Here‘s How The Top Startup Investors Choose Their Investments

Investing in startup companies may be as much an art as it is a science. There are very few certainties, and many variables that can impact the future of a venture. But there are definitely factors, criteria, and themes that are commonly repeated in how startup investments are made. In fact, the best venture investors are those that are able to have a pattern recognition when coming across opportunities that resembled other successful investments they may have done in in the past.

This includes:

• Multiple founders
• Coachable founders who are easy to work with
• Proof of product/ concept
• Multibillion dollar market potential
• Scalability
• Unique
• Something that the investor can add value to

Startup investors generally invest in, or even only seriously explore investments in 1 in 100 or 1 in 200 pitches they receive. Professor Scott Shane of Case Western Reserve University notes that the first filter most fundraising startups go through is who referred them to the investor. If the opportunity wasn’t recommended by a trusted source it will almost inevitably wind up in the trash. This is what is called in the venture world as social proof. In this regard, if you are looking for a template to pitch investors your business you can use for free the one below which has been used by hundreds of founders to raise millions.

In addition to the above, Shark Tank investor Robert Herjavec notes that entrepreneurs must have the skills and knowledge in place to both launch and manage a business, not just an idea.

Tim Ferriss who has invested in Shopify, Evernote, Alibaba, Blue Bottle Coffee, and Wealthfront, and has advised both AngelList and Uber reveals he has a very specific set of criteria for selecting startup investments.

This includes:

• Consumer services and products
• Products and services he could personally be a power user of
• <$10M pre-money valuation
• Demonstrated consistent growth (without paid acquisition)
• User demographics including popular tech cities, and his exiting audience profile

Startup investors can set their own criteria for filtering opportunities. This can be adjusted at any time, but may help filter some of the noise, and funnel in better matching pitches.

This may include:

• Sectors investors are most passionate about
• Size of investment
• Size of valuation
• Number of founders
• Caliber of people investing alongside you, or leading the round
• Location
• Ability to add value in a specific way
• Synergy with individual values

To aid in selecting the best startup investments, the process funnel normally follows this pattern…

1. Receive recommendations from trusted sources
2. View executive summaries or pitch decks
3. The Shark Tank moment; meet the founders, hear the pitch, ask questions
4. Conduct thorough due diligence
5. Review term sheets
6. Execute the documents and fund your investment

While operations should be left to the founding team and board, there are always opportunities for investors to facilitate the success of their startups. Peter Thiel does this by going big into fewer startups so that they have the capital to win. Others amplify success by coaching or integrating the product and service into their established distribution channels. At a minimum every investor ought to be able to recommend, share, introduce, and shop their startup. Not doing so just doesn’t make sense. For example; investors in Tesla wouldn’t be driving a Toyota or Porsche. If you invested in Coach, you don’t want to be rocking a Michael Kors bag.

Startup isn’t just fashionable; it can be very profitable. There are some common threads in what leaders in this arena invest in, though the spread of sectors and niches savvy angels put their capital into is quite diverse. What may be most important in choosing a great startup investment is taking a page from Warren Buffett and carefully vetting each opportunity and weighing on its own merit.

In the video below I cover in detail what startup investors look for in entrepreneurs before investing which you may find interesting.

FULL TRANSCRIPTION OF THE VIDEO:

Hello, everyone. This is Alejandro Cremades, and today we’re going to be talking about what startup investors look for in entrepreneurs before investing. Let’s face it. There are many different factors that come into place for an investor to get excited, for and investor to understand the vision, and to understand the future that entrepreneur is creating. In today’s video, we’re going to provide some key insights that you could use to understand and to get some of those patterns that are going to make that trigger in an investor to go ahead with making an investment. With that being said, let’s get into it.

The first thing is, they like founders who are able to build a great team around them. The thing is that in Jim Collins’ book, Good to Great, he always says that a startup is like a bus without a direction, but if you have the right people seated on the right seats, eventually you will find that direction to success. That’s the same thing with startups.

The investors want to know that you can recruit a team of A-players, and typically they would see as a red flag if they see a solo founder because that could signal the fact that they were not able to sell their vision enough to convince someone else to join them in that journey.

It’s all about being able to delegate, being able to get people that are better than you, and that can execute on that, and that can bring something to the table. Essentially, this is something that the investor is going to want and is going to require in order for them to potentially make an investment.

The execution is a really big one. The minute that you meet for the very first time with an investor, it’s rare that they’re going to give you the check. So, you’re meeting with them Day one here, and over the course of time, you’re giving updates, and you’re telling them how you’re doing, how you’re executing some of the feedback that they gave you and how you’re implementing it. 

