The Signs Investors Look For in a Startup
By: Silas Mahner
Tags: Investing, Funding, Venture Capital, Startup, Angel Investors

Over the past month, I’ve been consuming a lot of content about what investors look for in a potential investment. I’ve studied and noted advice/tell-signs of high-potential ideas/startups, from the likes of Kevin O’Leary, Jason Calacanis, Elon Musk, Jeff Bezos, Peter Thiel, and others. In addition to this, I’ve studied other business resources that teach what to look for in a successful business. In this post, I have laid out the top points that all of these resources have shared (in no particular order). Let’s dive in.

1. Does the Founder have what it takes?

Jason Calacanis discusses in his interview with Galileo at HyperChange that there are so many unknown things that will come up along the way. For that reason, it’s really important the founder can work through those issues calmly.

2. Is There a Market for it?

Without substantial proof that there is a market for the product, it’s not likely that you will have interested investors. This is why so many pitches flop on Shark Tank; they can’t prove market size. A good way to prove there is a market is by seeing if other companies are already in that space.

3. Is it Scalable?

If the business cannot be scaled rapidly professional investors and venture firms are not likely to pony up the cash. For them, the only reason to invest is potential returns, unless of course, it is something they have a particular passion for.

4. How Many Basic Human Desires Does it Serve?

This is taken from the book, The Personal MBA by Josh Kaufman. Every human has 5 basic human drives or desires. They are, Drive to Acquire, Drive to Bond, Drive to Learn, Drive to Defend, and the Drive to Feel. The more of these that your business has the greater the market and the more likely you are to have a highly desirable product.

5. What Unfair Advantages Does the Startup have?

Y-Combinator’s Kevin Hale has a great talk that states specifically the main factors Y-Combinator looks for in a startup in this video. One of them being the 5 unfair advantages of the startup. These 5 are,

A) The Founder . I.E. does the founder have some experience that makes him extra qualified in this space? This could be many years in a niche market. They use the hard number of 1 in 10. If the founder is 1 of 10 people in the world that can solve a certain problem.

. I.E. does the founder have some experience that makes him extra qualified in this space? This could be many years in a niche market. They use the hard number of 1 in 10. If the founder is 1 of 10 people in the world that can solve a certain problem. B) The Market. Is the market growing by 20% a year? If you are building a solution to that problem in that area, you will be in good shape.

Is the market growing by 20% a year? If you are building a solution to that problem in that area, you will be in good shape. C) The Product. Is your product 10x better than the competition? It has to be very obvious that it’s better than the competition. Having that distance between you and your competitor will make you much more attractive to potential customers, furthering your likelihood of success.

Is your product 10x better than the competition? It has to be very obvious that it’s better than the competition. Having that distance between you and your competitor will make you much more attractive to potential customers, furthering your likelihood of success. D) Acquisition . Is your company growing without paid advertising? Kevin states if your only method of growing is Paid Advertising, without any organic growth, you are going to attract competition who may very well have one of the other factors and will eventually outpace you.

. Is your company growing without paid advertising? Kevin states if your only method of growing is Paid Advertising, without any organic growth, you are going to attract competition who may very well have one of the other factors and will eventually outpace you. F) Monopoly. This is referring often to the effect that being in the market longer than others will have. If as your company grows the success of your growth widens the gap between your competitors, such as through network effects, or patented technology advancements, you will be set up for success.

6. Does it Pass The Threshold Test?

Another thing that Kevin Hale discussed in the aforementioned video is, does this past the threshold test? What he means by that is, what basic thing has to happen in order for this idea to succeed. If that is, successfully manufacturing the product, is it reaching the market, is it keeping up with demand, etc? If that basic threshold is accomplishable/the founder can overtake that threshold, there is a good chance the startup will succeed.

7. Does the Idea Benefit Society/Humanity?

Elon Musk, arguably the most influential innovator of the 21st century, is motivated to do things that benefit humanity. Any startup that truly seeks to better society, is highly likely to succeed. While this point is something I’m adding from my observations, I truly believe that this, paired with perseverance, will result in a successful venture.

8. Is it in a Market Where No One Else is?

In this video, Co-Founder of PayPal, Peter Thiel discusses that one of the things he looks for in a company/organization. Organizations that are building something that is unpopular for the right reasons, should succeed. I would argue that his PayPal venture was unpopular at the time because it posed a threat to banks at surface value. The same could be said of Electric Vehicles; it posed a threat to conventional vehicle manufacturers hence the difficulty in breaking into the market.

9. Do the Founders have Team, Tech, and Strategy?

This is another piece of advice from Peter in the same video as mentioned in point 8. If the founders are only talking about the technology they are offering, then get them to talk about the team and the strategy. He says that you need to have all three areas for it to succeed. If the founders are not comfortable speaking to all three points, they likely lack some necessary foundation blocks to succeed.

10. What are Your Sales?

Is the company successfully selling their product, and on what platforms? Increasing sales is a basic factor to success but one that can occasionally be overlooked because of too much excitement in the product on the part of the investor. Identifying where their sales are coming from can be a good way to identify opportunities. Investors may know other mediums to sell the product which can help know if it’s a worthwhile investment.

11. Does the Company Actually Need Funding?

Not every company needs funding. A truly successful team and strategy might already be in place, and the inexperience of the founders might be simply seeking funding to “accelerate” their growth. This mindset can be an indicator of “money-chasing-syndrome”, where the founder simply wants explosive growth because of the huge amount of money that will be at their disposal. This is something that can be corrected but should definitely be screened for.

12. Does the Product Move Quickly?

One of the big points I noted from Shark Tank is the acute focus on how much inventory is held. If there is a large amount of inventory, it could be an indicator that the product doesn’t move swiftly.

13. What are the Costs?

Does the product have a high margin that will increase as scaling happens? When the existing margin is high at the early stages, it’s usually an opportunity for greater improvement in the future as the process is streamlined, and the production/fulfillment costs are reduced.

14. Past Debt/Cash.

Not being a financial expert, I cannot explain to you the exact importance of these calculations, but this article offers a good basic understanding of the different healthy financial ratios that a Startup should have if they are seeking outside investment. Suffice to say, if these ratios are severely out of whack, investors will likely steer clear.

15. Is there a Good Team?

Having a team is very important to many investors. By having a team of any caliber, you prove that other people are confident enough in the idea to work with the idea fulltime. Beyond having a team, it’s important to have a well-functioning team. When proper delegation methods and the right expertise are mixed, it makes a fine concoction. A red flag is when all the decisions are being made by the CEO in a manner that takes away from him/her being able to focus on the growth of the company. The CEO shouldn’t be deciding what type of snacks to have in the office.