One question that comes up a lot is what investors look for when investing in an entrepreneur or a founding team (and, mind you, for the most part investors are putting money into the team, not necessarily the product).
To help put a framework on this, below are some criteria that investors use when they evaluate YOU as a founder. So, without further ado, let’s get to them.
Investors, first and foremost, look at your intangibles. If you’re a football fan, you know that beyond raw athletic power and positional skill, many coaches and scouts look for the “intangibles.” A similar happens when investors are deciding whether or not you are someone they want to invest in. The criteria vary by investor, so it’s hard to pin down exactly what they’re looking for. I think a fair representation of the intangibles includes (1) business savvy, (2) ability to keep your ego in check, and (3) your appearance.
By business savvy, investors want to see that you are deeply knowledgable about your target market, beyond mere internet research. Do you have a list of contacts in your industry who could be customers, evangelists, or ambassadors? Do you have deep and well-reasoned insights into the future of the market? If you have previously spoken to an investor about your idea, have you made progress since then? Better yet, have you been able to generate revenue?
Business savvy also includes a certain amount of leadership skills. Investors want to see that you can partner and delegate effectively. After all, n people can get more done than 1 person. Also, are you able to lead and work well with others?*
The next general intangible that investors look for are your ability to keep your ego in check. Regardless of how brilliant you are, you don’t know everything. More likely, you probably do not experience managing and leading a team as your revenues grow exponentially. That’s when you’ll get a lot of “coaching” from your investors. You’ll get straight up criticism about your business, revenues, and management skills. Don’t take it personally.
Finally, this is admittedly somewhat wishy-washy, but investors want to believe that you can look professional. What does this mean? Well, it means different things to different people, but at the end of the day, you need to look appropriately professional for your business and you need to speak and communicate your concept in a way that inspires business confidence. It’s unfortunate, but in some way you need to fit your potential investor’s stereotypical picture of a successful entrepreneur. That’s one reason, among many, why you need to strategically choose your investors.
* n > 1, obviously.
The next big intangible is traction. One thing traction refers to is your ability to take the concept out of your head and into a product or prototype. It also refers to your ability to attract talent to take your product to the next level. Obviously, it also refers to your product’s traction with consumers or customers.
But traction also refers to whether or not you got traction other investors. On a certain level, investors are timid. They want to know that you passed someone else’s gut check. If other investors have invested in you, this mitigates their risk.
The third intangible is execution. This is a malleable concept but it basically refers to your ability as a business manager to effectively use money. Obviously, one reason you are going to investors is for money. They want to know what you will do with it. They want to know how you manage your priorities and delegate your time and efforts.
But it also runs deeper than just what you will do with money. Investors want to also know if you externally driven. That is, would you still push your product and company forward even in the absence of money? Obviously, if you are the type of person who can only envision moving forward if you had money, then some red flags might be raised.
Last, but not least, we have the concept as the final criteria by which an entrepreneur can be judged. Obviously, if the concept viability (ie. Market opportunity) is not strong, then there are questions as to your business savvy and thinking process.
Investors also want to see that you are actually talking to customers and capturing market demand. The best measure of concept viability is whether customers are actually buying your product or have signed letters of intent saying they will buy your product. At the end of the day, investors are money people and they understand the language of money. No one can argue with actual revenues coming in.