An investment is preceded by a thorough examination of the company, its management, expertise, market, and growth potential. From an entrepreneur’s perspective, it is beneficial to understand the investor’s investment criteria, allowing for the best possible preparation for the process. Certain factors influencing the investment decision are common across all venture capital and private equity investors’ lists.
Investors review a large number of companies before making an investment. Particularly in startups, there is more to choose from compared to traditional growth companies. On the other hand, on growth companies, there is more data and information available over the years, which often emphasizes a longer period of familiarization during the investment process.
An investment decision is the sum of many factors. Before seeking an investment, take a look how the following aspects are addressed in your company.
Do you have a technological competitive edge? Growing markets are often competitive. Patents supporting the business and innovations providing a competitive advantage make an impression on investors.
Does your team have sufficient and relevant expertise? Investors pay attention to the team, too. Beyond the current team composition, investors are interested in the company’s ability to recruit top talent. Investors expect the company to acknowledge the team’s strengths and development needs. Key personnel should be committed to the company with contracts and financial incentives.
Is your company at the right stage? Timing, investment size, and the company’s development stage significantly affect the investment decision. Investors often focus on specific stages of a company’s development and investment sizes. A venture capital and private equity investor investing in startups typically seeks ownership of 10–30%.
Is the business model scalable; do you have evidence of international demand? The company does not need to be profitable yet, but it is usually beneficial to have proof of demand and interest in the product or service, a viable commercialization model, and the potential for successful internationalization. The company must be able to demonstrate its sales pipeline: how many potential customers it has, how customers are brought into the sales process, how sales convert into customers, and whether the company’s product has customer retention. Investors looking for scalable growth are also interested in how much it costs to acquire a customer and the resources required from the company’s team.
Are your contracts in order? Startups are rapidly evolving companies, so their documentation may not be as established as more mature companies. However, the most critical contracts must be in place. For example, shareholder agreements must be sound, and the intellectual property rights generated in the company must be clearly owned by the company. Employment contracts should ensure that employees’ patents belong to the company as well.
Do you have an estimate of your funding needs? Startups typically go through multiple funding rounds. Investors are interested in a clear estimate of the need for subsequent funding to implement the later stages of the growth strategy.
Venture capital and private equity investors evaluate investment opportunities in established growth companies significantly based on realized financial figures. Investors challenge and examine the company already during the due diligence phase. Therefore, even just discussions about investment with a venture capital and private equity investor can develop the company, even if it does not ultimately lead to an investment.
Management: The investor must believe in the management’s abilities, motivation, and vision. Most often, the investor makes an investment only in a company whose management wants and is committed in becoming an owner as well.
Thorough examination of the company: The investor examines the strategy, industry, business, customers, position in the value chain, contracts, and valuation of the company. This process also refines the business plan.
Strong company culture: For the investor to help the company grow, there must be a unified company culture. A cohesive culture is particularly important when the investor seeks to combine two or more companies.
Demonstration of growth: The management, strategy, and figures of the company must show the ability for growth and positive value development. If the company has not grown without an investor, it is not given that it will grow with an investment. However, the investment could be the crucial factor that leads the company to a growth path, for example, through an acquisition, investment, development project, or a determined strategic goal. Investors may also be interested in lower-growth companies with a strong market position and cash flow.
Credible growth strategy: The company and its management must have a desire to grow and a credible vision for future growth. Most often, the investor helps sharpen the growth plan and brings their own ideas and experiences to the discussion.
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The article is part of a blog series based on the association’s fundraising guide for entrepreneurs. You can find the full guide here.