Assess your startup for investability
The first thing to consider before going through the process of raising investment from investors is whether your business is suitable for this type of funding in the first place. You need to understand why investors invest in startups and what they look for in opportunities and then review your business through this lens to understand whether your investment opportunity is attractive and how to pitch it correctly.
So, what makes a business investable?
You're addressing a real market need
You have tested and proven something (not just thought of an idea)
The potential for a high return on their investment (at least 10x in 5-10 years time).
If you’re in the really early stages, the investors are investing in you (the team) more than your idea, why are you the right person for the job? Having a really strong well-balanced team is really important, have you run a business before? do you have a technical/product person in the team? Are you fully committed to making this business happen?
Put yourself in their shoes
Raising equity investment means that your business shares are essentially being considered as stock. Now, imagine you are looking for things to invest in on the stock market, what are you looking for in companies? Most likely, for ones that will provide you with a healthy return in exchange for tying your money up for a period of time. Just like investing in stocks, when investing in early-stage companies, there is always a risk you may not get a return or that you lose all of your money, so, in exchange for taking this risk, there needs to be the possibility for you to get a high return.
Assessing return potential
Have a look at your growth plan and cashflow forecast: does your business have the capacity to grow to at least 10x the size it is now? Will it happen in 5-10 years time? It’s important to note here that many businesses are limited to how much and how fast they can grow, and whilst that doesn’t mean it isn't a good or profitable business, it may not be an attractive option for an investor to put their money into.
Will there be a liquidity event?
Another thing to consider is how you will return the funds back to the investor. At some point, the investor will want to realise their gains and withdraw their investment, and so there needs to be an opportunity for them to do so at some point in the future. Do you have a plan to eventually sell the business or go public? If the answer is no and you are instead thinking of building a business that will create a great lifestyle for you which you own forever, then this may not create an opportunity for exit and therefore not fit investors’ criteria.
