How Investor Evaluate Your Startup?

Benjamin Debonneville
Founder & CEO
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In the unforgiving world of startups, investors are not your fairy godmothers brandishing wads of cash in magic wands, rather, they're astute businesspeople. Their eyes, trained through years of experience, are perpetually searching for promising 'signals' that could translate into profitable ventures.

So, what exactly are these elusive signals?

Well, they can be anything from an innovative product or a passionate team to a burgeoning market and much more.

Here's the catch though - investors are not in the business of charity; they're in the pursuit of returns.

They're betting on your potential success, and like any shrewd gambler, they're looking to hedge their bets. They seek to dissect your business plan, assess potential risks, judge the viability of your product, and scrutinize you, the founder.

Why such caution, you wonder?

Simply put, they are seeking to understand if their money is safe in your hands, and more importantly, if it will grow.

It's a daunting task to win over these savvy investors, no doubt. But fear not, for this blog aims to be your guiding light, illuminating the path to getting the green signal from investors.

So, are you ready to decode what makes investors tick?

Let's find out.

What do Investors Look for in a Startup?

Understanding the investor's perspective is critical to securing their investment. As an entrepreneur, you need to know exactly what the 'magic potion' is that has the potential to woo an investor toward your startup.

This potion could be the passion of your founding team, the potential market size, the unique demand your product meets, or perhaps the traction you’ve already gained.

Here, we will dig deep into these key elements that could stir up an investor's interest and potentially open the floodgates of funding.

Before that, here’s what Sam Altman, founder of OpenAI has to say about this:

A tweet about Sam Altman's startup evaluation criteria.


We couldn’t agree more with this!

Let’s get into the details now.

1. Passionate Founders

Startups are a direct reflection of their founders, the captains at the helm. Therefore, investors keenly observe the founders, aiming to understand their passion, drive, and future vision. To them, a founder's zest is like a lighthouse in the stormy sea of startups.

So, what are the key traits that investors look for in startup founders?

Let's break it down:

  • The 'Known-You-For' Factor: Investors are curious about how long they have known you. The length of your relationship with investors often adds a layer of trust and familiarity, influencing their decision-making process significantly.
  • Vision and Goals: Investors want to see that you have a clear and compelling vision for your startup. Where do you see your company in the next 3 to 5 years?
  • Progress and Growth: Your journey from where you were a year ago to where you are now matters to investors. Have you shown a consistent growth trajectory?
  • Professionalism and Readiness: Are you ready to get down and dirty in the business world? Your professional demeanor and preparedness for challenges are key indicators for investors.
  • Funding and Plan: Your capital needs and plans for the raised funds also come into the picture. How much do you aim to raise and what's your strategy for utilizing these funds effectively?

Investors want to back founders who are passionate and committed. In their eyes, these founders are the ones who will turn their investments into successful ventures.

2. Team Members

A startup’s success is often a reflection of its team. As the saying goes, ‘You're only as strong as your weakest link.’ And who understands this better than investors?

tweet about importance of startup team

They're betting not only on the founder but also on the team that's driving the startup's vision. They scrutinize every pawn on the chessboard.

So, what are investors specifically looking for in your team? Let's outline it:

  • Track Record: They're interested in what your team members did before joining your startup. Did their previous experiences provide them with a unique, perhaps 'unfair,' advantage?
  • Industry Experience: Have your team members spent significant time, say a decade, in the relevant field? This long-term commitment often translates into deep insights and expertise.
  • Past Progress: What was the team member’s situation a year or two ago? Have they shown growth and progress in their roles?
  • Funding Strategy: What are the team's plans for raising funds, especially from Series A onwards? A clear, structured funding strategy can indicate a forward-thinking team.
  • Delivery History: Have your team members been consistently over-delivering, under-delivering, or hitting the mark? Investors favor teams that have a track record of exceeding expectations.

In short, a strong, experienced, and committed team can sway the scales in your favor when pitching to investors.

3. Market Size

When it comes to startups, the adage 'size matters' gets a new meaning. Investors look at the size of the market your startup plans to conquer.

A billion-dollar market size? Good. A ten-billion-dollar one? Even better. After all, in the world of venture capital, size equates to opportunities, to profits.

So, what are the key factors that investors consider while evaluating the market size? Let's slice it down:

  • Bottom-Up Approach: Investors appreciate startups that adopt a bottom-up approach to market analysis. Such founders estimate the market size based on their solution's cost and the potential target pool. Multiply the two, and voila, you have a more accurate market size.
  • Market Growth Rate: Besides the present size, the potential growth rate of the market also plays a vital role. A rapidly expanding market indicates more opportunities for the startup to grow and succeed.
  • Market Potential: For venture capitalists, a large market signifies a revenue potential of $1 billion or more. A startup's business plan should include a detailed market size analysis that illustrates product differentiation and traction.
  • Traction and Differentiation: Market size alone isn't enough. Investors want to see the startup's traction in that market and how their product or service stands out from the competition.

