What investors look for before taking an investment decision

The side headlines of Economic Times, 27th August 2015 read – “It’s Back to Basics for Net startups”. The main give away of this newspaper article was to convey the readers that now, considering the tough competition, investors are becoming more choosy and picky. This piece of news is good for some, but certainly bad for most of the entrepreneurs, who have the right idea, but lack the resources to carry it on.

“Valuation speed bumps may bring focus back on company building” Says Madhav Chanchani, a member of the Times Group. Today, investing and funding play a major role in the company’s growth. Startups with a great investor team to boast of often go on to become big multi million dollar businesses. In the initial stages, companies like Snapdeal and Flipkart were also out in the market, looking for investors and Venture capitalists.

From a startup’s point of view, your idea may be the best. But now, since tables are turning around, it is time to think from the investor’s point of view. What does an investor look for? What are the factors that they keep in mind while making investing decisions?

They check on the idea’s scalability
You have an idea which is not yet present in the market? Good! But, how scalable it is? How big a market size can this idea reach up to? Is this firm really going to benefit the market, firm and investors at large? Will the product or service last long in the market or it will reach the saturation point in a short period?
An investor seeks answers to these questions, when they question you about the scalability of your idea.

They analyze the trade – off between risk and return
Well, this is a fairly big concept that any management student is taught. But, apart from the theoretical importance, investors give this concept a lot of weightage. They actually calculate the amount of risks involved and what are the returns that the firm and they, as an investor will get. In case the returns are more favorable than the risks, then the startup idea is good to go.

The Management of your startup
Be it an MNC or a startup, an investor is always satisfied when there is a good management system in place. A one man show is always on the negative cards of an investor. Any investor always prefers to fund those startups that can present individuals/ partners/ executives who have been successful in building businesses.

Competitive advantage
If you do not have anything better than your competitor, then you have lost the investor forever. It is always important for you, as a startup to come up with a product or service that is far more superior to the existing ones – in terms of quality, quantity and technology.

Market size
Apart from coming up with innovations, an investor also gauges you upon your understanding of the market. You have to come up with figures and facts stating how your product or service is going to scale up to the target market, and how much of a market are you aiming at.

“Venture capitalists expect business plans to include detailed market size analysis. Market sizing should be presented from the “top down” and from the “bottom up.” That means providing third-party estimates found in market research reports, but also feedback from potential customers, showing their willingness to buy and pay for the business’ product.” Says Ben McClure, on Investopedia.

A great idea can be declared a not – so great idea, if you do not succeed in luring the investors into your ideation. While coming up with a business plan or an investment presentation, always think from an investor’s point of view. This way you yourself will be able to position your firm and come out with a better and innovation startup idea.

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