Each investor, whether an individual or a firm, has a view about what makes a good investment. They consider a range of factors and issues and then weigh up what, in their minds, are the ones that matter. When we have spoken to investors there are a number of themes that are common to their approach. They are:-
What is the background, experience and track record of each founder? When asking this question we are not necessarily seeking founders who are serial entrepreneurs, rather we are seeking founders who have sound backgrounds in the technology or market in which they plan to establish their business.
Over 80% of startups fail. We want to improve upon that situation. Our approach is to provide practical help those founders that we invest in to improve their chances of success. In our view the people are the most important element of the business proposition.
It is not just about the founders, but also the initial team they build to help them grow and scale their startup. What are their motivations in joining the startup? Are there tensions between short term and long term personal, family and business goals?
Each investor, whether an individual or a firm, has a view about what makes a good investment. In reviewing a proposition we ask questions like:
- How do they operate and contribute as a team?
- Do they have and demonstrate passion?
- Will they 'bust a gut' to make this a successful business?
- Are they looking to build a long term sustainable business? It may take 5 - 10 years to get to the point where it has a successful outcome. Do they have the staying power?
- Are they self reliant or reliant on other specialist skills / capabilities to design the product and launch it?
What is the product (or service)? The founders should be able to answer this question in a few slides or sentences very much like an elevator pitch.
- Why hasn't your product been built before now?
- Who are the competitors?
- How scalable is the product and business model?
- Are there regional and international demands that need to be accommodated in the design now, or in the future?
- Are there any regulatory standards that have to be complied with (e.g. GDPR, PCI DSS)?
- Is there any reliance on other technologies, products or services to deliver the finished product?
- Is there a feature / enhancement roadmap?
- Is there any technical debt already built up or likely to be incurred?
- What is the approach to user engagement and support and is it scalable?
- Have you developed the concepts for your Minimum Viable Product?
Pricing (& revenues)
- What is the revenue model (perpetual licence + maintenance, subscription etc.)?
- How is the product priced (per user, per device, per system, value realisation share etc.)?
- Are there any special pricing approaches for different market segments or customer groups? How price sensitive is the commercial proposition and how does that impact on revenues?
- Is there a Freemium and Premium approach?
- What is your approach to generating revenue? Your chances of survival depend on how fast you generate sales revenue.
- Have you developed your financial model, deck and pitchbook?
- What is the size of the market?
- What is the total addressable market? How much of it can be captured?
- Have you determined product / market fit?
- Can you build first mover advantage?
- What are the barriers to entry into the market? If it is low cost to enter, then it is easy for others to also compete.
- Who are the customers and why will they buy the product from you rather than from anyone else?
- Does the product fit into or require an ecosystem to help leverage its adoption?
Why will customers buy the product now? What are the drivers for a sale?
- What differentiates the product from its competitors, what are the unique selling points?
Compared to the incumbents is it:
- Better (more functionally rich)?
- More convenient?
Does it sell itself or does it require dedicated sales effort?
Is it a short sales cycle or a longer one that requires considerably more sales effort?
How will the founder(s) and their team act as stewards for the money that is to be invested in their business?
Why is the investment needed and what is it to be used for (application of funds)? Is it to hire more engineers, sales staff, do more marketing etc? What is the projected 'burn rate' and how much runway does that provide? Have they flexed their estimates so that they understand the impact of lower and higher than expected revenues and costs?
There are some supplementary questions that may be asked which helps to position the current situation with history. They are shown here
Lastly, the $64,000 dollar question - what investment are you seeking?