Then over the course of time, they’re going to be able to see that you’re delivering on your promises all those different things that they told you. They can see that you’re listening and that you’re applying them. Then all of those different factors or ingredients are going to help them understand that you’re really good at the execution, which is going to give them that assurance toward making an investment. Remember as well that at the end of the day, 5% is going to be the idea, and 95% is going to be the execution, which accounts ultimately for the success of a business concept or venture.

Founders that know their customers: This is another big one of investors. You’re going to see it when you go to meetings. They’re going to want to hear about your customers, what you know, what kind of data, what kind of information, what you’ve learned, what they like, what they don’t like, what do they look like? 

Those are all different things that you need to know because it’s all about understanding your customer, and if you really understand your customer, then you’re going to be able to bring or deliver a service that they want and need. That essentially is what investors want. 

They want the entrepreneur to be able to build something that has product/market fit. What that means is something that is literally flying off the shelves, something that is addressing a specific need in the market, and is something that is going to help the investor determine that you’ve done your homework, that you know your customers, and that you’re giving them exactly what they need.

Expertise: They want to know that you know the market that you’re dealing with, that you’ve done your homework about it, and that they’re not giving you the money to make the mistakes. They’re giving you the money to execute. That’s something that investors want and that for them is going to be a super big one. So, when you’re getting in front of them, you really need to convey why you and your team are the right team to execute this idea and what you have done in the past that gives you that edge for the execution and to bring this venture to the finish line.

They want a very big market. They want to invest a company that is potentially taking on a really big market, and those need to be 1 billion dollars and up. Anything under a billion is probably not going to be of interest because ultimately you need to understand that whatever that market is, even if you had the best idea, and the best execution, and the best team if the market is small, that is also going to determine the returns of that investor. 

With that in mind, you want to be in a market that is really big, that has the potential for great disruption, and that is going to create a great excitement with those investors that you’re targeting because they can see that if you execute well, then perhaps their returns are also going to be super meaningful and are going to justify the risk of investing in your company.

Being able to adapt: This is another really important one because this is going to tell the investor that you’re able to listen, that you can listen to your customers, that you can listen to them, that you can listen to your employees. You need to adapt because essentially what you’re bringing to the market – maybe that business plan or that pitch deck that you had put together one day, thinking that it was going to be a massive success, ultimately, you put it to the market, and you realize that it needed some tweaks. 

There were certain things that you did not understand, or you didn’t know were there, but that by listening to your customers, you understand how with one or two tweaks are whatever is needed, you’re able to adapt, and you’re able to completely reinvent whatever you’re doing and perhaps even completely reinvent yourself or whatever your offering. I think that being able to adapt is a critical one, and then, in the end, essentially being able to listen too.

Focus: This is another one that is super important because the thing about entrepreneurs is that you’re always thinking about what the future is going to be. What can you bring to that problem that you’ll solve? What kind of solution? The problem is that when you start thinking too big or when you start to get other distractions, that is going to be a red flag. 

Always, as an entrepreneur, start by not building them all first. You want to build the store first, and then you build it over time to become that big mall or that big idea that you have. But you need to always think big and start small. That is going to give that assurance to the investor that you know how to focus and that you’re going to be crazy about execution on those milestones that you’ve already outlined.

They also want to see the sense of urgency and the passion there because here’s the thing: you need to be crazy, like crazy obsessed with your business. It’s night and day. This is not like a title; it’s not a job; it’s a lifestyle. You’ve come across a crazy problem that frustrated you. 

It all started with a personal story of yours and how you brought that to life to address with your solution that problem that you were seeing. It’s all about your personal story. It’s about how passionate you are about that, and that is something that is going to come across during your discussions. 

So, again, and again, and again, make sure that you’re showing that you have that passion for whatever you’re resolving and addressing and that you’re able to talk about your why – the why of how you brought this business to life because that is, in a sense, what is going to give that idea to the investor.

With that being said, hopefully, you liked this video, and if that was the case, hit the Like button. Also, leave a comment and let me know what you’re up to. Then, as well, subscribe to this channel so that you don’t miss out on any of the new videos that we’re rolling out every week. 

Then, take a look at the fundraising training, which is the program where we help entrepreneurs from A all the way to Z with everything related to fundraising. There, we have live Q&As, templates, agreements, a community of founders helping each other all over the world, and I think that you would find tremendous value in it. With that being said, thank you so much for watching.