In a nutshell, a sizable, well-analyzed market with room for your differentiated product is an investor's dream.

Just remember, size is important, but how you approach it makes all the difference.

4. Product Demand/Competitive Advantage

Products and services are the heartbeat of any startup, the catalysts that turn your vision into reality. When it comes to investors, the focus sharpens on this heartbeat.

They're looking for a product that doesn't merely exist but excels, a solution that does more than just solving a problem. They're hunting for that X-factor, that unique competitive advantage.

So, what exactly are the aspects that investors scrutinize in a startup's product? Let's break it down:

  • Problem-Solving: First and foremost, does your product or service solve a real, tangible problem in the market? The more unsolved or poorly addressed the problem is, the more attractive your solution becomes to investors.
  • Unique Proposition: What's your product's USP? Investors are on the lookout for a competitive edge, a unique offering that sets your startup apart from the crowd.
  • Customer Validation: Venture capitalists might play detectives and speak with your customers. Positive customer feedback not only validates your product but also paints a promising picture of its future demand and growth.
  • Customer Functionality: How does your product work from a customer's perspective? Is it user-friendly and does it deliver value consistently? A product that delights customers is music to an investor's ears.

In essence, a unique, market-need-addressing product with solid customer validation can work wonders in catching an investor's eye.

Remember, in the investment world, your product is your pitch.

5. Traction

Ah, traction! The magic word that sends sparks in the eyes of investors.

It's the evidence that your startup isn't just a compelling idea or a promising product. It's up and running, gaining momentum, making a mark. And when it comes to investors, this evidence speaks volumes.

But how do they measure this elusive traction? What are the markers that investors search for? Let's decode it:

  • KPIs & Benchmarks: Hitting the $1 million benchmark in 12 months is a dream come true, while 18 months is still an appealing timeline. If you're aiming to raise series A, hitting the million is a critical milestone that investors look for.
  • Sales Cycle: Investors might play timekeepers, keenly observing your sales cycle. A shorter, efficient cycle indicates well-oiled sales machinery, a green flag for investors.
  • Spend Analysis: How much money do you plan to burn? And more importantly, will the spending massively increase customer acquisition costs? These are key considerations for an investor.
  • Recurring Revenue: What's the projected Monthly Recurring Revenue (MRR) by the end of the year? A healthy MRR indicates a steady, reliable income stream, a sight that investors love.
  • Conversion Rates: Historical conversion rates offer a peek into the startup's past performance, which could be indicative of its future success.

In a nutshell, traction for a startup is like a strong, steady heartbeat for a doctor. It's a reassuring sign that things are on the right track.

And remember, in the world of venture capitalism, nothing speaks louder than proven results.

How Startups Should Stand Tall Among Investors?

So, dear startup dreamers, you've now peered into the minds of investors, unraveling the criteria they use to evaluate startups.

But how do you make your startup the shining star in the sky, the one they can't help but invest in? Here's your blueprint:

  • Stoke the Passion Fire: Let your passion blaze brightly. Show them why you wake up every day eager to bring your vision to life. Remember, an engaged founder is an engaging prospect.
  • Team Magic: Showcase your team's unique strengths, their synergies, and their previous victories. The whole is indeed greater than the sum of its parts, especially for startups!
  • Master the Market: Understand your market inside out. Your bottom-up approach to market analysis not only impresses investors but also helps you navigate better.
  • Product Prowess: Ensure your product or service isn't just unique but undeniably beneficial. Validate it through positive customer feedback.
  • Traction Tells Tales: Proven results, as demonstrated through traction, are your startup's most compelling story. Share it proudly with your potential investors.

In short, standing tall in the investors' world isn't about mere growth. It's about growth driven by passion, teamwork, market understanding, product differentiation, and demonstrated success.

Conclusion: What’s Next?

As we reach the end of this exhilarating journey through the investors' lens, one thing becomes abundantly clear: winning over investors is no easy feat.

It requires a symphony of passion, a powerhouse team, a deep understanding of the market, a standout product, and evidence of traction.

But fear not, for armed with this knowledge, you now hold the key to unlock the doors of investment.

So, go forth and ignite your passion, assemble a team that dazzles, analyze your market with precision, craft a product that captivates, and let your traction speak volumes.

Remember, the investment world seeks pioneers, those audacious enough to turn dreams into reality. With perseverance and determination, you can stand tall among investors.

So, take that leap of faith, for the startup world awaits your triumphant rise. May your vision soar high and your success be unmatched.

The time is now. Go conquer!

Benjamin gave great tips to my start-up Blend for polishing and optimising my pitch deck, refreshing perspective. Recommend!