area in which it is based and withstand the pressure of that growth. If your market is only around your headquarters, your growth is limited.

So, investors are looking for a business that has a presence at least regionally. So for example, if you live in a big city, your product should be well-known across the city. It doesn’t have to the known by everyone but should be known beyond your area of operations.

Competitive advantage

What makes your product or service unique? A product or service that is different from the existing products or services in the market has the potential to be the best in the market.

The uniqueness could be in the product or service or much more affordable than the competition while offering quality. An investor will want to know that they are investing in something that will solve what it sets out to solve but still assure them of long-term profitability.

An Exit strategy

Investors often want a solid return on their investment, and thus, need to know your exit strategy once they have gotten their returns to their investment.

So, they will often have these questions in mind: How much do I invest? How much will I get back and when? Investors will want to know your strategy for acquisitions, the sale of shares, and your timeframe for the exit. If you can’t provide any, they will hesitate in investing.

Passion

Finally, you need to show that you believe in your product or service. Passion is often overlooked but to investors, passion means that you are confident in what you create, which builds confidence in customers.

Startups with an owner passionate about its product or service will convince the market of its viability, hence providing room for the business to grow and guaranteeing investor returns.

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