What are investors actually looking for?
“Give them quality. That’s the best kind of advertising.” — Milton Hershey
As a venture capital intern, I worked in a firm with a network that exceeded over 900 investors, family offices and venture capital firms. I believe that this gives me ample experience to relay exactly what the investors were looking for and what criteria were used to filter through the piles of aspiring startups.
Some of the trends which we found after interviewing over 200 of our partner network were interesting, if not surprising:
Trend #1: Early-stage/Seed investments are highly sought after, while Series A/B investments actually appear riskier in the long term
Many Series A/B level startups are experiencing tough times due to the impact of COVID-19 and have attempted to cut costs and fire some of their workforce, all whilst rapidly burning through their capital.
Which is why pre-seed startups are the best positioned because no one really expects them to make a ton of revenue in the first six months in any case, so they will start to focus on go-to-market in an environment which is likely post-health crises
Trend #2: Liquidity is important!
The biggest drawback of private market investments is that they are highly illiquid. Whereas, the bloodbath, that is the public markets, is seeing extreme volatility.
“There is plenty of capital sitting on the sidelines, waiting to jump in when the volatility subsides,” said Scott Wolstein, CEO Wolstein Group.
Top 5 investment sectors US family offices will continue to deploy capital in:
- Healthcare (medical supplies, medical equipment, diagnostics, tele-medicine)
- Supply Chain Services and Logistics
- Streaming, particularly Distance Learning
- Industrial warehousing and data center
Now I will delve into the criteria we use to grade startups and what you can do to improve.
- Total Addressable Market (Market Size) — It has got to be large enough to attract investors. Investors are typically not interested in small, niche market sizes.
- Unfair Advantage/USP — The startup must have some differentiable factor that sets it apart from its competitors. Investors won’t invest their capital into a firm that clearly only imitates a more successful counterpart.
- Momentum & Metrics — Which big names have you partnered with? Have you closed any deals? Revenue? Profitable?
- Strength and Experience of Management — Where have the founders worked? Who is on the BoD? Investors are looking for individuals with clear experience in the respective field/industry. Even if you are just an undergrad at university, simply by having someone with significant experience as a BoD member or external advisor, goes a long way.
- Competition — We analyse the competitor’s results and how the startup fits into the competitive landscape.
- Existing Investors — If notable names e.g. Temasek or Novartis have invested in your startup, FO’s are much more likely to want to invest.
- Resilience to Economic Downturn — Given the current condition of the global economy, how has the startup faired? Have you thrived and grown even through uncertainty? Obviously, this highly depends on the industry the startup is in. However, they say “diamonds are made under pressure”, clearly this was the case in the last recession with notable names such as AirBnB, Uber and Slack being founded then.
- Economics of the Deal — How much is being raised, how much already raised? What are the pre-money & post-money valuations? Your ask must be clearly outlined with some idea on how you are going to use the capital.
If you represent a tech-startup based in the UK and are seeking funding, please do get in touch.
As a venture scout, the firm I represent is looking for technology startups that have already gained traction and have displayed some form of revenues.