What do Investors Invest in Startups First? Teams, Products or Services?
When it comes to investing in startups, what do you think investors invest in startups first? Product, idea or a team? If you choose team then you’re on the right page. A product or an idea is nothing unless there is a solid team that can execute on the business plan, regardless of how good an idea or a product.
The management of a startup is its lifeline; no matter how many great ideas one has they cannot overcome a flawed management team. The people are significant in the early stages of a startup. So, what creates a good team? How can you tell if you already have a great team, if you are a good team leader, and if any investor can perceive you in the same way you do yourself? Maybe it is better for you to approach these questions from another point of view.
We all know that startups are full of challenges from the beginning. Some of these may include, technical, commercial and HR hurdles of different kinds, just to mention a few. These problems need particular personality attributes and attitude from the founder so that the startup can survive. The personality attributes may include a combination of individuality, confidence, stubbornness, curiosity, eagerness to learn, energy, maturity, humility, as well as a sense of self. Most founders that share such characteristics are better and stronger in running their companies over the long run compared to those that don’t have these characteristics.
Although all the factors mentioned above are just personal attributes of a good founder, an investor looks at other factors when they want to invest in startups. This makes the equation more complicated. Most investors will pay really close attention to if the company’s startup stories creates an emotional connections with them or their customers.
Other than the mentioned personality attributes the following variables are included when an investor is analyzing a startup.
The Commercial & Technical Competence of the Founding Team
This could either mean that the founder has the required experience from having started another company before or they have developed the right skills required to execute the stated vision of a new company.
The Capability to Handle Conflicts
Since most new teams tend to face problems when they least expect them, the ability to divide the issue into parts, use humor at the required time or knowing when to take a break are all essential skills that need to be demonstrated. These are some of the things that determine if your team can stay together and work hand in hand in spite of the conflicts that arise inevitably.
Although some investors conduct an artificial stress test while conducting investment reviews, it is not standard practice for you to inform them about it. Usually, by spending time with the team, they can easily tell if there are potential internal personality problems.
Know When to Quit or Persevere
Some individuals tend to quit too early while others keep pushing too long beyond that point when the strategy is the ideal one to use. While it is hard to evaluate when meeting the team or a founder, it is vital to have this attributed internally so that you can use the investor’s money and time optimally.
The Team Can Articulate Their Plans and Thoughts
Communication is a key item for any organization in order to succeed both internally and externally. It doesn’t make sense to have an amazing programmer who can come up with amazing things, but he or she ends up making mistakes because they did not get the management’s specificity or did not understand what they were supposed to work on. Additionally, it is useless to have founders who are great at building products, but they are not able to communicate their vision to the outside world.
Other Metrics to Considered When Investing in Starts
Other than checking on the entire team, it can be hard to know other factors of a startup at this early stage. Since the investor will likely not find any news online about the company they will most likely turn classical evaluation markers. Below are several metrics investors use to size your young business when they want to invest in startups.
This can be a key factor for many investors. How much is the company making each day, month, quarterly or yearly? While they know that revenue does not equate to profits, they know that they will get a sense of the company’s size and growth rate. What’s more not all revenue in a firm is created equally. They will want to know if the company gets recurring revenue or each sale is conducted once, and that is it.
Showing revenue, any revenue, is a sign of validation of your idea, product, and/or service. It is always a good strategy to start earning sales as quickly as possible, regardless of how low the revenue might be. When an investor is searching to invest in startups they are looking for validation and market competition.
We can define gross margin as the revenue of the company minus cost of goods sold. It offers visibility into a firm’s ability to profit. Investors want to know more about the startup including their cost of goods sold figures because this comprises of the total cost associated with manufacturing, support, and delivery of commodity or services. Some company models naturally have lower or high gross margins compared to the others. However, as the company grows over time, the gross margins ideally go up.
Every investor expects a startup to have low or no gross margin in the first few years. It natural for a startup to spend their profits on gaining additional sales in the new year or new quarter.
Total User Base
The total number of registered users a startup has can be a useful indicator to investors, especially for companies that are created to take advantage of network effects or companies with business models that require strong user bases to convert percentage to pay the customers.
When evaluating a freemium based business model, the total number of user base is critical in evaluation.
To determine user traction, the total number of active users usually is a more relevant number compared to the entire user base. This total user base includes all clients who have come and gone or consumers who are mildly invested or interested in the products or services. Although the number of active users is usually less than total user base, it gives a potential a vivid picture of the number of users your company engages with over a period of time.
Invest in Startups Conclusion
In sum, investors consider different factors before they can invest in startups. They will want to know the kind team they will be working with if they decide to invest both their time and money in your company. Ensure to consider all these guidelines we have outlined, and you will be able to attract new investors in no time.