Have you ever wondered what makes a company stand out to investors? According to a study by the Harvard Business Review, 75% of start-ups fail to secure funding because they don't know what investors are truly looking for1. Securing investments for your business is about understanding the key factors investors look for before investing in any business.
Understanding these priorities is crucial if you're a startup founder or business owner hoping to attract investment. Investors look for specific elements in a company before they decide to invest2.
By the end of this article, you'll know practical insights on what investors expect and how you can fine-tune your operations, pitch, and overall strategy to boost your chances of securing that investment.
Fundamentals investors assess before considering a company
Initial screening criteria
Initial screening is the first step investors take to filter through many investment opportunities. It helps them quickly identify the businesses worth deeper evaluation and which ones to discard. Investors look at early-stage financials, such as revenue potential and scalability.
This process helps investors weed out companies that don't align with their investment goals, risk appetite, or strategy. It helps ensure that only promising candidates move forward for more detailed analysis. A strong initial impression is key to progressing to the next stage. Investors typically look for specific criteria such as:
- Industry relevance: Is the business operating in a sector with growth potential?
- Stage of the business: Are you at the right stage for investment (seed, growth, etc.)?
- Clarity of vision: Does the company have a clear and compelling vision for its future?
Many businesses are discarded during this stage, even before investors dig into the finer details. Investors are selective, and only those companies that make it through this filter will get a closer look.
Market relevance
One of the most critical factors investors look for is market relevance. A growing or high-demand industry business has a much higher chance of securing investment2. Growth potential drives investor returns. So, why is market relevance so important?
- Industry trends: Investors want to see your business as part of a thriving industry. Being in a growing market offers more opportunities for scalability and long-term success.
- Consumer demand: If increasing demand for the product or service increases, the investment becomes more attractive.
For instance, industries such as artificial intelligence, renewable energy, and health tech have become especially attractive due to their high growth potential. If you demonstrate that your company operates in a market with significant demand, you're already one step closer to securing investment.
Risk assessment
Investors are in the business of making money, but they’re also in the business of managing risk. Therefore, assessing potential risks is one of the first things they do when evaluating a company. Key red flags they might look for include:
- Market volatility: Is the market unstable, and can your company weather any economic downturns?
- Financial instability: Are you overspending or not generating enough revenue to cover costs?
- Regulatory challenges: Are there potential regulatory issues that could disrupt your business?
Identifying and preparing a plan to mitigate these risks early on can significantly improve your chances of securing investment. A company that demonstrates the ability to manage risk is far more attractive than one that doesn't.
Scalability and growth potential
Investors want to know that their investment will grow over time, and scalability plays a significant role. Scalability is the ability of a business to grow without being hampered by its structure or available resources2. A scalable business is a massive plus for investors because it signals long-term growth.
- Expanding customer base: Can your business easily tap into new markets or customer segments?
- Operational efficiency: Does your business model allow you to scale efficiently without significantly increasing costs?
- Profitability at scale: Investors want to know that once your business grows, it will become more profitable.
One of the best ways to make your business attractive to investors is to show how it can grow rapidly and efficiently.
Key factors that influence investor decisions
Business model and market opportunity
Investors look for a business model that is both scalable and sustainable. A scalable model means the business can grow without proportionally increasing costs, while sustainability refers to long-term viability in a competitive market. Investors want to see that the business can generate consistent revenue and adapt to changes in the market.
Additionally, they evaluate the market opportunity, which is crucial. Investors assess the size of the target market and how the business positions itself relative to competitors. Understanding the market trends and competitive advantages can help the business effectively show its market potential, making it more appealing to investors.
Financial health and profitability potential
Investors closely examine key financial metrics, such as revenue, profitability, and cash flow2. Financial transparency is key to earning investor trust and investing in your business.
It builds investor trust by providing clear, accurate, and timely information about a company's financial health. Transparency fosters credibility and enhances reputation, which is crucial for attracting and retaining investment.
While profitability is important, it's not always the deciding factor. Investors prioritize the growth potential and scalability of your business. They also consider long-term growth potential, market position, and risk factors.
They prioritize factors like strong management, innovation, competitive advantage, scalability, and sustainable business models. Companies with potential for expansion, resilience, and adaptability are often more attractive, even if profits are currently low. Businesses must present a clear, realistic financial picture to attract investment and reassure investors that the company has long-term potential.
Team strength and leadership
A competent and experienced team is one of the most important factors investors consider. Investors want to know that the team can execute the business strategy and overcome challenges. The team slide in a pitch deck shows the leadership and team's experience and track record.
