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What can entrepreneurs learn from the top startup investors?

Startup investing is growing in popularity. The potential for a new era of negative interest rates, pushing individuals to invest for themselves in private enterprises, and the passing of the PATH Act which offers 100% tax free gains for qualified small business stock, is only likely to add more fuel to startup investments. Venturing into this asset class is exciting and can be incredibly rewarding. Yet, savvy investors only put their capital into a little over 1% of the opportunities they are pitched.

So what lessons can be learned from the proven experts in order to increase the chances of getting funded as an entrepreneur? What do this startup investors look for or look like? Below you will be able to find the 10 things that might answer these questions.

1) They Invest in Industries They Understand

One of the most frequently repeated nuggets of advice from the ‘Sage of Omaha’, Warren Buffett is to stick to investing in your ‘circle of competence’. When it comes to startups we see this with Elon Musk who has put his own money and energy into tech driven, transport related startups with aim to reduce the chance of human extinction. Think SolarCity, Tesla, and SpaceX.

Daymond John has invested in a number of fashion related startups, because he understands the dynamics well. Tim Ferriss says he has chosen startups that he could personally be a dedicated power-user of. It all boils down to “do I get this?” “Would I buy and use this?”

One of the mistakes entrepreneurs make is trying to pitch investors that are outside of their industry. If you are in the health care space don‘t try to pitch an investor that is focused on a different sector (e.g. Saas). You are wasting your time and also theirs.

2) They Invest in Entrepreneurs with Shared Values

If investors and entrepreneurs don’t share similar values there is bound to be trouble later. That may not make it a bad investment in the long term. There are plenty of cases in which famous startup investors have had to step in, oust the founding team, and take over. Most don’t want that level of involvement.

So do they share a Mark Cuban like lust for crushing the competition and making the big money? Do they share a passion for creating an alternative currency like the PayPal mafia? Or are you both compelled to make the world a better place with an innovative healthcare startup, or retail business like Combat Flip Flops which scored $300,000 from 3 Shark Tank investors in season 7 of the show.

3) They are Aware of Heavy Costs

How do the sunk costs, manufacturing and production costs, and overhead stack up? How will profit margins and the amount of cash required impact the potential for success, and future returns? A startup that needs substantial upfront cash and ongoing cash injections to develop inventory is going to have a very high capital burn rate. The more funding rounds required to get the business through to a sustainable breakeven point, the more capital investors may need to invest later, or face dilution.

As a startup you will be better positioned if you are cash flow positive. Otherwise you are going to be one round of financing away from going out of business. Don‘t get caught up on what you read on TechCrunch. [ctt template=”1″ link=”m5252″ via=”yes” ]Real businesses are built with real revenues.[/ctt]

4) They Deal with All Decision Makers

In one February 2016 episode of Shark Tank an entrepreneur was badly mauled for coming on solo, without his majority partner. Not everyone is excited about selling and pitching. That’s okay. Each founder and partner has their own skill set. If one is an expert in marketing and sales that can be enough.

However, investors need to know who they are investing in. It can be harder and uglier to get out of a business partnership than a marriage. No one wants to waste time either. If there is a real pitch opportunity that could lead to a term sheet, show up with the whole founding team, and be prepared to make a deal on.

5) They Invest in Where They Can Add Value

Daymond John epitomizes the concept of an investor that can add value to clothing and retail startups. He knows the models that work in this realm and can add instant credibility and even distribution channels to a product in this arena.

Investor-marketers with substantial audiences and attention like Tim Ferris can plug for their startups through existing media channels such as podcasts, TV shows, and blogs; unlocking sales potential. Incubators and accelerators like Y Combinator and 500 Startups, and crowdfunding portals can help early stage startups not only land capital, but prepare them for future funding rounds, and introduce them to a larger number of qualified investors too.

Similarly Google Ventures could add access to great expertise and talent for tech startups.

6) They Invest in Coachable Entrepreneurs

Via TechCrunch Joe Kraus, partner at Google Ventures says that his #1 rule is to “invest only in teams that don’t need you.” It’s great to add value, and find opportunities where the venture and the capital partner find mutual benefit. It is also critical for all business leaders to be coachable, and to be open to learning and advice. This is especially true for entrepreneurs who face constant evolution into new territory.

7) They Go Big in What They Believe in

There can be some advantages of diversification in investments. Yet, investing legends like Peter Thiel and Warren Buffett have increasingly been touting the value of going bigger into fewer investments.

By big some experts would warn not to exceed 10% of the capital in any one investment. However, Buffett and Thiel pose that investors will make more of an impact, and will pick better investments if they go harder into a tighter portfolio of business ventures.

8) They Invest With Others

One of the biggest advantages of the Shark Tank for the sharks is the ability to simultaneously invest together. This not only spreads risk, but ensures investors are putting their money in alongside other accredited and savvy investors who will be motivated in seeing the venture succeed.

Imagine your startup received an investment from all five sharks like Breathometer. With all the PR, expert advice, and future capital potential, it’s hard to see a deal like that failing.

9) They Know It Can All Fall Apart in Due Diligence

A significant number of deals done on reality TV fall apart. Inquisitr quotes Barbara Corcoran as saying that one third of her Shark Tank deals do not close after the process of due diligence. Other estimates claim two thirds of all Shark Tank deals fail to materialize. Most angel investors simply don’t have that type of time to waste. This dynamic was one of the major drivers behind the launch of Panthera Advisors to help startups every step of the way in raising capital as well as getting acquired and optimize as much as possible the chances of getting a deal done.

10) They Only Invest in Companies with REALLY BIG Potential

In his book Zero to One, Peter Thiel reveals the data that shows it is critical for investors to hone in on startups with massive potential. A company isn’t going to be able to achieve and sustain a high multi-billion dollar valuation and deliver 100x returns unless it really has room to scale.

If a venture with 100x projections does just 10% as well as hoped most investors will still be happy with a 10x return. If the same happens to a company with 10x projections it may become financially unsustainable. High multiples also ensure that even if only 1 out of 10 investments succeed angels will still come out on top.

In this regard, below you will be able to find the pitch deck template that has been used by hundreds of founders to raise millions of dollars. You will be able to find there a clear path when it comes to presenting your company in a powerful way towards investors and show them how they will achieve returns by betting on you.

Summary

As you are looking to raise financing for your company, take these ten lessons here and use them as a checklist for vetting future potential prospects. Use these concepts to get ahead of the curve in efficiently sourcing more more investors so that you can reduce the time of fundraising and getting money in the bank quicker.

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