How Startup Investors Evaluate Entrepreneurs

What Startup Investors Look For In Entrepreneurs and The Red Flags They Avoid

Investors, like most educated gamblers, bet on the jockey – not the horse. Making you the most important asset for a successful fundraising round – especially if you have a proven track record. Studies show that:

“Successful serial entrepreneurs are more likely to replicate the success of their past companies.” and “Nearly 80% of [startup] unicorns had at least one co-founder who had previously founded a company of some sort.”

However, regardless of your previous success investors need to get to know you before they consider investing. They need to trust that you can execute your milestones and that you will provide a valuable ROI. To earn their trust and ultimately win them over you need these essential qualities:

  • Character
  • Confidence
  • Coachability

Character

Renowned leadership guru Simon Sinek states that “People don’t buy what you do; they buy why you do it.”

If an investor doesn’t know why you are creating your startup what incentive do they have to invest in you; as opposed to the thousands of other founders out there. If they can’t be sure their money is in the hands of an intelligent, capable, trustworthy founder they are unlikely to commit to a deal.

Moreover, they aren’t just planning to invest capital in your business but also their valuable time. They are looking to create a long-term business relationship with you and share their expertise and network. If they don’t like or trust you they simply won’t do it.

Your character is a critical factor and potential investors will want to answer the following questions about you:

  • Competency – “Can you do this?” Is the question nearly all financial backers will want the answer to. Demonstrating competence is challenging, but can be made easier if you have been part of (or already founded) a successful startup.
  • Commitment – Are you totally invested in your startup? Are you still working for someone else or have you taken the leap? How hard do you work?
  • Honesty – Do you tell the truth? Any lies you tell will inevitably backfire. Howard Stevenson (Professor Emeritus at Harvard Business School) sums it up perfectly: “The first time you hear anything dishonest come out of a founder’s mouth, you should run, not walk”
  • Trustworthiness – More than telling the truth, do you keep your word and deliver on your promises?
  • Who you are underneath it all – Aside from the above are you the kind of person they will be happy to introduce to their professional networks? Will they enjoy working with you over the next three to five years?

Confidence

It may seem obvious but you need to be confident that you, your idea and your team can overcome the inevitable challenges of founding a startup. You will need to get used to hearing no from investors, clients, banks and even family and friends. It’s important to develop a thick skin and generate self-confidence no matter the hurdles that arise.

However, there is a fine line between confidence and arrogance – and it’s a line you will need to tread carefully. Overconfidence and arrogance will make you look like a “know-it-all” to investors. If they decide that you won’t be open to guidance and new ideas it will be a deal-breaking red flag and they will walk away. The best way to ensure that you’re portraying confidence and not arrogance is to support your claims with facts and figures.

Coachability

Do you listen well? Can you learn quickly and effectively? These are two factors essential for investors. They want to feel their time (and money) is well spent and that they are investing in a founder who is open to learning and being mentored.

A good (smart money) investor will want to nurture a mentor-mentee relationship with you. A receptive mind is a vital quality that you will need. Ron Conway, an active early-stage investor in Google and Paypal (and Founder of SV Angel) puts it this way:

“Coachability enables a willingness to be open and make the necessary and often numerous course corrections and morphing that startups require.”

The Red Flags & Dealbreakers for Investors

There are seven “deadly sins” that will leave you investor-less and could potentially harm your reputation. Here they are and how you can avoid them:

1. Dishonesty

As I mentioned before lies inevitably backfire. Lying about any aspect of your business (or yourself) will plant a seed of doubt into the minds of any potential investor. They will do the necessary research into you and your company to verify your claims before they open their wallets – so be upfront and honest at all times.

2. Telling Them you Have “No Competition”

Even if your product is the most innovative product the world has ever seen you will either be disrupting an existing market or creating a new market that will quickly fill with investors.

3. Saying you “Only Need 1% of the Market Share”

This is a great way to show investors that you don’t understand sales or customer CPA (cost-per-acquisition). Instead of talking in market share talk in customers. Specifically how many you need, how much you will spend to get them and how long it will take for you to get to that number.

4. Failing to Fulfil Your Commitments

When asked about what might kill a potential deal for her clients Marcia Nelson Managing Director of Alberleen Family Office Solutions said on aspect is when a “startup’s management takes too long to get us requested information – while it may not kill a deal, it will certainly make us more cautious.” Investors want to know that you take your commitments seriously and that you are prepared to fulfil requests in a timely manner.

5. Being Desperate

Desperation can break a business partnership before it begins and shows investors that you are unconfident.

6. Being Arrogant or Defensive

As I mentioned above confidence and arrogance are close neighbours and it’s important not to come off too strong.

7. An Unwillingness to Listen

Own your weaknesses. Investors will be put off if you act like you have all the answers and don’t need any help. You will need guidance and help on your journey and investors already know that. If you admit your faults and actively seek advice you will be left with a much healthier and more productive business relationship.

As a founder, it is your responsibility to make as easy as possible for investors to say yes to both you and your startup. You have to put yourself in the best position to form a great partnership that will be a lucrative deal for all parties involved. And the next step in that process is choosing your founding team,

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