Investors assess management capabilities and adaptability by evaluating the leadership's experience, track record, and decision-making skills. They focus on how the team has navigated challenges and their ability to pivot in changing markets.
Strong leadership signals resilience and long-term business potential. Team chemistry and expertise are crucial in building investor confidence. A cohesive team fosters effective collaboration and problem-solving.
Having the right expertise ensures the team can execute strategies successfully, while strong decision-making under pressure demonstrates adaptability. Investors want to see that the team can handle challenges and grow the business effectively.
Competitive advantage and unique value proposition
A business needs a clear competitive advantage and a strong value proposition to stand out in a crowded market. Investors look for unique companies, such as intellectual property, innovation, or defensibility2.
Presenting a well-defined competitive edge helps businesses demonstrate how they differentiate themselves from competitors, which is crucial in securing investment.
In your pitch:
- Clearly explain what sets your business apart from competitors.
- Highlight your unique value propositions, such as proprietary technology or distinctive business models.
- Show barriers to entry, like patents or regulatory advantages,
- Emphasize your team’s expertise and experience in executing the strategy.
- Present solid market research and data that validate your competitive advantage, proving you can sustain and build on it long-term.
Ensure your pitch covers this to create a strong competitive edge.
Traction and proof of concept
Investors want to see evidence that a business is viable and has potential for growth2. Key indicators include customer acquisition, strategic partnerships, and early revenue.
Demonstrating traction, such as growing user numbers or expanding market share, helps investors understand that the business is more than an idea. While projections are important, showing tangible progress through actual metrics and real-world success can be more convincing than future estimates.
Risk factors and mitigation strategies
Investors are always concerned about risks. A business needs to identify potential risks early on and show a solid plan for addressing them. Investors need to know that you can identify the risks associated with your business.
This shows you have done proper research and are knowledgeable in your business. Common concerns include market competition, regulatory challenges, and financial instability.
Businesses that demonstrate proactive measures to reduce or manage these risks show that they are serious and prepared, which helps reassure investors and can increase their confidence in the company.
Exit strategy and investor ROI
All investors want a return on their investment. They need to see a clear plan for achieving returns. They also need a solid exit strategy that gives them confidence that they will profit, whether through a sale, IPO, or other options.
A well-defined exit strategy is essential for attracting investors. It provides a roadmap for how investors will eventually cash out and earn a return on their investment. Without one, investors may hesitate to back your business due to uncertainty.
Common exit options: acquisition, IPO, mergers, etc.
1. Acquisition: A larger company buys your business, providing immediate returns for investors3.
2. Initial Public Offering (IPO): The company offers shares to the public, allowing investors to cash out if the company is highly valued3.
3. Mergers: Two companies combine, often increasing valuation and giving investors an exit opportunity.
4. Secondary sale: Investors sell their shares to another investor before an IPO or acquisition.
Businesses can align their goals with investor expectations for returns if they:
- Set growth milestones: Show that your business is growing and heading toward an exit strategy, like acquisition3.
- Communicate early: Discuss your exit plan with investors from the start to build trust and align expectations.
- Understand timing: Ensure you provide realistic timelines for exits, whether through an IPO, acquisition, or merger.
- Align interests: Ensure your business goals and investor expectations are in sync to ensure a mutually beneficial exit.
By aligning your exit strategy with investor expectations, you improve your chances of securing funding and ensure everyone is on the same page regarding returns.
How a strong pitch deck influences investor decisions
A well-structured pitch deck highlights all the key factors discussed above: market opportunity, financial health, team strength, competitive advantage, and traction.
A pitch deck design agency like Propitchdeckservices.com can help ensure that your deck is investor-ready and communicates your company's value in a clear, compelling way.
Investors receive hundreds, if not thousands, of pitch decks. Yours needs to stand out and make a strong first impression. A professional pitch deck is your ticket to securing that investment.
Align your business with what investors expect by focusing on the right factors, such as market relevance, scalability, financial health, team strength, and a strong competitive edge. Presenting this clearly and confidently in a pitch deck is crucial to winning investors.
If you’re serious about attracting investment, consider working with a pitch deck design agency such as Propitchdeckservices.com to make your pitch deck shine.
Sources used in this article;
- Why Start-ups Fail: https://hbr.org/2021/05/why-start-ups-fail
- What do Investors Look for in a Partner? A 10-Point Checklist: https://aofund.org/resource/what-do-investors-look-for/
- How Investors Shape Exit Strategies: Driving Startup Success Through Exit opportunities: https://www.pitchdrive.com/academy/how-investors-shape-exit-strategies-driving-startup-success-through-exit-opportunities
