The startup culture around the globe has ushered in stimulating changes and exciting new ways to do things. Business news is awash with lead stories that feature sensational new startups and unicorns being created.
The excitement is quite palpable and there is a huge buzz in investment circles around startups. Investors are eager to bet big, pick that next winner, and surge ahead in the race to earn handsome ROI. But as attractive as an idea may seem, like every other investment, there are some start-up financing criteria and a start-up financing checklist that needs to be followed.
The points below can only serve as checkpoints. There are many other things that can go on to form a startup investors checklist, but these are the fundamentals. It’s money and that too a lot of it is at stake. It’s better to be smart and safe than careless and sorry.
First Check – A background check on the team of founders.
No matter what AI or modern automation says; people are going to be the ones who make a difference. For a startup too, the founding team behind it and the decisions they make are going to take it forward. Having the details of the founders, their professional experience, their core expertise, and studying them will give an investor a ringside view of the business. Knowing the founders is an essential part of a startup investor’s criteria. Who is bringing what to the table and how well they will perform as a team – ultimately helps investors learn how the startup is faring in the long run. Knowing who is going to be in control and who is directing the flow of money invested in the startup is a comforting thought.
Second Check – Check for a credible and sound business plan
A startup with a plan demonstrates serious intent. Every smart investor looks for a solid and believable business plan. It is as good as a road map signifying the clarity of thought, the vision of the founders, how business goals are being set, how are these goals going to be achieved, the revenue projections, the scalability of the business, and a whole lot of tiny details that are answers to success critical questions. This is a must-do on every startup investor’s checklist. Knowing How the money invested is being planned to be spent on the enterprise, is really reassuring.
Third Check – Check for a product or a service that is unique and resolves real-life problems for customers
Startup founders may present a very optimistic and at times a very enthusiastic claim for a product or service. This is all good because it shows they believe in their offering. But what a savvy investor will do is applaud the enthusiasm, but at the same time verify the claims, the function, ease of use, and look for every advantage claimed. Most importantly, seek to really discover and quantify what is so unique about the product or service and are these competitive advantages sustainable in the long run. Knowing what the money is going to be invested in is a very important aspect of startup financing criteria.
Fourth Check – Check the size of the market
To give credit where it is due, the startup founders surely know their business. It is a given fact that a path-breaking idea or a great product will be welcomed by the customers they have been created for. The box that needs to be ticked however in the startup investors criteria is the size of the market. There should always be a strong case for a sizeable market, a dominant market share, and consistently high demand in the long run. This will mean that the startup would reach critical mass and show profits sooner.
For the astute investor, investing in a startup that shows the potential to evolve fast into a full-fledged commercial success and get a significant return on investment is always the target. Knowing when the money invested is going to start yielding returns is a critical point on the startup investors’ checklist.
Fifth Check – Check the MVP
The proof of the pudding is in the eating goes the old adage. It still holds true. Checking the MVP that a startup has created in answer to a perceived market gap or a probable customer need is a must. This item ranks high in the startup financing checklist, simply because it is what will drive business and profit margins. Before investing, breaking the MVP down into easy-to-understand blocks will really help assess how it performs. This makes it easier to gauge its usefulness and its potential market in the real world. Knowing what the money is going to create and deliver ranks really high on a startup financing checklist.
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Q. What is a startup investor?
A. When an investor makes an investment in a startup, he or she owns a piece of the company. In simple terms, the investors are putting money down in exchange for equity, which includes a share of the company’s ownership and rights to future sales.
Q. What percentage should I give to an investor who is investing in my startup?
A. When it comes to angel/seed rounds, the general thumb rule is that the founder should sell between 10% and 20% of their company’s shares. The percentage is estimated based on the profit expectations of an early-stage equity investment.
Q. How fast do investors get paid back?
A. Generally speaking, angel investors often expect a return on their investment within 5 to 7 years, subjected to an annualized internal rate of return (“IRR”) of 20% to 40%. Venture capitalists often look for higher returns than angel investors.
Q. What is a sleeping partner?
A. A sleeping partner is an individual who contributes some funds to a business but does not participate actively in its management.